Room for growth: European cities hotel forecast for 2015 and 2016

2014 was a good year for hoteliers. Europe attracted 22 million more international tourists than it did in 2013. All but two of the markets we look at saw RevPAR growth, and many are breaking records, especially on occupancy.

The economic backdrop has been generally supportive, growth has remained strong in the US and key emerging markets, the Eurozone has grown, albeit modestly, and falling oil prices have increased consumers discretionary spending power. We expect economic growth to continue in 2015 and 2016, although the risks are weighted to the downside given uncertainty over the future of Greece and the Eurozone and instability in the Middle East and North Africa. In this fourth edition of the European cities hotel forecast we look at 20 cities across Europe. In most hotel markets we are expecting rising occupancy and Average Daily Rate (ADR), although generally at a slower pace than 2014. But some cities are facing specific challenges; Geneva and Zurich are made more costly by the appreciation of the Swiss Franc, whilst Moscow is impacted by international sanctions. Other markets will receive a welcome fillip, such as London where the Rugby World Cup will bring additional visitors.

We build on previous editions of the forecast in considering the impact of global megatrends on the hotels business and adaptive strategies for 2015 and beyond.

These include:

  • The increasing potential to use robots and Artificial Intelligence for hotels to cut costs and improve the customer experience;
  • The potential for a new global deal on climate change to affect travel behaviours;
  • The strength of the US economy and consumer;
  • The potential for new smartphone enabled technology (such as iBeacons) to be adopted in the sector; and
  • The rising importance of sub-Saharan Africa in the global economy.

The sector still faces plenty of challenges and geopolitical uncertainties. But we are optimistic in its ability to compete, adapt and succeed; especially now economic fundamentals of rising prosperity and increased globalisation have reasserted themselves following the financial crisis.

Summary

The 4th edition of PwC’s European cities hotel forecast looks at the outlook for hotel trading in 20 key cities in Europe set against a backdrop of uncertainty and change.

Uncertain economic backdrop
The majority of the markets we are analysing are based in the Eurozone where the start of 2014 was looking more optimistic, with average GDP growth of 0.8%, but concerns have now returned and the ECB has announced quantitative easing (QE). This is likely to encourage a depreciation of the Euro which should be beneficial for tourism and the hotels market. Many visitors to Europe come from further afield and the improving economic situation in the US should lead to increased numbers of tourists this year and into the future.

Trends and issues
In addition to the economic outlook we examine some other issues that could keep hoteliers awake at night, such as which megatrends will impact hotels most; how alternative accommodation business models, like Airbnb could impact if demand slows; how it’s necessary to provide a local and authentic experience and what developments in technology and Artificial Intelligence (AI) might mean.

A positive picture for travel and hotels
Despite continuing economic and political uncertainty in Europe, travel and hotels actually did rather well in 2014. There were almost 600 million international visitors and 2.7 billion nights recorded in EU tourist accommodation- a new peak, and up 1.7% compared with 2013.

Room for more growth in 2015 and 2016
In terms of city results in 2015, we forecast strengthening fundamentals, with RevPAR growth in all but three markets, Geneva, Moscow and Zurich.

We anticipate growth in all but two of the markets in 2016, Geneva and Zurich, although some is relatively marginal – but it’s still growth.

The top RevPAR growth stories in 2015 are expected to be Dublin with 8.8% growth in 2015; followed by Madrid (5.6%) and London (4.6%). There follows a long list of cities with healthy growth stories – a further 10 cities with growth over 3%. In 2016, Dublin tops the growth story yet again, followed by Madrid, London, Rome, Milan and Barcelona. Despite this good news story the hotel market overall remains significantly behind pre-recession peaks in real terms (i.e. factoring in growth in overall prices). For example, European RevPAR exceeded pre-recession peaks in 2014 in nominal terms but is still 13% below in real terms.

What’s driving growth?
Factors driving growth in 2015 include the continued strength of inbound international tourism into Europe. Business travel spend is expected to accelerate by over 6% in 2015 with growth strongest in the key economies. Restrained supply growth is helping some cities, like Dublin. Others with high pipelines like London, continue to attract high visitor numbers. Improving consumer confidence is also a positive.

On top of their historical and cultural attractions many of the cities have an extensive 2015 events and trade fair cycle – a few in particular stand out: EXPO 2015 in Milan expects around 20 million visitors over the six months of the EXPO; Berlin hosts the UEFA Champions League final this summer; also the Rugby World Cup is taking place in England and Wales during September and October with large numbers of visitors expected. Euro 2016 sees France as the host nation with the football tournament held at 10 host cities (including Paris) between June and July. Still on the topic of football, 2016 sees Milan’s San Siro Stadium host the UEFA Champions Final. But perhaps stealing the limelight from Europe, summer 2016 sees Brazil host the Olympic and Paralympic Games.

