As we exit a 2023 characterised by outstanding ADR performance, muted transactions, high interest rates and increased utility costs, many are wondering what the coming year holds. Will 2024 bring with it a surge in transaction volumes? In what areas do investors need to keep a keen and watchful eye? And where does sustainability and ESG fit into the conversation in the next twelve months? To get a sense of where we might be heading, we spoke to representatives from Savills, Colliers, JLL, and Christie & Co to get their thoughts.
Interest rates and transactions
As expected, interest rates and inflation will continue to be central factors in European markets. However, the consensus is that they have peaked and will start to come back down in 2024.
Interest rates have stabilised and we’re seeing some downtrend in inflation. We’ve seen positive trends around and across Europe,” Saar Sharon, head of hotel capital markets at Colliers says.
Rob Stapleton, director, hotel capital markets at Savills agrees, noting that this development bodes positively for transactions.
“The high interest rates are affecting buyers’ ability to pay a price that meets the owners’ expectations. If interest rates come down next year, financing will be cheaper so I expect the bid ask spread to narrow more next year. It's starting to narrow already.”
Transaction volumes in 2024 are also expected to be aided by those who need to refinance in the next 12 months.
Will Duffey, head of EMEA Hotels & Hospitality Capital Markets at JLL says: “There are a number of owners across Europe that will need to refinance. And while interest rates look like they may come down, that’s not going to change the needle much in terms of that have through Covid used all the free cash they have in the business to keep the lights on but haven't really invested in the asset and now are facing this refinancing challenge.”
He explains further. “They have assets which need capex and they don't really have any further equity to plug any form of gap. And so they will need to either sell or bring someone in to provide some sort of rescue finance to help them for the short term. So I think next year, we’ll see some situations where the capital stack is broken and they will be forced to do something.”
Carine Bonnejean, managing director, hotels at Christie & Co is also of the mindset that there will be significantly more transactional activity linked to refinancing.
She adds: “We’ve seen more distress already starting to appear and we’re going to see a lot more distress next year. It looks good on the outside but some of the cracks are starting to show. I expect a lot more transaction activity and a lot of it will be centred around the UK.”
However, Stapleton assures that while there has been an uptick in distress since September, with more inquiries coming in from lenders and insolvency practitioners, lenders will adopt a more collaborative approach than during and after the 2008 financial crisis.
“I don't think we'll see a significant flurry of distress like we saw post-GFC but I think there will be more consensual deals come to the market.”
Distress could attract private equity and experts expect a gradual increase in institutional interest, dependent on market transactions.
Institutional interest and international investment
Sharon says that while institutional investors have pulled back and have largely stayed away unless there’s a platform involved, he believes this will change in the course of next year.
“I don't expect in early in the year as they'll need to see some transactions happening before they move. They have the money and they're asking questions. We see a lot of family offices, sovereign funds looking at more trophy hotels and serviced apartments.”
Duffey agrees, saying he thinks private equity capital will get going in Q2 or Q3 of 2024, with bigger deals being done. However, he notes that this is dependent on pricing.
He adds: “Some investors are also looking at reducing their allocation to office and putting capital into living i.e. hotels or logistics. And so I think we’ll see more capital coming into the sector.”
“We’ll see more activity as long there are more interestingly priced opportunities. There has been some NPL activity happening and that's what drives them to the market. At the moment, they’re there and waiting but they haven't seen a lot of interesting IRR-driven value adds, portfolios or single asset deals that they can look at,” Bonnejean says.
Turning to international investment, experts are optimistic, with Bonnejean expecting international activity to continue to pick up in 2024 and Duffey drawing attention to interest from the Middle East and Far East.
Stapleton notes that there are a lot of Singaporean investors looking to deploy capital into the UK. He says: “A lot of that is money that has come out of China through Hong Kong. I’ve seen a lot of new capital come of Taiwan and Vitename and there’s a lot of Southeast Asian capital looking to deploy as well.”
He adds: “There’s a lot of US private equity waiting to be deployed but we haven’t seen the scale of transactions that companies like Lone Star wants to get involved in. But I think we’ll see more of those next year.”
However, geopolitical tensions may present obstacles, with Duffey noting investors’ concerns about the consequences of growing tensions and possible adverse effects on their investments, with some possibly choosing to wait it out and hope for a better landscape.
Positively though, all this means that in 2024, transaction volumes in the UK are expected to be between £3 billion to £4 billion, up from just under £2 billion expected for the whole of 2023.
“There's visibility on two and a half billion of deals that have been prepped for sale that I'm aware of. I think next year will be comfortably over 3 billion and I wouldn't be surprised if we got to four again,” Stapleton says.
In Europe, transaction volumes for 2023 is expected to be flat on 2022 levels.
