Leading the European real estate recovery
Contents
- Key Points
- Operational outlook
- “Coolcation” – the rising appeal of cooler destinations
- Investment market outlook
- Cross-border activity dominated in 2024
- Hotels, and wider hospitality assets, are moving up the agenda for investors
- The Iberian Peninsula remained the most resilient market in pricing terms last year
- 2025 Outlook
Operational outlook
Demand continues to expand, but ‘value for money’ considerations are likely to weigh on consumer choices in 2025
Growth in global travel over the past 20 years has been driven by shifting consumer preferences, an increasing emphasis on leisure travel, and the expansion of the “middle class” in emerging economies. The speed at which demand recovered post-Covid further highlights the scale of consumer appetite to travel - a key driver of Hotel performance.
In 2024, these fundamentals remained the same; however, consumer sensitivity around pricing and ‘value for money’ are likely to come to the fore in 2025 and shape destination and Hotel selection for some. For example, a consumer survey by Tourism Economics in Q3 2024 found that leisure trips were still cited as an important priority (with +67% net balance agreeing); however, the same respondents cited a desire to ‘limit expenditure when taking leisure trips’ (+26% net balance). While inflationary pressures have largely abated, tentative consumer confidence on the back of weaker economic forecasts and ongoing geopolitical tensions continues to weigh on confidence (see Figure 1 below).
US tourist demand is likely to prove more robust considering the elevation in the dollar against the 12-month average, although it has come under some recent downward pressure in response to President Trump’s tariffs.
The elevated dollar exchange to the pound (£) and euro (€) back in 2022/23 was key to improving US arrivals (see Figure 2) and meant that US arrivals into the EU were back to 2019 levels by early 2024. This time around, however, we are mindful that any potential currency momentum may be dampened by the softening in US consumer confidence seen in recent months.
This is set to be a 2025 headwind, but one that should abate as we move through the year, subject to major economies reporting positive economic growth. However, the impact of currency fluctuations will not be universal across all parts of the Hotel market, and there are signs that the economy segment in some of the more ‘expensive’ European cities is more exposed.
In fact, we already saw RevPAR contractions in some of these markets in 2024, with consumers questioning the ‘value of the proposition’ in this category, preferring to pay more for a product they perceive to be aspirational and/or better value for money. This is supported by the fact that RevPAR performance across the major European cities in 2024 was stronger, on average, when looking up the segments (from upper-midscale through to luxury).
The continued growth in the global UHNWI population, which Altrata suggested grew by 7.6% in 2023, is also helping to underpin demand and, in turn, performance
Marie Hickey, Director, Commercial Research
Luxury remains a lead performer
While value for money considerations may be influencing the budget sector, at the other end of the spectrum, luxury remains a lead performer across a number of European cities.
Across some of the largest Hotel markets in Europe, average 2024 Luxury RevPAR outperformed the other segments, driven by both occupancy and ADR improvements. In some cities, such as Madrid, this is even against a backdrop of increasing room supply. Madrid has seen the opening of a number of international luxury brands since 2020, including the city’s first Four Seasons (2020) and Rosewood (2024) Hotels.
The continued growth in the global UHNWI (ultra-high net worth individuals) population, which Altrata suggested grew by 7.6% in 2023, is also helping to underpin demand and, in turn, performance.
The quality of new luxury provision that is being delivered into a number of European markets will further bolster this, which, in turn, has the potential to elevate performance across the wider market, as has been the case in Madrid. London is also a prime example of this: a considerable share of the new delivery in 2024, and that which is expected to complete in 2025, is suite rooms, the provision of which currently lags behind other European cities.
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“Coolcation” – the rising appeal of cooler destinations
International arrivals into Europe are estimated to have ended 2024 2.0% ahead of 2019 levels, according to the European Travel Commission (ETC), with forecasts from Travel Economics then suggesting that arrivals in 2025 will be up 9.7% year-on-year (YoY). Increased arrival numbers have been seen across a range of European markets, yet a standout trend has been the growth in arrival numbers to cooler climates in the summer months.
