Investors spy juicy returns from hotels

The hotel sector continues to boom with investment levels expected to exceed EUR 800 mln by year end 2018, representing a slight fall y-o-y on the EUR 900 mln recorded for last year. This decline is mainly due to lack of investment product on the market. Institutional investors are becoming more dominant, accounting for 74 pct of total transaction volume in 2017 and 54 pct in the first three quarters of 2018. Over EUR 400 mln were transacted during the first three quarters of 2018 and a similar volume is expected for the final quarter ahead with several major deals in advanced stages across the region.

“For historic and political reasons, the CEE hotel market has had a 30-year catch-up with the West,” says Lukáš Hejduk, the head of Hotels & Leisure in CEE at CMS. “This pace of change has been reflected in the rate of sector development and investment across the region. Despite investment volume contracting slightly in 2018, growth across the sector over the last five years has been remarkable, with 2019 set to be another strong year. There are still large amounts of capital looking for healthy returns - and hotels in CEE offer superior yields compared to many other regions in Europe or indeed other asset classes,” he added.

Among the largest transactions this year have been Sofitel Budapest Chain Bridge (EUR 75 mln) acquired by Starwood Capital and the purchase of Sheraton Prague (EUR 42.5 mln) by Norwegian investor Wenaasgruppen. The acquisition of the Sugar Palace in Prague (for conversion into a luxury life-style hotel) by UBM was also a notable deal.

At the current stage of the cycle, opportunistic and value-add investors are typically looking to sell their repositioned hotels to institutional investors that have long-term hold investment strategies and seek stable cash-flow generating assets. This is leading to fundamental changes in the operating structure of hotels in the region with more hotels being operated under long-term leases, especially for newly developed hotels.

“Hotels are currently changing from an alternative to a mainstream investment as investors are becoming increasingly comfortable with the CEE being a maturing hotel market. The share of the CEE-6 markets in the total hotel investment volume in Europe has more than doubled since 2010, reaching approximately 4.5 pct in 2017. However, there is still lots of room to grow, considering that the region captures over 8 pct of nights spent across the continent and has nearly 10 pct of hotel room stock. We should therefore see transaction volumes of over EUR 2 bln each year. The main challenge for the region is the lack of quality and large hotel assets on the market. As the price per room rises above pre-crisis levels and debt financing costs increase to make us believe that yields are bottoming out, we should see more owners becoming convinced that it is a good time to sell and harvest their investment,” says Bořivoj Vokřínek, the head of hospitality research for the EMEA at Cushman & Wakefield.