“Amid all the geopolitical noise, many investors will want to look beyond political cycles and focus on investing in good quality hotel assets or indeed assets with credible repositioning plays,” says Richard Dawes, UK & pan-European hotel capital markets director, Savills. “We’re still seeing leisure travel expanding on a global basis, which should underpin the markets going forward.”
Yet there are a few European political dramas that deserve careful attention going into the new year, Dawes says. “There’s a bit of a short-term watching brief around capital flows from France and Germany, alongside potential shifting dynamics in Eastern Europe, due to the US election result.” While the future for the French government is uncertain, following the recent round of no-confidence votes, Germany will now go to the polls on 23 February, after an anus horribilis for incumbent chancellor Olaf Scholz.
Meanwhile, global markets are signalling mixed messages around Trump’s imminent arrival in the White House. Peter Branner, chief investment officer of global investment company abrdn, identifies “significant uncertainty about the precise contours of the coming policy shifts under Trump”. He adds: “There is a substantial risk that the Trump administration proves much more disruptive than we are expecting, both to the upside and downside in terms of economic and market outcomes. And there are scenarios in which Trump’s policy agenda proves even more supportive for growth and market sentiment.” Add in an increasingly unstable Middle East scenario, plus big questions around policy from Russia and China, and the topic remains an ongoing source of significant radio interference.
Positive economics
Yet against all this, there are strong signs that the macroeconomic picture will be rosier throughout 2025. While geopolitics impacts the direction of inflation, subdued domestic data supported central bank interest rate cuts in the final quarter of 2024, which should improve the outlook for financing and the prospects for core real estate strategies.
Credit ratings and research agency Moody’s forecasts that for Europe, the strong dollar and low fuel costs will continue to support hospitality revenues from international tourists throughout the year. Global asset manager PGIM similarly suggests that the strong recovery in travel demand and subdued supply is driving expectations for ongoing growth in revenue per available room (RevPAR) across all of Europe in 2025. Within this, Paris and Southern European markets (namely Madrid, Rome and Milan), which recorded the strongest performance in 2024 on the back of a rebound in international travel flows, are likely to see RevPAR growth even up at elevated levels as demand patterns normalise. For PwC, the outlook for UK hotel market demand in 2025 appears to suggest a generally positive picture. While the below average UK GDP growth of 1.6 percent in 2025 could dampen UK domestic business and leisure demand, a weaker pound caused by falling interest rates should assist incoming travellers.
Dawes agrees that there will be variations throughout the markets. “If there is more of a stable situation in Eastern Europe, this could open the doors for greater international investment into Central European markets which has seen relatively low deal volumes over the last few years. The UK, Spain and Italy, which recorded excellent volumes in 2024, are likely to see continued robust deal volumes. Germany remains behind the curve, but we do expect a gradual improvement in transaction activity,” he says.
Downside issues
Yet even for the strongest markets, costs will remain under the lens as payroll remains a key driver of inflation. Expenses also remain elevated for development and restructuring drives, due in part to labour costs and ongoing materials shortages. Add to this a wall of imminent refinancing deals which may highlight business weaknesses, and some market players think that distress – or at least, market dislocations – could appear.
James de Lusignan, UK managing director of ActivumSG, says that his firm recently acquired an asset which was mired in complexity, with a previous deal for the property having fallen through. The firm purchased a mixed-used development called Sutton Point, comprising two hotels, residential, office and retail space. ActivumSG was able to sell off the non-hospitality assets to focus on the 99-key Ibis hotel and a 59-key Adagio aparthotel. These were subsequently financed via a senior loan from Leumi. He suspects that similar deals, perhaps displaying faults in the capital stack, are out there. “It’s true that post-pandemic, we have seen really impressive recovery for a lot of hospitality assets in the UK and Europe, with some nuances for specific segments and geographies. But many assets have been under-capexed for some time which continues to manifest itself. That has also coincided with headwinds like interest rates and inflation, plus the recent UK Budget, all of which are placing cost pressures on the sector.”
He suggests that lender patience may also be running out nearly five years after the pandemic began. “RevPAR is softening for certain segments across the UK, and we think there may be some level of sales activity in the near future.”
Back in the middle?
One hallmark of the hospitality industry in 2024 was a polarising of investor interest towards budget and luxury hotels, eschewing the middle ground. Dawes wonders if 2025 might see a shift in nuance. “The middle is in constant evolution,” he says. “Some of the product that is succeeding includes properties in the 3.5 star to 4.5 star category, providing a product which is operated with a much leaner staffing provision more in keeping with a limited service hotel.” Hotel groups like Ruby Hotels fit into this category offering ‘lean luxury’, meeting the needs of a price conscious customer who is nevertheless in search of quality accommodation and experiences.
Dawes also sees continuing opportunities at the top and bottom end. “Budget hoteliers are excellent at pivoting their model, focusing both on profit margins and what customers want,” he says. “Similarly, we can see further topline growth in luxury, where the outlook remains positive.”
Hotel markets in Europe this year convulsed as anti-tourism protests and increasingly draconian city authorities questioned the value of hospitality. However, the more stringent issuing of hotel permits, amid the outlawing of amateur B&Bs in some cities, has a largely positive upside for institutional hospitality investors, Dawes suggests. “If you own a hotel in that market, and supply growth is restricted, it creates a barrier to entry and underpins your asset long term,” he notes. “Similarly, moves to block short-term rental apartments could shift guests back towards more formal hospitality offerings.” Dawes thinks it likely that the sector will see a growing institutionalisation in the coming years, driven by everything from financing and insurer requirements to greater regulation and market consolidation. “The constant drive for safety and security will favour professionally managed hotels over the long-term,” he concludes.
By Isobel Lee
