Europe - HVS Hotel Valuation Index

HVS, the world’s leading hospitality consulting and valuation firm, is pleased to deliver the 2019 Hotel Valuation Index (HVI). The HVI is a hotel valuation benchmark developed by HVS. It monitors annual percentage changes in the values of typically four-star and five-star hotels in 33 major European cities. Additionally, our index allows us to rank each market relative to a European average. All data presented are in euro, unless otherwise stated.

The methodology employed in producing the HVI is based upon actual operating data from a representative sample of four-star and five-star hotels. Operating data from STR were used to supplement our sample of hotels in some of the markets. The data are then aggregated to produce a pro forma for a typical 200-room hotel in each city. Using our experience of real-life hotel financing structures gained from valuing hundreds of hotels each year, we have determined valuation parameters for each market that reflect both short-term and longer-term sustainable financing models (loan to value ratios, debt coverage ratios, real interest rates and equity return expectations). These market-specific valuation and capitalisation parameters are applied to the EBITDA less FF&E Reserve for a typical upscale hotel in each city. In determining the valuation parameters relevant to each of the 33 cities included in the European HVI, we have also taken into account evidence of actual hotel transactions and the expectations of investors with regards to future changes in supply, market performance and return requirements. Investor appetite for each city at the end of 2018 is therefore reflected in the capitalisation rates used and investment yields assumed.

Just when we thought that 2017 had been an outstanding year in terms of hotel values, 2018 was yet another spectacular year for the market, setting new highs. While geopolitical uncertainty and instability remain present in Europe, the influence on investors, developers and lenders within the hotel sector seems to be continually lessening. European hotel values registered an impressive 3.9% growth in 2017 and this positive trend continued throughout 2018 with hotel values growing by an additional 3.0%. We attempt to summarise so much into a few salient points.

Economy

  • What a difference a year makes. Political crises, market volatility and profit warnings make for a rather different backdrop to that of a year ago. While some argue that a market correction (or even a downturn) is already occurring, there is a common consensus that if this is not yet the case it is likely to materialise at some point in the next 18-24 months. In this context, European economic growth is expected to continue to moderate to just over 1.5% by 2020 (OECD).
Tourism Dynamics

  • Tourism is still in rude health. Globetrotter numbers continue to rise, and it is well known that ‘all roads lead to Rome’. As a result, Europe maintains its share of just over 50% of global tourist movements and received 713 million visitors in 2018, 6% up on an already exceptional 2017. The extremes in terms of performance were the sunny Southern European countries with a 7% increase and cloudy Northern Europe which remained flat as a result of low arrival numbers to the UK. The continued recovery of markets, such as Russia and some Arab markets, as well as increasing outbound travel from other emerging markets, such as India, present further opportunities for Europe as a global tourism magnet.

Brexit

  • Amidst the foggy uncertainty of Brexit, a few things have become clear, including the stockpiling of goods ahead of a potential ‘no-deal’ exit on 29 March and a number of larger companies (that haven’t already done so) fleshing out their strategies should this be the ultimate outcome of the ongoing negotiations. In parallel, however, a recent survey of British Property Federation members indicated that industry leaders have become more optimistic regarding the long-term outlook for UK real estate – at the expense, nevertheless, of new developments for 2019. With just a few weeks to go, the business community is eagerly awaiting a conclusion to this long process that will allow them (hopefully!) to plan more accurately for the short to medium term.

Hotel Performance

  • Despite a slow December across European markets and some country-specific challenges (such as the ‘gilets jaunes’ movement in France), 2018 was generally a profitable year for hotels. Europe experienced another year of solid RevPAR performance, with an aggregate increase in euro terms of around 5%. While the continued recovery of markets such as Paris and Brussels in Western Europe were significant, the likes of Istanbul and the Russian markets also had solid performances in euro terms (and even better ones in local currency). On the back of continued robust demand, the European pipeline remains one of the more modest in the world at 8%, which is reassuring for 2019 performance, financial and political turmoil aside.