Looking to Scandinavia: in Norway, Sweden and Denmark, international arrival numbers in the summer months of 2024 (July and August) were, on average, 23.9% higher than the equivalent period in 2019. Norway has been the key driver of this, with summer international visitor numbers up almost 46.6% compared to 2019, boosted to a certain extent by the recent weakening in the Krone. Likewise, Sweden saw a sizeable 16.4% increase in summer tourist numbers when benchmarked against 2019 – a sharp contrast to the key Mediterranean markets of Spain, Italy, and Greece, where numbers were, on average, only 4.4% above 2019 numbers over the same period.
The percentage uplift in summer tourist numbers to Norway and Sweden compared to the Mediterranean markets does reflect growth off a lower base, and Spain, Greece and Italy remain major summer destinations. Nevertheless, it does point to evolving consumer preferences, some of which may be linked to Climate Change.
In recent years, extreme weather events have become more common, with a number of Southern European destinations at the forefront of these in the summer. Even outside of the more extreme examples, temperatures have been climbing. For instance, large parts of Southern Europe saw the equivalent of two full months of “strong heat stress” last summer, meaning that it ‘feels like’ temperatures of at least 32°C (The Copernicus Climate Change Service).
For some, it is these higher temperatures that are leading them to look to other European destinations in the summer. Likewise, the rising appeal of activity and culture-focused breaks, in lieu of the traditional summer ‘beach flop’, is adding to the appeal of Scandinavia.
Evolving consumer preferences are not just shaping summer destination selection, but tourism trends throughout the year. While higher summer temperatures in Southern Europe may be tempering visitor growth during those months, it is supporting stronger growth during other periods of the year, thereby reducing seasonality. For example, total international arrivals to Spain and Greece in 2024 were 10.7% and 12.7% above 2019 levels, with the strongest growth seen in March and November. With the challenges posed by Climate Change set to continue, and a predicted increase in visitor numbers, we expect to see tourism expand to other European destinations and across more periods of the year moving forwards.
As a result, European Hotels was one of the few asset classes to report both an increase in annual volumes and against their ten-year annual average in 2024. The only other asset class to see this was industrial and logistics (as displayed in Figure 5).
Increased activity was seen across a number of national markets. The UK Hotel market saw €6.83 billion (£5.73bn) invested, up 157% YoY and equating to 31.1% of total European volumes. Italy and the Netherlands also saw a return in volumes, up 102% and 237% respectively YoY, although the latter continued to lag slightly behind its ten-year annual average (-5.7%).
Elsewhere, Ireland reported an increase in transaction volumes, from €150 million in 2023 to €1.24 billion in 2024, which was 155% above the country’s ten-year average. Following robust investment activity in 2022 and 2023, activity in Spain slowed last year with volumes down almost 19% YoY, at €3.30 billion. However, activity remains elevated against long-term averages and 2024 was 14.2% above the ten-year average, demonstrating the continued global investor interest in the Spanish market.
Encouragingly, 2024 saw the first potential signs of a recovery in German transaction volumes. Hotel investment reached €1.32 billion, and while this was still some 61% lower than the long-term trend (ten-year annual average) it was 7.0% up YoY.
This marked the first annual increase in transaction volumes since 2022, a change in part attributable to the recent softening in debt costs, a vital component in a market dominated by institutionally-owned, leased assets. Considering that Germany typically accounted for 15.1% of European volumes pre-pandemic (based off the ten-year annual average) renewed activity in this market will be key to driving pan-European volumes in the future.
An essential component of the increased volumes in 2024 was the elevated portfolio activity across a number of markets. This has previously been a trend in specific countries, for example in Spain in 2023 the Equity Inmuebles portfolio acquisition by ADIA and the partial corporate acquisition of HI Partners alone accounted for 42% of the total annual volumes. But 2024 was a year where we saw high levels of portfolio activity across most European markets, significantly bolstering the full-year transaction volumes across the region.