“On the European side, we’re slightly below where we were last year, year to date. Last year we were about 10.2 billion and we currently are at 9.7 billion. There’s no doubt that activity has picked up massively in the last few months and we only have about half a billion to make up for in differential. I think that bodes well for next year,” Bonnejean said.
Areas of interest
On which areas are emerging as hotspots for investment in the UK, London and Edinburgh are prime locations for hotel developments and conversions from offices or department stores, with Stapleton drawing attention to the softening of the City of London’s policy around turning offices to hotels.
Saar adds: “London and Edinburgh are attractive not only for existing hotels but also for office conversions and department stores conversions, the latter particularly in Edinburgh. We definitely see a trend in London for office conversions to go to hotels and strong interest in that.”
There are a number of office buildings that we’re getting presented where a conversion to a hotel is being explored so there will definitely be more than several office buildings that will get converted to hotels,” Duffey agrees.
However, he warns about the possibility of too much supply in micro-markets, noting that there needs to be a balancing act done in this area. Bonnejean also warns that while office to hotel conversions will be a big trend, it’s important to remember that not all offices make good hotels, and this may limit the possibilities in some markets.
Duffey says that cities like Oxford, Cambridge, and Manchester also continue to attract significant attention.
In Europe, Saar Sharon adds that Spain is emerging as a high value/value-add market with robust activity and a lot of coastal interest. In Portugal, coastal areas including Lisbon will continue to be of interest.
He adds: “In the Netherlands, definitely Amsterdam because there's a moratorium to build new hotels and that's reinforcing the interest in what is already a strong market. I think Paris will see some very potentially large hotels coming to market on the trophy side and that’s always of interest.”
Stapleton notes that Italy and Spain have had significantly higher transaction volumes this year than seen historically and expresses the belief that this will continue into 2024.
“They are highly atomized markets so it’s easier pickings at the moment for the portfolio aggregators to build up those platforms,” he says.
Positively, Bonnejean says that while the UK has seen muted transactions in comparison to other countries in Europe, she believes 2024 will tell a better story, predicting a more vibrant UK market and potential slowdowns in other European countries. “I think the UK will be back a bit more to where it used to be and it’s no doubt going to be better than this year, driven more by regional UK key cities than London.”
Experts say that while there will be more portfolio deals across the board, the market will still be led by single-asset deals as portfolios remain challenging to sell due to financing difficulties.
Bonnejean says: “It will still be more difficult to sell big portfolios in the current market if you’re not ready to add a massive discount so I think single asset deals will be dominant. Maybe we’ll see more portfolios towards the back end of the year but it's going to take time for massive portfolio activity.
By segment
Going into 2024, trading performance is expected to continue to be strong, with Duffey noting a high conviction rate that luxury hotels and limited service will continue to do really well and Bonnejean singling out lifestyle and economy.
Duffey adds that while midmarket hotels in secondary locations which haven’t been updated will struggle, there may be some activity in that segment as some may take advantage of the fact that there are less eyes on that part of the market.
Rob Stapleton adds the MICE segment will still remain a very strong and important component.
In terms of overall performance trends for the next twelve months, Bonnejean says: “I think we’ll see positive, albeit slower growth for next year and of course, some continued pressure on some of the costs but not as much as we've seen in the past.
Technology and sustainability
Moving forward, Duffey says the sector needs to pay more attention to technology and sustainability.
“Technology is still lagging way behind where it should be from an efficiency perspective and from a consumer perspective and that's something that definitely needs to be enhanced. He adds that while sustainability is talked about extensively, the market isn't necessarily paying a premium for assets that are really sustainable in terms of having every credential possible. “
However, he notes: “The more we see it becoming more important in valuations and there being more of a discount for assets which are not sustainable or don't have a path to it, the more sustainability will have a part to play.”
Stapleton agrees, saying: “There’s definitely a growing focus on sustainability, particularly where it's new development. While it feels like it has fallen back on people's agenda in the last couple of years, I think it’s definitely going to continue impacting investment decisions, particularly in that more institutional space where it's a now a requirement that things are at least measured, monitored and improved.”
Government asylum contracts
Another thing to be aware of, Stapleton says, are the hotels which have been under government asylum contracts and what effect their coming out of service will have.
“There's been a bit of an artificial bump. For example, about a quarter of the Dublin market is under government contracts and those contracts coming to end - and the stock coming back into circulation - will have an impact. We’ll maybe see poor quality hotels come out of circulation and be converted into retirement living or care homes or in some cases residential.”
In a nutshell, it seems the hotel sector in the UK and Europe is set to experience varied dynamics in 2024. Interest rates, inflation, sustainability, and technology are pivotal factors shaping the landscape. Challenges in refinancing and capital constraints present both difficulties and opportunities, with institutional capital and international investment also expected to play a role.