Transaction Volume

  • Total European hotel transaction volume reached €18.6 billion in 2018, an 14% decline on 2017’s volumes. The decrease is in part due to the lessened participation of HNWI and Asian buyers, which was not fully compensated by the increased appetite of solely hotel-focused real estate investment companies and REITs. Institutional investors continued to be net buyers, heavily investing in Germany, which was the second most popular market for transactions after the UK. London, Dublin and Amsterdam were (in that order) the most liquid cities in Europe. For more details please refer to our sister publication 2018 European Hotel Transactions.

Hospitality Investment

  • Interestingly, the hospitality sector, including not only hotels but also student accommodation and senior living, attracted a record level of investment in 2018, to reach almost 30% of all investment volume according to RCA. This represents a doubling of its share compared to the previous peak in 2017. Attractive returns as well as a desire for diversification are some of the drivers for this trend.

Capitalisation Rates

  • As funds keep on cumulating and both equity and debt continue to chase opportunities, the perception that the cycle is past its peak and that most deals are too pricey becomes more prevalent. Capitalisation rates remained stable for the year, as strong performance underpinned cash flows, although caution regarding changing economic conditions are also factored in by investors.

Hotel Values

  • More than a decade since the peak values of 2007, it is interesting to note that our index only records a handful of markets that have seen values increase in real terms. Of these, only Munich and Frankfurt experienced compound annual growth of more than 1% during this period. We still see upside potential in Eastern and Southern European markets, while currency fluctuation is still the main reason for the lowish euro values of UK markets compared to peak performances.

Sure, Brexit is THE big unknown force lurking out there. And yes, wobbles in the stock market in December, increasing interest rates, ongoing trade disputes and slowing GDP growth in Europe also contribute to a somewhat pessimistic outlook. But at odds with all this, demand for hotel accommodation remains vigorous across most markets. So, while it might be true that economic growth for this cycle is past its peak, it would be too dramatic to expect hotel demand to suddenly fall away. Furthermore, new supply remains modest (except for some active pockets, such as London, Manchester and various German markets), which should prop up fundamentals, even in the event of diminishing demand volumes.

Across the pond, the USA is seeing moderating economic growth. This doesn’t, however, mean that the Fed will walk away from further interest hikes in 2019. The Bank of England or the European Central Bank walking this path seems unlikely given the regional circumstances. Perhaps low interest rates will indeed remain the European reality for a bit longer after all?

As we ponder the impact of eventually rising interest rates versus strong cash flow performance, and consider the impact of these factors on the risk premium, it is ever more likely that increasing interest rates will be the part of the equation we need to focus on the most in the short to medium term as that will likely mean upward pressure on cap rates. The likelihood of serious changes on this front should, however, remain low if no economic downturn materializes.

Market Value Change (€Euro)

Market 2018 2019
Amsterdam
Moderate value increase
Moderate value increase
Athens
Significant value increase
Moderate value increase
Barcelona
Stable values
Moderate value increase
Berlin
Moderate value increase
Moderate value increase
Birmingham
Stable values
Stable values
Bratislava
Moderate value increase
Moderate value increase
Brussels
Significant value increase
Moderate value increase
Bucharest
Significant value increase
Moderate value increase
Budapest
Significant value increase
Moderate value increase
Copenhagen
Moderate value increase
Stable values
Dublin
Moderate value increase
Stable values
Edinburgh
Moderate value increase
Stable values
Florence
Moderate value increase
Stable values
Frankfurt
Stable values
Stable values
Geneva
Stable values
Stable values
Hamburg
Stable values
Stable values
Istanbul
Significant value increase
Moderate value increase
Lisbon
Significant value increase
Moderate value increase
London
Stable values
Stable values
Madrid
Moderate value increase
Moderate value increase
Manchester
Stable values
Stable values
Milan
Moderate value increase
Moderate value increase
Moscow
Significant value increase
Moderate value increase
Munich
Stable values
Stable values
Paris
Significant value increase
Moderate value increase
Prague
Moderate value increase
Moderate value increase
Rome
Moderate value increase
Moderate value increase
Sofia
Significant value increase
Moderate value increase
St Petersburg
Significant value increase
Moderate value increase
Stockholm
Stable values
Moderate value increase
Vienna
Stable values
Stable values
Warsaw
Significant value increase
Moderate value increase
Zurich
Stable values
Stable values

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