While the post-pandemic years have been very positive indeed for Italy’s hotel sector, with ADR and profitability growth in the country ahead of most southern European markets, experts speaking at the Italian Hospitality Investment Conference stressed there are several fundamentals which need attention, areas in which Italy lags behind its counterparts.
The fundamentals
While Italy is able to attract high-spending clientele by way of its luxury offering, Ezio Poinelli, senior director, southern Europe at HVS says the country is lacking in its ability to grow traveller demand.
“More or less, all the southern European countries are back to 2019 numbers in terms of international arrivals and demand; Portugal is up 13%, Spain is almost there as well as Greece. But Italy is still 10 per cent below,” he says.
He adds: “Looking at long-term demand, in the last ten years, Italy on average has been growing by 3 per cent, which is the lowest; in Greece and Portugal, they have over 10 per cent average growth rate of international arrivals and in Spain 5 per cent. So, we are not so competitive.”
He points outs out that while Italy is able to push room prices, long-term investors go where there is stable growth in demand, stressing that Italy has to be more competitive in that area.
Poinelli also notes that Italy lags behind countries like Greece and Portugal in terms of how easy it is to invest in real estate and more work needs to be done to improve the regulatory and economic environment to improve the Italian hotel sector’s attractiveness to international investors.
Looking at supply, he states that there aren’t enough suitable hotels for transactions for international investors and the demand is outpacing the offer.
“Out of ten investors we have maybe one that can find hotels that are suitable, and then there’s a gap in pricing expectations,” he says.
Pricing expectations
However, experts express hope that gap in seller and buyer expectations will get smaller.
While sellers may be reluctant to sell a hotel for less during this period of outperformance, Guido Castellini, senior advisor at Coldwell Banker Commercial says the challenges of refinancing and the increase in operational costs could convince some sellers to revise their expectations.
“The reality is that while the topline is great, the bottom line has seen some erosion due to things like rising energy costs, employment costs and other operational costs,” he says.
Ezio agrees, adding “A correction of ADR that we could see in some segments of the market in the next few years could help sellers review their expectations on asking prices.”
Where are the potential opportunities?
Castellini adds a lot of deals may come to fruition in 2024 for a variety of other reasons.
“One is in relation to people who will need refinancing. The second is redemption; the ones who want to get the value they’ve achieved up to now and they want to sell because they see potential challenges in the future or maybe they need capex reinvestment in the property; many properties in Itay need major capex.”
He adds that generation change is a major opportunity as there are a lot of families where the younger generation don’t want to go into the hotel business. Therefore, the older generation in those family-owned businesses will explore selling as there’s no one to take care of the operation of the hotels.
Separately, he notes the banks may also force some deals to become reality in 2024.
Alessandro Lomabardo, chief commercial officer at Gabetti Moderator adds that 51 per cent of investments in the Italian hotel sector are focused on upper upscale and luxury, however these hotels only represent about 22 per cent of the total portfolio in Italy, and this presents an opportunity.
“We think there will be a lot of deals in the next few years that will grow this 22 per cent to at least 40 per cent,” he says.
However, Poinelli notes that the structure of offer in Italy needs to be addressed as the current fragmented nature presents challenges for potential investors.
“Despite having the largest number of hotels and rooms in the market, the structure of the offer is very fragmented; mainly individuals in terms of ownership so it’s difficult to find portfolio deals. The size of hotels is also a critical issue; majority of our hotels are small, old, need renovation and are too small for institutional investors”, Poinelli says, stating a possible solution is the formulation of a plan to scrap smaller hotels for newer and bigger ones.
On top of that, Italy has the lowest brand penetration in Europe at 20 per cent, trailing behind Spain’s 60 per cent, Greece’s 25 per cent and Portugal’s 25 per cent, with its mild brand penetration decreasing its attractiveness to investors.
“In the last ten years, the penetration of hotel chains has been growing but we may need a plan to facilitate this process,” adds Poinelli.
Inflation and interest rates
Another challenge is the effect inflation will have on investment in the country’s hotel sector, with Castellini expressing belief that inflation will remain stubborn and won’t be lower than 5 per cent for at least another year. Positively though, he forecasts there won’t be a slip into recession, stating “I think we’ll see lower growth instead of recession.”
However, he adds: “Interest rates are going to stabilise and remain higher and this will impact on the yields. Therefore, we think with hotel valuations, there’ll be a decline in value of between 20 per cent to 35 per cent.”
On a more positive note, he says the future isn’t all doom and gloom for those who have to refinance debt, due to the amount of debt and equity capital on the sidelines looking to deploy.
To conclude, it seems that while experts agree that here are positives, navigating towards a flourishing future for the Italian hotel sector calls for strategic adjustments including a less fragmented and more consolidated market architecture, enhanced brand penetration and an improvement in the regulatory environment.