Hospitality Outlook 2023

REAL ESTATE

outlook

While ESG has already been at the forefront of thought for many industry stakeholders, so far, the hotel sector has struggled to assign an associated monetary value. However, with mounting research, empirical evidence, and tools that allow more effective measurement of ESG impacts, we should see sustainability more clearly reflected in pricing, and this will finally translate into valuations, which is long overdue. Explore our latest ESG Hospitality Investor Survey here.

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Monetised sustainability

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Hospitality

While recession and growing cost of living will challenge the recovery in hotel performance, there is still a strong desire to travel, underpinned by enduring pent-up demand. Trends that prevail will depend on many factors and will vary from market to market. Luxury and economy segments are likely to be less affected by economic factors, especially in markets driven by leisure and domestic demand or those benefiting from favourable exchange rates. Now more than ever, the varying levels of new supply entering markets may decide where we see pain or gain.

Winners and losers in turbulent times

The impacts of COVID-19 alongside labour shortages have forced hotels to maintain lean operating structures and focus on driving rates instead of volumes, benefiting the bottom line. However, now hoteliers must face yet another challenge, underpinned by inflation and the energy crisis. While this might hurt in the short-term, it will drive unprecedented investment into technology, energy savings and challenge unnecessary services, leading to even more efficient and sustainable operating models. No pressure, no diamonds.

Leaner and greener hotels after the double cleansing

A dual speed deal-line

Hotel transactions will likely be split into two opposing buckets. In the first bucket, driven by pressure from lenders and redemptions from funds, we can expect to see a greater number of pre-emptive or distressed sales, offering attractive but sporadic acquisition opportunities. High-quality prime assets in difficult-to-enter markets, on the other hand, will maintain their pricing with minimal outward movement in yields, in some cases even compensated by nominal income growth.

From ‘wait & see’ to ‘fortune favours the brave’

Traditional financing within the hospitality space will remain selective in the short term, with lenders being more stringent with criteria and the focus shifting from LTV to DSCR or EBITDA multiples. While the alternative lenders such as debt funds will be keen to seize the opportunity and come to the table, the underlying cost of capital is expected to increase and both investors and motivated sellers will need to get creative, exploring all possible avenues including JVs, earn-outs, seller financing, or green financing.

The art of deal structuring & the multi-layered capital stack

Driven by the resilience demonstrated during the pandemic as well as the rapid evolution of mobile lifestyles, investors will continue to seek non-traditional hospitality concepts, blurring the lines between hotels, extended-stay, co-living, student housing and residential. Developers and brands will be more thoughtful and creative with concepts in a bid to gain a competitive advantage, winners will be those that trend truer to the evolving lifestyle of the modern traveller, who continues to demand more.

Blurring lines between traditional hospitality and living

Leisure & lifestyle in favour

The pressure on owners to improve liquidity combined with investors’ need to deploy large amounts of recently raised dry powder will eventually lead to a rebound in investment activity - most likely in the second half of 2023, when economies could start to rebound with tamed inflation. For the gap between the buyer and seller expectations to close, at least one side may need to compromise, and the attractiveness of the asset will define who will have the upper hand.

Investors will continue to be attracted by the strong recovery and the long-term growth prospects for leisure travel, supported by the increased spending on experiences. Several funds have been launched within the back end of 2022 to deploy capital on leisure-centric assets throughout 2023 – target assets will expand from resorts to lifestyle hotels in popular urban destinations across western and southern Europe, further beyond Spain, France, and Italy.