In the aftermath of the pandemic, as global economic landscapes continue to recover, the hotel sectors of Southern Europe have grown from strength to strength, experiencing a robust recovery burgeoned by throngs of tourists armed with pent-up wanderlust.
Spain, France and Portugal have witnessed a distinctive strengthening, attributed to leisure performing exceptionally well and subsequently attracting heightened investor interest even as activity slows in other European markets.
“Looking at year to date transaction volumes for 2023 compared to the same period last year, Spain recorded an increase of about 4 per cent, Portugal recorded an increase of about 35 per cent and France was up about 18 per cent,” notes Ana Ivanovic, executive vice president at JLL Hotels & Hospitality Group.
However, she adds, “But when you look at markets such as Germany, transactions are 36 per cent down, and the UK is 62 per cent down. So, there’s certainly less of a slowdown in these markets than in UK and Central European markets.”
Looking ahead, Gonzalo Gutierrez, managing director, hotels at Colliers in Spain forecasts the country’s total transaction volumes at the end of the year between €2.5 to €3 billion, noting this represents a very similar figure than last year, a positive considering the amount was achieved with a lower number of transactions.
Portugal is also expected to remain at a similar level to last year in relation to total investment, another positive, managing director at Collier Portugal Pedro Valente says, considering 2022 saw the largest single hospitality transaction in Portugal of €1 billion.
Leisure leads the way
Experts agree that leisure has been the primary driver for recovery, with Gutierrez stating “Leisure has been the main driver and has been quicker in the recovery, particularly in resort hotels which recovered first and then those in markets that had a very leisure-focused approach or positioning.
He adds: “We expect this year to be a record in Spain in terms of revpar, with the driver of that revpar being the increasing ADRs; we are seeing more than 20 per cent increase in ADRs compared to 2019.”
Valente paints a similar picture for Portugal, noting that ADRs in that market are up about 20 to 30 per cent, not just with resorts but also on the urban side.
However, they warn that even in these markets, the ever-increasing ADRs have a ceiling, with impacts already being observed.
Nicolas Cousin, managing director, Spain & Portugal at Christie & Co says “I don't expect ADRs to continue to rise as much because at some point, it will become unsustainable and it may become a trade-off between occupancy and higher rates.”
Ioannis Orfanos, partner, head of capital markets at Colliers Greece adds: “Post-Covid, we didn’t have a normal market; we had a market where people had obviously accumulated some savings and people were more willing to spend. But this year, where the ADRs were too high, we did see corrections.”
Looking ahead, he notes that with interest rates going up, and inflation and disposable incomes not being at the same level that they’ve been the last two or three years, travellers will become more conscious in terms of pricing and value for money.
“I therefore don’t see how these increased ADRs can continue.”
Ivanovic is in agreement, noting that ADRs have already corrected themselves in certain destinations this summer and hoteliers are beginning to take notice.
“We’ve seen a slowdown in some markets which typically have very high growth in rates, such as Mykonos and Santorini. That growth has certainly slowed down this year and in some instances was actually only on par with last year.
“Speaking to operators and owners, we think that some of them won’t be as aggressive with their budgets next year like they have been this year. It’s certain that 2022 was a record for a lot of destinations and that they're not expecting the same figures for next year.”
High end hospitality
However, they note this isn’t the case for some assets in the top end of the market, which have continued to see rates rise.
Ivanovic says: “Ultra luxury hotels have seen the growth continuation from last year because most of the ultra-luxury hotels, particularly in Spain, are actually quite new so they're still in the ramp up. I think rate growth will still continue for ultra-luxury hotels because the clientele for these types of hotels will most likely not suffer from whatever crisis which may or may not occur.
Whereas, with the entry level five-star and four-star segments, we're already seeing a correction in a lot of markets, and I think the ones that haven't seen are most likely going to see it as of next year.”
Turning to what assets are grabbing the attention of investors, Cousin says in Spain, investors are focusing on trophy assets in key destinations, with most transactions taking place in Barcelona, Madrid, Costa del Sol and the Balearic Islands, adding that people are still willing to compete on top luxury destinations.
However, secondary destinations are a bit more challenging as the booming performance of hotels contributes to a mismatch in pricing expectations.
