This is the second lowest level of investment in the past decade, according to the HVS European Hotel Transaction Report from global hotel consultancy HVS London and its hotel brokerage arm HVS Hodges Ward Elliott.

Transaction volume across Europe reached €10.7bn, with 388 hotels changing hands – and an average price per hotel that was 9% lower than in the previous year, although significantly ahead of the transaction volume in the years following the global financial crisis. (*Only transactions above €7.5m were considered).

According to the annual European Hotel Transaction Report, which has now been published for over 25 years, real estate investment companies were the most active investors in 2023, buying and selling nearly €6bn of hotel assets but 28% down on the previous year’s activity.

Owner-operators were the second most active, transacting €4.1bn of properties, up 45% on 2022 levels, while investment from private equity firms dropped significantly as they divested their hotel assets to become the largest net sellers, generating a net balance of €628m.

“The year was dominated by higher inflation and higher interest rates which meant increased financing costs for acquisitions and a rise in operating costs for hotels. While hotels were somewhat cushioned by strong top-line performances, higher borrowing costs led to a softening of yields and a slow-down in transactional activity,” commented report co-author Serena Yang, an associate at HVS HWE.

Spain and France saw the most transaction activity accounting for 44% of total investment volume, emphasising the renewed focus on southern European leisure markets and pushing the UK out of the top slot. Notable was a fall in core asset transaction activity as investor interest moved more towards focussing on value-add assets, promising higher returns. There were also fewer distressed sales than many had anticipated.

Single asset transaction volume dropped by 17% on the previous year, totalling €7.3bn, with France seeing the most activity – up 37% – and Spain following with a 26% rise on 2022. Portugal, Denmark and Switzerland also saw uplifts in single asset activity while the UK, Germany, Italy, Ireland and Sweden saw single asset volumes fall.

Overall portfolio transactions fell 24% in 2023 with total volumes of €3.4bn. Spain proved the most buoyant market for portfolio activity. Deals in the UK were 74% down although sales were boosted by two Hoxton London hotels, the Scottish Crerar Hotel Group and two Warner Leisure hotels.

The 2023 Transaction report concludes that the worst of the current cycle appears to be over, with interest rates seemingly having peaked. Strong performances boosted by room rate growth in many markets are a reminder that hotels are better insulated in periods of high inflation because they can re-price and grow room revenue.

“The financing environment will be the key driver for increased investment activity as we move through 2024 and with economic headwinds trending more positively and inflation falling, an increase in hotel transactions is expected,” said report co-author Matthias Hecht, a senior associate at HVS HWE.

“Investment activity is already fairly strong this year and the rise in brand offerings and differentiation by various hotel groups will continue to lead to increased conversion acquisitions and this, combined with the huge weight of capital ready to be deployed, looks positive for more hotel transactions,” he said.