Investing in hotel real estate in Europe, how the market is changing after covid

The consequences of the pandemic are still being felt in the hotel property market. According to Scenari Immobiliari's Report 2023 on the hotel real estate market, presented at the Hospitality Forum 2023organised in Milan by Castello SGR, while it is true that tourism is practically back to full strength, in Europe the sector's turnover was 20.5 billion in 2022. Italy, on the other hand, fared better with a 40 per cent increase to EUR 3.5 billion. A return to pre-covid levels is expected in 2024.

Investment in the hotel sector after covid

The boom in tourism is having a positive impact on both the hotel market and entirely new sectors such as short-term rental. Global hotel real estate investment in 2022 decreased slightly (-1.5 per cent compared to 2021) to EUR seventy-two billion, with interest uneven by relative location, urban areas, holiday resorts and level of facilities.

At European level, the hotel property market remained essentially stable, closing 2022 with a turnover of EUR 20.5 billion (21.2 in 2021) blocked by rising costs and increasing geopolitical concerns: for the current year it is expected to be worth EUR 19.5 billion, with an increase from 2024 onwards (estimated EUR 25 billion).

Italy continues its positive trend and closes 2022 with a forty per cent increase in total turnover, amounting to EUR 3.5 billion, while a realignment to 2019 levels is expected for 2024.

The trend of the accommodation market in Italy and Europe

"The year 2023," says Francesca Zirnstein, managing director of Scenari Immobiliari, "is off to a positive start for the European hotel property market. Investor activity increased after the limited intensity of 2022, with an increase in allocations in the sub-fund, compared to the first quarter of last year, of more than fifteen per cent to four billion euros of invested assets. There continues to be a fair degree of optimism among operators, with the level of security proportionate to the characteristics of the segment, maximum for luxury, minimum, but still sufficient, for economy structures. The solid recovery in tourist flows and the restoration of real estate assets did not have the hoped-for effect on the institutional investment side. Just under eighty per cent of the segment in 2022 was made up of European players, three quarters of which were single properties and one quarter portfolios with cross-border investors, among whom the return of Asian demand was evident.

 "The growth in turnover generated by the Italian hotel real estate market in 2022," says Giampiero Schiavo, CEO of Castello SGR, "is undoubtedly an encouraging sign. Given the uncertainty that characterises this historic moment, it is in any case necessary for all market players - each in his or her own role - to continue their efforts, especially in two directions: to make the entire national territory more attractive, also by strengthening the infrastructure, and to continue to renovate the Italian hotel heritage in order to be more attractive to international tourism'.

Tourism after the pandemic

During 2022, global international tourism recovered 66 per cent of pre-pandemic levels: by the end of the year, the number of tourists travelling abroad reached 960 million, more than double the 2021 figure, although still 34 per cent less than in 2019. In the first half of the year, the number of arrivals reached 37.5 per cent of the total, while in the second half of the year, six hundred million international arrivals were recorded, accounting for 62.5 per cent of the total travel.

Europe, the world's largest destination region, recorded 585 million arrivals in 2022, reaching almost 80 per cent of pre-pandemic levels; Western Europe in particular reached levels of 87 per cent. This was supported by robust intra-regional demand and the implementation of coordinated travel measures, such that the Old World accounted for 64 per cent of global arrivals in 2022. Despite headwinds, such as the emergence of the Omicron variant at the beginning of the year, the start of the Russian offensive on Ukraine and the difficult economic environment, international tourism has shown good resilience, as evidenced by the strong recovery in arrivals: from minus 59 per cent in the first quarter of 2022 compared to the same period in 2019 to minus 28 per cent in the last quarter of the year just ended, again compared to the same period in the pre-pandemic year.

Investment in hotel real estate in Europe

In Europe, the total investment volume in 2022 reached EUR 15 billion, with a higher concentration in the first half of the year, down about ten percent on 2021. The general expectation of falling prices, even for good-quality real estate, has been disappointed for the time being, thanks not only to increased indicator performance but also to inflationary pressure on rents. On the one hand, there is a growing interest in hotels that are less exposed to cost increases, due to changes in the price of goods and general inflationary pressures, the need for less specialised labour and reduced operating expenses. On the other hand, the focus remains on classic and historical tourist locations, supported in 2022 by a strong upturn in leisure demand and limited space for new players to enter the supply side.

European accommodation transactions involved hotels in all supply segments, with a majority share relating to the four-star class. The transactions detected in the last eighteen months involved 430 facilities, spread over about 255 transactions, totaling just over 65,625 rooms.

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Investing in hotels in Italy

In Italy, the hotel real estate market in 2022, together with the retail asset class, showed a seven per cent drop in investment volume compared to the previous year to EUR 1.7 billion, despite an increase in overall turnover compared to 2021. The reasons for this can be traced back to the realisation, during the second half of the year, of the first signs of a slowdown caused by the ECB's gradual raising of interest rates and the consequent wait-and-see attitude on the part of investors.

Just over eighty three-star (around 26 per cent),four-star(41 per cent) and five-star(around 32 per cent) market-detected accommodation facilities were allocated in the last eighteen months. More than four thousand rooms were invested in 2022 alone. Some of the transactions continued to involve consolidated locations such as Milan, Rome, and Venice, while the others took place in secondary cities and peripheral territorial areas that are potentially attractive but characterised by socio-economic fundamentals almost exclusively related to forms of tourism that are distinctly seasonal or markedly experiential.

Short-term rentals in Italy

The residential stock in Italy amounts to approximately 35.4 million units, part of which is now dedicated to short-term renting for leisure and business reasons. One part concerns bed & breakfasts, at national level the number of facilities is over 33 thousand units, a share concerns 120 thousand private flats managed by professionally structured companies, while the largest portion, 465 thousand flats, concerns privately owned properties placed on the market for short term rental with independent management.

The national real estate structure offers forms of residency, for work and leisure, to a share of demand that has been growing for more than ten years and is characterised by the need to feel part of a familiar environment, even when it is far from one's usual home. Forecasts of an increase in short-term rental contracts, in double figures for many of the locations where the sector is developing most, show the strength of interest.