Inflation in the eurozone remained high in November—and that's the good news. Consumer prices in the 19 countries sharing the euro grew by 10 in the month after a 10.6% increase in October. Many analysts had predicted a 10.4% rise.
It was the first time inflation in the eurozone had fallen since mid-2021, a distinction that could have an impact on how the European Central Bank moves on interest rates. Or, potentially not, as ECB President Christine Lagarde told European lawmakers this week. “We don’t see the components or the direction that would lead me to believe that we have reached peak inflation and that it is going to decline in short order,” she said.
Say it ain't so, Christine.
As The Wall Street Journal pointed out, consumer-price inflation has increased since Russia’s invasion of Ukraine and the Kremlin’s decision "to weaponize the country’s vast stores of energy to undermine European support for Kyiv." According to HotStats data, total utility expenses in Europe were up to €8.74 in October on a per-available-room basis, just off the highest number recorded in August at €9.15.
Though inflation is still high across the EU, it's propitious that it declined month to month (U.S. inflation has eased for four straight months from July), but there is always the possibility that it could rise again.
Could the decrease impact the ECB's decision on the next probably interest rate hike? “Today’s reading supports the ECB council’s doves who favor a 50 bps hike in December over the hawks, who would like to see another 75 bps hike,” Katharina Koenz, an economist at Oxford Economics, told The Wall Street Journal. Whichever way that decision goes could influence how hotel investors deploy capital.
Theodor Kubak, managing partner Arbireo Capital & Value One Hospitality, said that despite inflation softening in the near term, the downtrend is unlikely to produce a dovish result. "Given that the eurozone has historically been lacking behind the U.S., there will be very little movement in almost every aspect or the first half year [2023]," he said. "We know that the present obstacles for transactions are debt availability, the gap between seller and buyers expectations and general geopolitical uncertainty."
Kubak is reasonably decided that this could change in the latter half of 2023. "For one, valuations in the market will have triggered a correction in pricing," he said. "This correction in pricing could have an effect on the current over allocation on real estate. As many institutional investors are now over-allocated to commercial real estate, which is a result of real estate having performed well, while public equities, fixed income and other investment classes have underperformed."
Meanwhile, Marc Nelson, EVP in JLL’s Hotels and Hospitality Group, and based in London, said that though the cost of borrowing is higher, it's becoming easier to read, which gives investors better confidence to more informed investment decisions.
“Since the fall-out of the mini-budget and the disruption to capital markets, we have seen liquidity pressures subside to a degree, and redemptions are less pronounced, which has resulted in some fixed-income transactions being pulled from the market," Nelson said. “As interest rates have become more stable since November and the impression that future rate rises are broadly being baked into swap rates and gilts, investors are going to be able to price more reliably and therefore while pricing will reflect a higher cost of borrowing, these are likely to be less volatile and bid spreads will have narrowed."
He added that it is likely too soon to say inflationary pressures are easing and that central banks will adopt a more "dovish stance" in the coming months.
The first half of 2023 should serve as a barometer on the transactions and broader travel market, something Kubak said will provide further clarity on overall trading performance. "This new reality should, providing still a high level of liquidity that needs to find its targets, narrow the pricing gap. Some creative new structures in which midterm interests are more aligned should accelerate the pick-up in the transaction activities."
He added that there is one more additional factor that could spur cross-continental capital flow: foreign exchange dynamics.
Risk and solidity are at the heart of a hotel investment decision and underwriting deals will not be made simpler until interest rates settle.
Deal Trends
According to JLL's "Global Hotel Investment Trends YTD Q3," transaction volume hit $50.4 billion, down 8.6% from 2019 and down 0.5% from 2021. In addition, price per key for full-service hotels was up versus 2021 but down versus 2021 for select-service hotels. Meanwhile, total funds raised hit $18.6 billion, which was up 27.3% from 2019, but down 13.1% from 2021. In the UK, total transaction volume in London hit $1.2 billion, down 43% from 2019.
JLL reports that private equity groups continue to raise funds with a 42% majority of closed-end funds targeting real estate debt assets.
European hotel deals might be down compared to prior years, but hotels are still transacting. Notable recent trades include the 162-room W Rome in Italy, acquired by a joint venture between the Canada Pension Plan Investment Board and Hamilton Pyramid Europe for €172 million or €106,000 per room. The hotel was acquired from King Street Capital Management and Omnam Investment Group. In another high-profile transaction, Schroders Capital acquired a 50% stake in the 177-room Sofitel Legend The Grand in Amsterdam for around €150 million or €847,000 per room.
Even Kubak's Arbireo Capital got into the action, acquiring the 101-room B&B hotel in Cuxhaven, Germany, on behalf of a family office for an undisclosed sum. Kubak puts 2023 into the context of a chess match. "There will be a cautious opening to the year, which allows to position the pawns and to control spaces, and puts prudent players in a position to strike at the first possible opportunity, but at all times having an end goal and safety first in mind," he said.