Supply in the slow lane
On the flip-side of the equation, supply has not been a huge concern during the recession. For example, in Dublin there is almost no new supply expected in 2015. In contrast, there are sizeable pipelines in supply in cities like London and Amsterdam which could impact performance and factor in more serviced apartments, home rentals like Airbnb, and new style hostels and the competition to accommodate visitors can be seen to be hotting-up.

Strong trading means a buoyant investment outlook
Reflecting the healthy trading fundamentals we anticipate that deal activity will remain strong in Europe in 2015 with many countries expecting an increase in deal volume, although deal size may not be as strong as 2014 due to potential limited supply in further high value pan-European portfolios such as were transacted in 2014. We expect to see banks and lenders looking to dispose of more over-leveraged assets in 2015 and overseas investment is expected to remain high, with increased demand from Asian capital resulting in heightened competition for trophy assets in prime European cities such as Paris, Rome, London and Barcelona – this could lead to further escalation in pricing as demand outweighs supply.

Spotlight on cities: prospects for 2015 and 2016

Improved trading fundamentals across virtually all the cities in 2015 and 2016. Dublin, Madrid and London lead the pack in RevPAR growth terms for both years.

Growth on growth
The good news is that the improving economic and resultant business travel backdrop is expected to drive hotel trading growth again in 2015 and 2016.

All the cities except one are expected to achieve some growth in 2015 and all should see additional growth in 2016.

Growth is actually remarkably uniform with 17 out of the 20 cities in this report forecast to enjoy RevPAR growth close to or in excess of 2% in 2015. Half are forecast to see growth in excess of 3% in 2015. One city – Dublin – outshines the field with almost 9% RevPAR growth forecast in 2015 and 8% in 2016.

2015 forecasts
The cities best placed to take advantage of circumstances in 2015 are Dublin followed by Madrid and London and then Rome, Prague, Porto, Amsterdam, Edinburgh and Barcelona. The others are very close behind in growth terms.
Paris is expected to see 1.8% RevPAR growth in 2015 – enough to catapult it into the lead in absolute terms as the city with the highest RevPAR in this survey.

At the other end of the scale, Geneva, Zurich and Moscow’s hotel sectors are not best placed to grow as the removal of the Swiss franc cap and the ongoing geopolitical crisis (Moscow) cast long shadows. Moscow sees a decline driven by occupancy falls in 2015 as a result of international sanctions. Geneva and Zurich also see declines.

2016 forecasts
In 2016 the most positive RevPAR stories are Dublin, Madrid and London. In Dublin a lack of new supply and strong ADR growth (over 7%) is driving up RevPAR. Geneva and Zurich are expected to see further marginal declines.

What’s driving growth?
It is a mixture of ADR and occupancy growth, but in many top performing cities like London or Paris which operate at around over 80% occupancy, it’s ADR driving the most growth.

The strongest ADR growth in 2015 and 2016 is found in Dublin (around 7 % each year). London is also expected to see robust gains in both years (3% and 4.4% respectively). Madrid, Edinburgh and Barcelona also see growth on top of growth.

Rome, Lisbon and Porto see healthy occupancy growth in 2015. Rome, Madrid and Milan see solid growth in 2016.

What could cast a shadow over growth?
The changing balance of global growth and geopolitical risks will determine the global economic outlook for 2015 and this will have implications for travel and hotels in the cities analysed. The supply pipeline also has the potential to accelerate further in some hot spot cities and this could impact trading should demand weaken.

5 predictions and their implications for hoteliers in 2015

1. Politicians strike a global climate deal in Paris this year
In 2009, troubled by the global economic slowdown, politicians failed to agree a strong global climate deal in Copenhagen as they worried about the impacts on jobs and investment. This year as they head to the UN Climate Summit in Paris, a growing global economy may alleviate some of these concerns. At the national level, lower prices will also give governments the opportunity to implement carbon pricing or remove fossil fuel subsidies with less resistance from business and consumers. These, alongside vocal commitments made by many governments and businesses in 2014, make striking an international deal to curb emissions increasingly more likely.

Implications for European Hotels

Carbon taxes could limit reductions in flight prices
If politicians at the UN Climate Summit take this opportunity to implement carbon taxes, the market, a major global emitter, will likely be negatively affected. Both the introduction of carbon taxes and the removal of fossil fuel subsidies would lead to increased costs to airlines, pushing prices in the opposite direction to lower oil prices. However, we expect any measures would likely be introduced gradually and are unlikely to cause a major impact on the hotels and travel sector whilst oil prices remain low.

