The inflationary environment in Europe has created a complicated situation for hoteliers, allowing them to grow room rates thanks to high demand while also trying to get a handle on the rising costs of materials, labor and debt.
In a recent webinar titled “Inflation Vs. Vacation: Post-Pandemic, How Are Risings Costs and Inflation Impacting European Hospitality?” hosted by CoStar and its hospitality analytics firm, STR, industry experts discussed the current state of hospitality on the continent and how hoteliers are adapting.
Cycas Hospitality operates in 12 countries in Europe and in the U.K., and the pain is the same everywhere, said Asli Kutlucan, chief development officer at Cycas. Travelers are dealing with inflation as much as the hotel operators. Rate growth is strong, which is a pleasant surprise, and occupancies have been holding on, she said.
“I think we’re going have a slight dip in the winter when all these pressures are in,” she said.
Cycas executives are focusing on costs now and trying to keep them down while still supporting team members, she said. It’s a balancing act between hotel owners and employees.
“We’re really working closely with everyone across our portfolio, sharing clustering synergies across all and trying to prepare for the worst but hoping for the best,” she said.
Looking into the summer months in the U.S. and across Europe, bookings are strong, said Gonzalo Aguilar, chief operating officer, Europe, at Marriott International. Rate continues to grow at record levels. However, winter may bring different concerns.
“We do see corporate midweek business coming back, maybe a little slower than that of leisure demand, but it is coming back,” he said. “We are struggling to see the group business from that.”
There are some bright spots, but it’s necessary to stay focused on containing operating costs and to leverage everything hoteliers have learned during the pandemic, he said.
Availability of Capital
More than 10 billion euros ($10 billion) in targeted value of investments has been raised for hotel deals in Europe, said Bořivoj Vokřínek, partner and head of strategic advisory and head of hospitality research EMEA at Cushman & Wakefield. A large proportion of that capital hasn’t been allocated yet.
“That is certainly lots of capital, and it keeps coming,” he said. “There are recent announcements about new funding created, either in cooperation with some of the operators or some institutional investors teaming up with some sort of operating platforms.”
Among traditional lenders, increases in interest rates make some deals more difficult because if yields aren’t increasing in terms of cash on cash, then the cost of capital is increasing, he said. There’s pressure on either producing internal rates of return on the equity side or reducing the compression of yield.
“How this is going to play out is difficult to say,” he said. “I think it will be depending from deal to deal, where in core locations where the deal will happen it’s very, very aggressive yields. In non-core locations, non-core assets or difficult assets, we might see some sort of decompressing.”
At the same time, there’s a wall of capital, improving performance and a rising number of debt funds coming in and creating competition through alternative sources of financing, Vokřínek said.
“We’re not facing the situation as in 2008 or 2009 where financing disappeared and deal-making has entirely stopped because there is too much of a positive force that will prevent this,” he said.
The environment is shifting on a daily basis, said Sophie Perret, senior director at HVS in London. Talking with senior lenders means hearing about the increase in interest rates while European Central Bank President Christine Lagarde has been saying low-inflationary environments are a thing of the past. The Bank of England would agree with all of that as well, she added.
“I think we just find ourselves in a space where we are struggling a little bit to get visibility,” Perret said. “Inflation continues to be a big concern because, obviously, we are in a context where inflation remains high even though interest rates are being raised so that precisely we can tame inflation, but at the moment we’re in a pretty dark place where everything continues to be up there.”
Some investors may be reconsidering their risk-return equilibrium because of the discount rate perspective, which is shifting rapidly, as well as the cash-flow issues, opportunities and challenges that come into question, making net operating income more difficult to assess, she said.
“There is massive money out there,” Perret said. “There are many opportunistic funds that are still waiting to pounce on that opportunity, so I think it very much will depend on that assessment of the risk-return from an investor's perspective.”
Hotel Development
Hotel construction has substantially decreased over the past couple of months, said Yannick Wagner, vice president development, Central Europe at Accor.
The main reasons behind the decline are construction costs and financing, he said. Many banks are telling real estate developers they want security on the construction costs, and without it, banks won’t provide financing.
“So the developers are actually kind of squeezed from two sides — from the banks and from the raw materials suppliers, which brings it more or less to a halt,” he said. “The big question will be how long will it last.”
Construction companies are still in a favorable position as their books are filled with contracts for the next six to 12 months, Wagner said. They’ll likely start to worry in a couple of months what they’ll do after those projects. There’s a question whether they’ll be willing to take off some of the price risk on their side, but currently, as they have no pressure to fill up their books with new contracts, they want to pass on the entire construction risk to the developers.
This is one of the blocking points, he said. The real estate developers tried to pass it on to the operators as it’s mainly lease agreements being signed. They want to have strong index clauses passing the entire risk to the operators, but no operator is willing to accept since their operating costs are growing as well.
During 2020 and 2021, Cycas had about seven hotels under construction along with some renovations, Kutlucan said. Since 2011, the company has developed about 28 hotels across five countries. As part of its environmental, social and governance efforts, its development contracts with the contractors had minimum sustainability requirements.
The technology available now means new-builds and renovation projects can make the buildings more energy-efficient and environmentally friendly, she said.
“We’re trying to really engage at the very early stages of the development that it has to be all over the environmental side of the building, the physical building,” Kutlucan said.
On the social side, Cycas is taking employees’ well-being into consideration when working on new projects, she said. It used to be that development decisions wouldn’t factor in the employee element, such as where the employees live.
“That’s the kind of things we always focus on to make it above and beyond what they would expect and focus on their well-being alongside the well-being of the building,” she said. “Those things go hand in hand.”
Click here to watch the webinar.