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Low IRR and cap rates in EMEA help put hotel investor sentiment at all-time high


JLL Hotels & Hospitality Group has released the results of its bi-annual global Hotel Investment Sentiment Survey (HISS) which shows that trading expectations across Europe, Middle East and Africa (EMEA) are set to remain particularly strong for the next six months to two years. 

Confidence in EMEA hotels soars
According to the results of the survey, investors are feeling a strong uptick in confidence in the sector and expect trading growth to accelerate in EMEA with short term expectations rising 45 points to 64%* and medium term up 42 points to 79%* since the last survey.

O
f the 31 cities tracked across EMEA, all but one (Moscow) are expected to show growth in performance over the next six months, with Moscow joining the rest of the pack when looking further ahead. Investor sentiment is strongest in London, followed by Munich, Amsterdam and Copenhagen. 

In London, improved economic conditions, falling unemployment rates, rising consumer confidence and a flurry of hotel transactions at the start of the year all led to investors feeling particularly optimistic about the city’s short term (six months) trading expectations.

Munich is the most favourable market in the medium term (two years) where there is both strong competition for hotels with international appeal and many institutional investors seeking assets subject to long term leases. The steady economy and healthy supply of growth provide stable operating fundamentals across Germany with all markets expected to see trading conditions improve even further in the medium term. 

“With low cap rates and a slow hotel development pipeline, investors are feeling increasingly optimistic about trading prospects, and Munich will continue to be one of Europe’s most sought-after destinations for operators and investors.”Said Christoph Härle, CEO EMEA, JLL Hotels & Hospitality Group.
 
In Amsterdam, stable trading conditions, robust tourism demand and a strong development pipeline over the next two years provide a solid base for investors keen to tap into this market, while in Copenhagen a number of new hotels are set to open during the year, including Melia, CABINN and Wakeup, providing additional supply to the 4-star and budget segments. 

Moscow was the only city across the region where investors are anticipating trading performance to decline over the next six months. The current political situation in Ukraine is impacting markets across the sub-region with investor sentiment at an all-time low. In addition, the Russian economy is currently showing marginal GDP growth of just 0.5% expected in 2014.

Globally, investor sentiment for hotel trading has surged over the past six months with investor short term expectations up 26 percentage points to 58%* and medium term up 28 points to 67%*. Both are at the highest level ever recorded with positive trading sentiment for all three regions broadly aligned and a signal that the troubled days of the global financial crisis are now behind the global hotel investment market. 

IRR below three-year average
Expectations for leveraged internal rate of return (IRR) requirements across EMEA recorded a 100 basis point contraction since our last survey and currently sits at 13% - well below the three-year average of 16%. This reinforces the confidence in the market as investors are no longer requiring such high returns on their investments. London reported the lowest IRR requirements at just 10%, compared to 13% in our last survey.  At the other end of the spectrum, Casablanca and Cape Town saw IRR requirements rise to over 18% in the last six months and remain most at risk. 

Cap rates at an all-time low 
Cap rate expectations for hotels in EMEA have fallen to an all-time low of 7%, 50 basis points below the most recent three-year average. The survey results show that investors are becoming much more optimistic about the future of hotel real estate across the region as they continue to provide higher returns than alternative real estate options. Investors have the lowest expectations for historically “safe” markets such as London and Paris as they continue to attract the bulk of interest.

“According to the survey results, investment funds and private equity groups are the most acquisitive groups currently targeting EMEA hotel real estate, followed by hotel operators and REITs. In terms of investor’s target strategies for the next six months, 47% are primarily focusing on acquisitions, with hot markets including Madrid, Lisbon and Budapest. Key markets where our survey respondents expect assets to be disposed include Vienna, Moscow and the French Riviera.” Added Härle. 

The full report, including an infographic depicting the key survey results in EMEA is available online.

Fig 1: EMEA hotels trading performance expectations

EMEA hotels trading performance expectations.png
Source: JLL Hotels & Hospitality Group

Notes to Editors:
* The survey represents investors’ expectations for trading performance in the short (six months) and medium (2 years) term with results presented in line with the weight of opinion. Net balance is the percentage of respondents who respond positively minus the percentage of respondents who respond negatively. Results are averaged across all respondents for each region and are not weighted by the size of the market. Weighting is only conducted for the regional and global averages, based on the number of responses for each city.