2. US recovery to pick up
In what would be quite a coup for Obama given criticism over his stewardship of the economy during his first term, we expect US growth to be its fastest since 2005. One of the Americans’ oft-quoted economic metrics – unemployment – fell during 2014 to below 6%, and we expect this figure, combined with lower oil prices, to contribute to rising household consumption.

We are projecting economic growth of 3.2% in 2015, and for the US to contribute around 23% of global GDP growth in 2015. This would represent its largest contribution in a single year since the financial crisis.

Implications for European Hotels

Hotels will benefit from rising US household consumption
Expectations of the fastest US growth since 2005, coupled with unemployment now below 6% and low oil prices, mean households in the US will have rising disposable incomes. In addition, US tourists’ purchasing power in Europe has increased thanks to the recent dollar appreciation. These two forces should together encourage trips abroad and release the pent up demand for travel from the recession. Increased US tourism to Europe will be great news for European hotels: in 2013 US tourists spent 38 million nights in hotels, 2% of all nights booked, and spent €246 per night. France and Germany will be particularly affected as US tourists account for 13% and 10% of nights spent, respectively.

3. The contribution of the BRICs to global economic growth will fall for the 2nd year in a row, but growth in Sub-Saharan Africa will continue to outpace the global economy
We still expect China to make a major contribution to global growth in 2015, but its projected GDP growth rate of 7.2% would be its slowest since 1990 and its high debt levels pose some downside risks to growth. In Russia, we expect GDP to shrink in 2015 on the back of low oil prices and economic sanctions while, in Brazil, we expect growth to be sluggish at only around 1%.

On the other hand, Sub-Saharan Africa should continue to outpace global growth for the 15th year in a row. We expect the combined GDP of the region’s 4 largest economies – Nigeria, South Africa, Angola and Ethiopia – to overtake that of Italy in 2015 in purchasing-powerparity terms.

Implications for European Hotels

Shifting focus to Sub-Saharan Africa
With France, Italy and Switzerland in the top 10 most travelled to destinations by Chinese tourists, news of the slowing down of BRIC growth could be a cause for concern for European hotels. Tourists from China tend to spend a large amount on, for example, luxury shopping and hotel accommodation. As they see their slowest GDP growth rate since 1990 there may be some concerns for Europe. However, Russia’s economy will be of greater concern this year. In 2012, Russia was the fastest growing tourism market in Europe. Now, with the current economic problems this is expected to change. France and Germany have 3% and 4% of their tourists coming from Russia and so a slowdown in numbers will be bad news for hoteliers. In the long run, Sub-Saharan Africa is likely to continue growing at a faster pace than the global economy. Therefore hotels in Europe could shift their focus and look to tap into tourists from these countries.

4. Increased use of technology including the iBeacon
iBeacons, a micro-location technology, allows nearby devices to interact with each other without ‘pairing’ so allowing interaction with customers without generating privacy concerns. The technology will allow businesses to transmit tailored offers to customers who are nearby, collect data about how they interact with the environment and generally better understood their customers. We expect this to play an increasingly prominent role in the retail experience, but the potential application to hotels is also huge.

Implications for European Hotels

Embracing digital innovations
Digital innovations have already changed the hotel market, with online bookings allowing hotels to increase occupancy with last minute deals and personalised marketing. Now, with the adoption of iBeacons in the retail industry, hotels well need to adapt to new technologies and adopt them too.

Customers will demand more from their hotels, expecting a personalised service based on their updated needs, communicated via interactions between their device and the hotel. Ordering room service via smart phone, or choosing your breakfast so it’s ready for you at the table, could be the level of service demanded from guests very soon and will allow operators to up-sell services and boost loyalty.

5. Continued advances of AI and automation in the job market
The increasing sophistication of Artificial Intelligence (AI) and robotics may be paving the way for a second industrial revolution, this time affecting the service sector, following the first revolution which occurred in agriculture and manufacturing over the last 200 years.

Recent research has suggested that 47% of job categories could be open to automation within two decades. Robots are becoming cheaper and more sophisticated, and the use of sensors and AI mean they are no longer confined to static factory based roles and predictable environments. We expect that 2015 will see far greater use of technology to replace labour in services.

Implications for European Hotels

Robots: at a hotel near you?
While many guests would settle for free wifi, technology initiatives are transforming the service provided to hotel guests. Mobile room keys are allowing guests to use their smartphones to open room doors via an app, and this will be rolled out to the Apple Watch this year. A second trend is the use of robots to cut hotels’ costs. Since August 2014 ‘Botlers’ are already used by Starwood at their Aloft Hotel in Cupertino to fetch and carry for guests. Cruise ships are now using robotic bartenders to serve guests. This summer, the Hen-na hotel will open in Japan, staffed initially by 10 robots and with the goal of providing 90% of services robotically. With pressure on rates continuing we expect to see hotels continue to seek innovative ways to reduce costs in order to maintain their margins.