He expands, “Investors’ appetite in the main regions, especially Lisbon, Porto and Algarve, is strong. There's a very strong appetite for investors and brands want to get their flags out in Portugal. In Spain, we've seen people focusing on Madrid, Barcelona, Costa del Sol, Balearic Islands and Canary Islands. These top destinations have been very successful in terms of investment and the biggest part of investment this year have been concentrated there.”
He adds that the economy segment is driving more and more interest as it’s not as penetrated by brands compared to other markets such as the UK.
He notes: “We have relatively low, international brand penetration in markets in Spain and Portugal – such as Porto, Lisbon, Madrid, Barcelona, Malaga - which creates an opportunity for investors to take an asset, refurbish it, and get upside.
“The five-star segment will still develop in cities such as Madrid. And we'll be curious to see secondary destinations developing such as Bilbao and Sevilla because those destinations are driving more and more interest, specifically Sevilla which is a very trendy destination right now and is attracting a lot of international brands.
Gutierrez notes that in Madrid, the conversion of office buildings into hotels is being explored particularly in tourism hotspots, and Orfanos predicts more development in destinations where infrastructure has improved such as in Rhodes, Crete, tier 2 destinations like Kos and Halkidiki and islands such as Paros.
In Portugal, Valente highlights that there many interested entrants, especially on the value-add side of the market.
“The most active are the value-add players more than the core but several hotel owner-operators are also very active.”
Guitierrez and Cousin also note increasing interest from the Middle East in relation to Spain.
Turning to Greece, Orfanos says: “There is a lot of international interest in hospitality as well as local players looking to diversify their portfolio. There are also the owner-operators who because of their good track record, have plenty of funding from the local banks to buy and expand. So it's a very active market.”
However, he notes again that the challenge of pricing remains.
Challenges ahead
On the topic of challenges, which include ESG, financing and how these both intertwine, experts note that while ESG features in conversation, movement is still at an early stage. However, they warn continued slow movement could have a significant negative impact.
“For the new money that is being raised, ESG criteria is coming more to the forefront and we are seeing how some funds are seeking to pursue investment that meet Article 9 requirements. The importance of decarbonisation, energy efficiency measures and ESG is becoming pretty prevalent for hotels,” Gutierrez says.
Ivanovic adds: “The increase in institutional ownership in Spain will certainly increase the awareness of ESG because the moment you have an owner like Blackstone or Starwood Capital, there needs to be a path to get certain accreditations. We've already seen how important it is in the processes that we’re running; if the buyer has the profile of a German or a French institution, if you don't have any ESG accreditation, it's almost impossible to sell.”
Ioannis says that while the hospitality sector lags behind, Greek banks are now paying more attention to ESG and sustainability, and this may force some change.
Cousins adds that the combination of regulation coming into force in Europe by 2030 and brands proactively developing plans to improve their ESG metrics, may help move things forward.
Focusing more on financing and debt, Cousin stresses that the high cost of debt as perceived by investors remains a significant challenge.
Another challenge he notes, is the staff shortage which – while not as marked as in Northern Europe – is something that needs to be watched closely in Southern Europe.
“If we want to keep competitive, we need to keep costs at a reasonable level. But to secure high-performing staff, we need to reward them at a proper level. So that's a balance that will need to be found. While it’s not an issue right now because the hotel price increases managed to offset the cost increases in Spain and Portugal, this is definitely an area of concern in other regions and some hotels are running understaffed.”
Separately, Ivanovic advises a risk factor lies in what partners one chooses to engage, noting “It’s important to partner with the right operator. Big groups like Marriott and IHG are great brands, have amazing distribution and brand awareness. But the reality is that in certain locations, going with someone who has more local expertise, who knows how to manage the suppliers, your costs, employees turns out to be better on margins.”
She advises on a combination of both; going with a franchise with an international operators but a management agreement with a local entity, which will reflect better on P&L than opting for expensive management agreements with big brands.
She also advises that underwriting business plans on the basis of 2022 is probably a bit too optimistic, stressing the importance of projections striking a balance of not wearing rose-coloured glasses but also not being too conservative.
It seems the journey ahead for Southern Europe's hotel industry seems paved with a myriad of opportunities – in both key destinations and developing regions - but with risks and challenges along the way. Hoteliers and investors therefore need to carefully manage and watch ADRs, balancing rates and occupancy as well as inflation, interest rate shifts and evolving consumer behaviour.