August 24, 2023

Revitalizing Hospitality Investments in Europe: Opportunities and Challenges

With the hospitality market reclaiming its pre-COVID strength, investor interest is resurging. Notably, the realm of hotel investments is witnessing a distinct upswing, as financial institutions and sovereign wealth funds channel resources into the European Hotel market, highlighting its promising potential.

This article aims to provide a comprehensive perspective on opportunities and challenges in the current European market. While signs of recovery are evident, specific obstacles persist, warranting careful consideration.

By delving into the present market, this article offers initial insights encompassing revitalised investor interest and existing as well as forthcoming industry challenges.

Complete Recovery of the Hotel Market Post-COVID

When evaluating the hospitality industry, a critical aspect emerges. The performance of the hospitality sector has outpaced other industries like technology and retail, a gap that notably widened in the latter half of the year. Coupled with this, the revenue per available room (RevPAR) has exceeded global GDP growth within the current economic cycle (graphic). Given these factors, the outlook for the hospitality sector in 2023 appears promising.

Boosted Confidence Drives European Hotel Market Resurgence

The remarkable rebound of the hospitality industry in 2021 and 2022, reaching pre-COVID heights, positions it as a prime investment prospect for 2023. It distinguishes itself as a top-performing asset class within real estate, garnering significant interest from companies and sovereign funds investing in the European hotel market. Commerz Real AG, the private equity subsidiary of Germany's Commerzbank AG, is among these companies. Commerz Real has allocated 10% of its real estate investments to the hospitality sector, recognizing the growth potential of this niche. In an interview with, Sven Nötling, Head of Hospitality at Commerz Real, elaborates on the surge in hospitality investments:

“Hospitality has been on a very steep recovery curve coming out of Covid, which is a very good thing for our team,” he notes. “Another strong point is that you can’t ‘virtualize’ the hospitality experience. While retail and offices have suffered due to digitalization trends, hotels are an experiential asset class – if you want to dip your feet in a pool, you have to actually go there.”
“We see people wanting to travel, and that means they need accommodation. From a business perspective, there are also negotiations that work better face to face, there are relationships that need to be developed, and all this builds the case for hospitality investment.”

Sovereign wealth funds have also recognized the substantial potential within the hospitality sector. Over the past year and the preceding one, numerous Sovereign wealth funds from the Middle East and Far East have strategically invested in the European hotel market. A significant collaboration arose between the Abu Dhabi Investment Authority (ADIA) and Singaporean state fund GIC, jointly investing in Greece's Sani Ikos Resorts. GIC's substantial contribution amounted to an impressive $2.3 billion, approximately €840,000 per key.

These state funds have channeled substantial resources into the hospitality sector strategically. This trend is underscored by ADQ, the Abu Dhabi fund, which invested nearly a quarter of a billion dollars to acquire the esteemed Marriott Edition "Reykjavik Hotel" in January 2023. This strategic decision underscores a heightened awareness of the enduring value and potential gains presented by the hospitality market.

Collectively, these investments have infused nearly €7 billion into the European landscape, with Paris and London emerging as attractive destinations. These choices are fueled by robust tourism industries and well-established infrastructure.

In conclusion, the burgeoning interest of state sovereign funds in the hospitality sector underscores its enduring strength and growth potential. These strategic investments highlight the sector's capacity to deliver solid returns, rendering it an appealing avenue for significant investors seeking stable returns and potential portfolio appreciation.

Challenges on the Horizon for the 2023 Hospitality Market

Similar to any market, the hospitality industry presents specific challenges requiring careful investor consideration. Deloitte, a respected expert in this field, has highlighted some significant challenges that investors need to heed.

Currently, these challenges are intertwined with the global financial landscape. Escalating inflation is driving up hotel expenses, necessitating vigilant monitoring as it directly impacts industry expenditure and earnings. Encouragingly, hotels possess the flexibility to adapt their cost structures and adjust prices more dynamically, providing a significant advantage compared to entities like office buildings or residential real estate.

An additional concern pertains to the scarcity of skilled professionals within the hospitality market. This issue assumes a pivotal role as the industry heavily relies on proficient personnel to deliver exceptional services. The dearth of skilled workers not only compounds operational complexities but also triggers an escalation in employee wages, thereby contributing to prevailing financial challenges.

Beyond the existing circumstances, it becomes imperative to broaden our perspective to encompass the imminent challenges that the hospitality sector is poised to confront. Of notable significance is the paramount consideration for investors revolving around the impending global Environmental, Social and Governance (ESG) compliance framework. In the contemporary landscape, the prominence of investing in hotels that manifest a palpable and constructive influence on environmental preservation has never been more pronounced. Equally noteworthy is the inherent consciousness among industry stakeholders regarding the pivotal nature of these environmental concerns.

In summary, stakeholders in the hospitality sector should maintain vigilance over these diverse challenges. Vigilantly monitoring the ascent of inflation, strategically addressing the dearth of skilled labor, and proactively managing escalating labor costs are of paramount importance. As investors navigate this intricate landscape, judicious decision-making and adaptive strategies will serve as indispensable tools for surmounting challenges and optimizing opportunities within the industry.