Deal Talk

2014 recap
The European hotel market was very active with an estimated 30% increase in transaction volume year-on-year. The availability of debt and the improved trading conditions across Europe have resulted in heightened investor demand for hotel assets and a more stable environment for banks and lenders to dispose of any overleveraged assets. The demand from international investors has continued to grow over the year, with approximately 60% of transactions in 2014 including cross border investors.

There has been further strong demand from Middle Eastern capital for trophy assets in prime European cities and 2014 saw increasing interest from Asian capital.The three largest single asset transactions in Europe in 2014 were all located in Paris, demonstrating the strong demand for prime trophy assets from overseas investors. Private equity appeared as one of the main players in the portfolio market in 2014, together with trade purchasers. The three largest pan-European deals below include Jing Jang’s acquisition of Groupe de Louvre plus two significant buy-backs of freehold interests of large leased portfolios.

The European hotel deal market experienced a significant decline in deal value following the onset of the economic recession in 2007. However, following strong recovery in RevPAR in 2010, deal volume has generally been growing in line with RevPAR, with an increase of c.30% in 2014 reflective of the stronger RevPAR growth this year.
As well as portfolio and single asset deals, we are seeing more loan transactions in the market in particular in regions, including the UK, Ireland and Spain, which would have a more positive impact on 2013 and 2014 deal values.

Investment and deals outlook for 2015

Hotels: Increasingly on the radar
PwC research shows hotels are becoming a higher priority for real estate investors and developers compared to last year. Strong trading fundamentals in some countries will continue to drive values and interest.

European markets to watch
The recovery in capital markets started in the UK and Germany but we are now seeing a much broader spread of recovery with Italy, France and Spain expected to show continued to improvement in 2015.

According to Emerging Trends Europe, the five leading cities for investment prospects in 2015 are a mix of German stalwarts and recovery plays.

Real estate: busier and more profitable in 2015?
Europe’s real estate industry, including hotels, expects to be busier and more profitable in 2015, despite weak fundamentals and lackluster economic conditions in many countries.

The future for hotel deals across Europe is bright, as equity rich investors look to invest in the sector and benefit from stronger returns as trading conditions are set to improve.

So what trends do we expect in 2015?
It is anticipated that deal activity will remain strong in 2015 with many countries expecting an increase in deal volume, although deal size may not be as strong as 2014 due to potential limited supply in further high value pan-European portfolios such as transacted in 2014. Trading performance across the key European markets is generally forecast to improve in 2015 having a positive impact on investor demand and investor confidence and we believe that RevPAR growth will continue to drive deal activity in key European cities.

It is also anticipated that Banks and Lenders will look to dispose of more over-leveraged assets in 2015 following a more stable trading and investment market, with countries such as Ireland forecasting an increase in debt sales and Spain and Italy anticipating an increase in assets being bought to the market by Banks/Lenders providing more potential targets for opportunistic buyers.

Overseas investment is expected to remain high in 2015, with increased demand from Asian capital resulting in even more competition for trophy assets in prime European cities such as Paris, Rome, London and Barcelona, which could lead to further escalation in pricing as demand outweighs supply. Local investors will also look to optimise opportunities on smaller regional hotels/hotel chains as the trading environment is set to improve over the year.

Contact us

Austria

Wolfgang Vejdovsky
Director
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Fabian Haupt
Consultant
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Belgium

Jean-Paul Ducarme
Director
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Arnaud Chantraine
Manager
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Czech Republic

Tomas Basta
Partner
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Jan Musil
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France

Anne-Claire Ferrie
Partner
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Geoffroy Schmitt
Partner
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Olivier Vialle
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Germany

Dirk Hennig
Partner
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Markus Hauk
Manager
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Ireland

Ann O’Connell
Partner
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Jennifer Gillen
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Italy

Nicola Anzivino
Partner
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Fabrizio Franco de Belvis
Executive Director
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Federico Colacicchi
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Caterina Moliterno
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Netherlands

Bart Kruijssen
Partner
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Koniwin Domen
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Portugal

Cesar Gonçalves
Partner
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Susana Benjamim
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Russia

Oleg Malyshev
Partner
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Andrey Tonkonogov
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Spain

Álvaro Klecker Alonso De Celada
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David Samu Villaverde
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José Manuel Fernández Terán
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Switzerland

Nicolas Mayer
Partner & Industry Leader - Lodging & Tourism Clients
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Bettina Buelte
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UK

David Trunkfield
Hospitality and leisure Leader Robert Milburn
Hotels sector leader
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Liz Hall
Head of Hospitality & Leisure Research
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Sam Ward
Hotels transactions specialist
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Richard Snook
Economist
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Bruce Cartwright
Partner
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Jaci Badenhorst
Senior Associate
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