The UK saw the return of portfolio activity in 2024, resulting in volumes reaching a seven-year high. Portfolio transactions accounted for 57.9% of total investment, with notable deals including the KKR and Baupost purchase of the 33 property Marriott portfolio from ADIA for a reported €1.03 billion (£900 million) and Blackstone acquiring the Village portfolio for close to €915.8 million (£800 million). Other key portfolio deals elsewhere in Europe included the acquisition of the 12-hotel Dutch Zien Group in the Netherlands by Fattal for €400 million.
Cross-border activity dominated in 2024
Cross-border investment made up the lion’s share of European activity, accounting for €12.9 billion - 58.6% of the total. This was an 81.4% YoY increase and a 13.8% rise against the ten-year annual average.
US Private Equity activity surged across Europe, with the five largest US private equity investors alone – Blackstone, KKR, Baupost Group, Starwood Capital, and Oaktree – contributing €5.9 billion in transaction volumes. With the dollar strengthening against the euro, subject to any turbulence which may result following recent tariff policies, the European Hotel market should remain increasingly attractive to US buyers.
While we may see a decline in private equity investment in 2025 due to fewer portfolios coming to market, heightened interest from US investors is expected to continue.
Private investors, including HNWI, owner-operators and non-traded REITs, also demonstrated strong appetite for Hotels. 2024 volumes totalled €5.45 billion, marking an 18.1% YoY increase and an impressive 39.6% rise compared to the ten-year annual average.
By contrast, institutional investment remained muted in 2024. Volumes reached €1.69 billion, a -34.7% contraction on the preceding year and less than half the ten-year annual average. Institutional investors were the only investor group to record a decline in transaction volumes YoY. Elevated debt costs have meant fewer leased assets coming to the market, considering typical yields for these assets are much lower than that for VP/Franchise opportunities.
But as debt costs continue to soften, we expect to see more leased opportunities come to the market, and while stock has been an issue, appetite has improved for high-quality assets and we have seen competitive bidding in these instances.
Yield stabilisation became more entrenched in the second half of 2024
The stabilisation in yields that we noted in our 2024 European Hotels Report became more entrenched over the second half of 2024. Overall for 2024, prime indicative yields across the 21 city markets we track moved out by an average of 30 bps across the various operating structures (Leased, Management Contract, and VP/Franchise).
Yet, over the final quarter of 2024, it was only average leased yields that continued to drift out quarter-on-quarter (QoQ), albeit only by 2 bps on average. This was a marked slowdown on the 12 bps outward shift seen in Q3. The higher debt cost environment had a more significant bearing on the leased part of the market, where asset management and value enhancement opportunities are more limited and target returns are more closely pegged against underlying so-called ‘risk-free’ rates or interest rates.
For example, leased Hotel yields softened by 32 bps over the course of 2024, although most of this movement was seen over the first half of the year. By contrast, the higher-yielding structures of VP/Franchise and Management Contracts reported yield decompression of 30 bps and 28 bps, respectively, over the same period, with some markets such as Berlin, Munich and Brussels seeing a significant outward shift in yields of 75 bps between Q3 2023 and Q4 2024.
"Lenders have demonstrated a strong appetite for the hotel sector over the past 12 months, driven by robust market fundamentals and resilient performance across key markets. The sector’s strong trading dynamics, underpinned by healthy occupancy rates and RevPAR growth, have further reinforced lender confidence.
With competition intensifying across the broader commercial real estate debt market and a shortage of high-quality financing opportunities, new lenders are increasingly looking to enter the hotel sector.
This influx of capital has led to tightening pricing, with bank lenders reducing margins and alternative lenders offering more flexible structures to stay competitive.
As a result, borrowers are benefiting from an attractive financing environment, with lenders actively competing to deploy capital in this space. Given these dynamics, we expect continued lender support for the sector, providing a favourable backdrop for hotel owners and investors seeking financing solutions in 2025."
Hotels, and wider hospitality assets, are moving up the agenda for investors
In PwC/ULI’s latest European Investor survey (Q4 2024), Hotels and Serviced Apartments, along with a number of other operational real estate (OpRE) asset classes, featured prominently as sectors deemed to have ‘good prospects’.
