Research article

Yield compression across Europe

Increasing investor appetite for hotels has led to yield compression across key European tourist markets

Prime indicative yields have compressed across operating structures in key European markets

Hotels on non-leased operating structures have seen yield compression across the majority of markets tracked by Savills, as investors look to move up the risk curve in pursuit of higher-yielding assets. Prime yields for hotels on VP (Vacant Possession)/Franchise terms saw a 25bps yield compression across 12 markets in Q3 2019, up from just three markets in Q2. For prime yields on an MC (Management Contract) basis, half of the reporting markets witnessed a 25bps inward shift, up from two in Q2.

Prime yields on leased assets remain the sharpest across all 22 markets tracked by Savills, averaging 4.26%. This is being driven by the continued attractiveness of long-term income security associated with this type of operating structure, particularly within more mature tourism markets.

Furthermore, the spread between government bonds and equivalent hotel yields remains attractive to investors across a number of European markets. This is notable in key German cities whereby leased hotel assets have become a more attractive investment option helped in part by the fact that government bonds are now trading at sub-zero yields. This has led to yields in markets such as Berlin and Munich becoming amongst the keenest in Europe, matching Paris at 3.50% for hotels on leased terms.

Restrictions to future hotel development within major tourist markets is increasing investor demand

A number of key tourist markets, such as Amsterdam and Barcelona, have been applying restrictions on future city centre hotel development as a means to regulate over-tourism. This, coupled with continued growth in tourism demand, will ultimately boost the operational performance of existing hotels, therefore, increasing the attractiveness from an investment perspective. In the case of Amsterdam, prime hotel yields on both VP/Franchise and MC terms sharpened by 25bps in Q3 2019, in response to growing investor interest.

Investor appetite across Europe remains robust, driven by cross-border investment

Hotel investment in Europe remains robust with year-to-date (Q3 2019) reaching almost €16.0 billion, an increase of 4.3% compared with the same period in 2018.

Over half (53.1%) of this activity has been driven by international investors, including key deals such as the Hilton Parkview Vienna, sold to a consortium from South Korea for €375m in July 2019. A number of large international investment funds are now deploying significant capital to the hotel sector, helped in part by low interest rates supporting the relatively lower cost of debt.

High growth tourism markets remain an attractive option for investors seeking higher yields

Extensive stock growth coupled with growing tourism demand across rapidly expanding European tourism markets has opened new hotel investment opportunities, especially for investors looking beyond traditional markets in search of higher yields. For example, Lisbon has seen significant hotel investment growth, with year-to-date volumes already exceeding the total for 2018 by 151.0%, according to RCA. This is reflected in pricing with prime yields across each operating structure hardening by 25bps for the second consecutive quarter, the only market in Europe to do so.

Warsaw and Prague have experienced a similar trend, each seeing significant growth in investment volumes. Continued stock growth in some gateway and emerging markets does, however, pose some potential headwinds to performance due to short term absorption issues.