Europe’s environment of constrained supply could present further opportunities for hospitality investors this year, according to sector experts. 

Pierre Ricord, head of consultancy - hotels for Europe at Christie & Co, sees an industry torn between taking development risks and preferring other routes to expansion, such as adaptive reuse or converting existing hotels. “Investors focused on the sector have varying degrees of risk appetite,” he notes. “Many are looking for assets that offer an element of safety, such as hotels in central locations in primary markets, which tend to be places that are difficult for ground-up development.” However, with financing costs starting to come down, and trading plateauing in places, he anticipates that some investors may contemplate returning to the development route. 

Other owners are attempting to get the most out of existing properties by repositioning upwards to drive “faster cash flows”, he notes. Yet the supply equation remains relatively slow-moving in a number of markets due to an overall lack of distress. “In the UK, for example, using hotels to house refugees has contributed towards the low number of stranded assets in the market.” He suggests that in these cases, the phasing out of government contracts will return mid-market inventory to supply, adding pressure on selective markets and creating a potential capex bubble. “Some owners may opt out, leading to additional investment opportunities.”

Italy is a territory in flux, where its high volume of owner-operated hotels and family-run businesses has typically made it difficult for international flags to penetrate the market. “This is starting to change as international brands and investors are encountering some success in cracking the Italian nut,” Ricord adds. Italy has traditionally focused on the upper end of the market and has fewer properties in the pipeline, with around 7,000 rooms under development, compared to c. 10,000 in France and 20,000 in Spain, he adds. However, the supply landscape may evolve in line with generational shifts, with younger family members not necessarily wanting to stay in and operate the business. “To grow in Italy, you need patience, strategy and boots on the ground,” he adds. 

As hotel owners pursue growth, they will also want to consider the mix of services they provide. Ricord notes that while luxury hospitality was traditionally associated with a high level of amenitisation, experience-led trends are driving hotels at all scale levels to think about the services they provide. “We are seeing an opportunity for all segments to deliver an experience, often connected to a sense of place,” he adds, noting that partnering with local communities or inviting neighbourhood artists can be relatively cost-effective ways to add value. “Meanwhile, as staff shortages and inter-sector competitiveness remain an issue for the sector, being able to offer employees a workspace where they get to innovate daily and surprise their customers can add meaningful appeal to hotel jobs.”

Opportunities in hostels

Oliver Winter, CEO and founder of a&o Hostels, says that the group expects to expand further in Europe through the conversion of existing assets. “We have 44 assets in operation and just three of those were ground-up developments,” he notes. “Repurposing buildings has always been a key part of our business plan.” Reuse eschews development risks, saves time and has a positive environmental impact, he notes, with “the favoured option” being the acquisition of an existing hotel, where no change of use permit is required. “As we are a hostel operator, we can usually bring more beds into an existing hotel, and even convert spaces such as convention halls into bedrooms,” he says.