In fact, Hotels ranked 10th among twenty-eight asset classes in terms of income prospects, whereas city centre offices ranked 22nd. The shift in attitudes towards previously mainstream asset classes, such as offices, reflects the appeal of higher-yielding asset classes in light of current debt costs and the ability of operational assets to ‘re-price’ themselves against inflation, a key attraction considering the unprecedented rise in inflation seen in recent years.
This shift has been reflected in the yield movement for Hotels since 2019, when benchmarked against other asset classes. For example, average European leased yields softened by 118 bps between Q4 2019 and Q4 2024. Office yields (against a matched geography) have softened by 129 bps over the same period.
However, this softening was off a lower base and exacerbated by the uncertainty generated by increased agile working. As a result, the yield spread between leased Hotels and offices has tightened. In Q4 2024 the spread was 67 bps, down on the 77 bps spread that existed in Q4 2019 (see Figure 7 below).
The Iberian Peninsula remained the most resilient market in pricing terms last year
Paris and London continue to lead with the sharpest yields. Yields across operating structures averaged 5.00% and 5.42%, respectively, in Q4 2024, with indicative core leased yields in both markets at 4.50%. In the case of London, average yields moved out by 33 bps over the course of 2024. This outward shift was confined to the first quarter, and in the second half of 2024 yields remained stable or contracted. It was an almost identical story in Paris, albeit with a tighter outward shift of 25 bps.
While the top-performing markets in 2023 have remained the top performers in 2024, the stand-out climbers were those city markets in the Iberian Peninsula: Madrid, Barcelona, and Lisbon. At the end of 2024, average yields across all structures in each city were up 5.58%, 5.50% and 6.25%, respectively, ranking them fourth, third and seventh, after Paris and London, out of the 21 city markets we track.
In rank terms, this is a climb of more than ten places on 2019, reflecting the fact that yields have remained largely stable in this territory over the last five years. Average Madrid yields held over the course of 2024 and are in line with where they were in Q4 2019. Likewise, Lisbon yields compressed by 8 bps last year and as of Q4 2024 were only 42 bps above their 2019 levels.
Compression in Management Contract yields by 25 bps in Q4 2024 was a driver behind the yield shift in Lisbon. Overall, the relative stability and slight compression in yields for certain operating structures reflects the rising investor interest in the Spanish and Portuguese markets, underpinned by strong tourism growth and operational performance.
Two markets which saw a softening in yields versus last year were Dublin and Amsterdam, albeit both were marginal changes, and overall the markets remained stable, as average yields in both markets only moved out by 8 bps. In the case of Ireland, this was in Q1 2024 because of weak transactional activity in 2023, with the increase in 2024 investment helping to stabilise pricing.
In Amsterdam, leased hotel yields moved out by 25 bps in the final quarter of 2024, again largely down to the lack of transactional activity. German markets (Berlin, Munich, Frankfurt, and Hamburg) saw the largest outward yield shift last year, averaging 65 bps, reflecting the investment challenges facing that market. However, yields did stabilise in the second half of the year and, considering the slight uptick in 2024 transaction volumes, there are signs the German Hotel investment market may be at a turning point.
2025 Outlook
1. Economy Segment Pressured
Top-line performance may decline in the economy segment as value-conscious consumers drive ADR reductions. However, luxury hotels remain in demand and resilient to rate increases.
2. Single Asset Sales To Rise
Transactional activity will remain strong into 2025, supported by an improving debt market. However, with 2025 expected to see more single-asset transactions than portfolios, this may lead to a slight YoY dip in total transaction volumes following 2024’s record activity.
3. Yields To Tighten Further
Yields may continue to tighten, especially for leased core assets in prime markets like London and Paris. Strengthening debt market conditions could also drive yield movement across other European markets where low transactional activity has previously pushed yields outwards.
4. Seasonality Continues to Ease
Climate shifts are leading to a more varied and flexible travel market, benefiting hoteliers in a wide range of travel destinations, who can optimise performance during traditionally off-peak periods.