The hotel business, a winning strategy for those unafraid of a challenge

While several real estate asset classes have suffered severe discounts over the past three years due to the drastic rise in interest rates, the hotel industry has demonstrated its resilience, both operationally and financially. However, to capture its promise of value creation, investors need to be prepared to move up the risk scale.

This issue has been the subject of much discussion in the Paris hotel market over the past year. In receivership since April 2024, Hôtels de Paris, a subsidiary of the Machefert Group, was put up for sale at the end of the winter, presenting the market with a portfolio of 19 establishments located in Paris, with the exception of the Kube Saint-Tropez and the Murano in Marrakech, and owned either wholly (5) or partially, either on lease (2) or rental (5). And the latter attracted the attention of a host of investors with a passion for hotel real estate, with 36 buyers declaring their interest in a full or partial takeover in the first round.

"No one is surprised by the interest shown in this portfolio, as many hotels in Paris are transacted on a fund-only or fund-and-own basis, with an asset size of less than €30m," confides one market player, before adding: "Because this type of asset is of interest to families, private equity players and operators alike, it offers enormous liquidity!" What's more, the case is above all a striking example of the significant increase in the value of French hotel assets over the last two decades, argues an observer familiar with the matter: "Despite the financial distress of the group, which has been in receivership several times in recent years, the proceeds from the sale of its assets could outstrip its debts, which currently stand at €150m, by €100-150m."

In some respects, the craze generated by this case confirms the sector's strong appeal to investors. While several property asset classes have suffered over the past two years — office and retail have seen their overall investment volume fall by 27% and 23% in 2024, to just €4.9 billion and €2.4 billion respectively — the French hotel sector has attracted €2.7 billion in investment, according to data from BNP Paribas Real Estate. This represents a 25% jump on both the previous year and the 10-year average.

"2024 was an exceptional year, the best since I took over as head of the department five years ago," boasts Jean-François Morineau, deputy managing director of BNP Paribas Real Estate Advisory's residential and hospitality division, whose team notably signed the sale of the Hilton Paris Opéra, the second largest transaction of the year, at €268 million. "In the French market, hotels accounted for more than 10% of the volume invested in commercial real estate, and while this is indeed due to a base effect caused by the drop in office investments, this share is up on the pre-Covid period," observes Laura Ben-Ibgui, head of hotel transactions for JLL in France, adding that "this phenomenon is also being followed at the European level."

"There's a very clear appetite among investors for this asset class," says Sarah Carbonel, associate director at Turenne Hôtellerie, whose most recent vintage, Turenne Hôtellerie 3, will close in the summer, having exceeded its initial target of €80 million. "The typology of investors interested in the hotel business is much broader than in the past," she adds. "Our traditional investors - institutional investors such as insurance companies and banks - are still present, but more and more family offices and private investors are putting their trust in us, because they feel that the sector makes sense from a diversification point of view."

What's more, "the market remains extremely dynamic and liquid," says her colleague Alexis de Maisonneuve, who is a managing partner: "Transactions rarely exceed €50-60 million, which shows that the €2.5 billion invested in France last year was made up of a very large number of transactions." However, Laura Ben-Ibgui also notes that "large-volume transactions are making a strong comeback, with five deals in excess of €100 million recorded in 2024, mostly involving Asian and international capital."

Active in the hotel market for more than a decade, in 2017 the management company notably launched the Plein Air Property Fund 1, a nearly €400 million vehicle dedicated to the open-air hotel industry that completed the acquisition of three four-star campsites last March. BNP Paribas REIM intends to double the proportion of its overall portfolio dedicated to hotels by 2030, representing more than €2 billion of hotel assets that currently account for 10% of its European assets.

To support its growth ambitions, the company recently created a new division dedicated to the hotel and healthcare sectors. "We have the DNA of an investor with long-term convictions, and it's no coincidence that we want to develop so strongly in the hotel sector," explains Paul Darribère, global head of healthcare and hospitality at BNP Paribas REIM. "We believe that, in the coming years, this is one of the sectors that should offer the most attractive returns to our investors."

This renewed appetite for the hotel sector is explained above all by the resilience of its operating fundamentals, which were severely tested by the health crisis before rebounding strongly in the years that followed. "The hotel industry is one of the asset classes that has held up best despite a number of exogenous events and deep-seated crises, managing to deliver high and, above all, sustainable performances for several years, which is quite reassuring for investors," explains Sarah Carbonel, emphasizing that they see the asset class as offering a very attractive risk-return profile.

"Operating fundamentals are sound, and revenue per room has been rising for the past three years, even if it hasn't reached the peak of exceptional years like 2016 or 2017," reports Jean-François Morineau. "On the many Vefa deals closed during 2024, we also found that yields remained fairly steady, demonstrating that the hotel industry is a resilient asset class," he adds. "And 2025 is shaping up to be much the same, so we're expecting another very good year."

"If we look at it over a twenty-year cycle, the hotel industry is still showing very resilient growth, because travel has become a need that tends to be increasingly consumed and sought after by the middle and upper classes," observes Hélène Gauthier, general manager of Honotel. This newfound confidence also extends to financiers, who are called upon to support investors in their operations.

Emphasizing that Turenne Hôtellerie has "never missed an acquisition opportunity because of a financing issue, even during and after Covid," Sarah Carbonel nevertheless acknowledges that "following the health crisis, all the lights were on for some banking institutions, which saw the hotel industry as a disaster sector." On the other hand, she observes that "policy has now changed" and that "banks are more likely to support the hotel industry," so that "financing is no longer so much of an issue" for investors.

"Perhaps also because the operational resilience of the hotel industry has enabled its asset values to hold up where other real estate asset classes have had to undergo severe write-downs..." "Hotel real estate values held up well on the back of the sector's excellent performance," says Laura Ben-Ibgui. "Thanks to the property and fund ownership model, which values operating income rather than simple rent, the hotel industry has managed to avoid repricing and maintain its key values despite a universe of different interest rates."

Value creation in the hotel sector is all the more attractive for investors as it can also be achieved through the ownership and operation of the business, a fact that more and more investors have realized. "Clearly, more and more players are now looking at a mix of properties and funds; in fact, some SCPIs are even taking an interest in leasing/management models, whereas they were originally designed to hold only properties," reports Hélène Gauthier.

Recalling that this model has always been Turenne Capital's preferred positioning, Carbonel also confirms the growing popularity of this strategy among a wider range of investors: "Property companies that historically only owned the real estate of certain hotels have realized that owning the goodwill can boost performance and achieve quite interesting levels of IRR. "

This is the case for Covivio, which last autumn launched the WiZiU hotel management platform, in addition to signing an agreement with AccorInvest to divide its real estate and funds. In October, its CEO, Hôtels, Tugdual Millet, told us that the company's profile in the hotel sector is evolving "gradually from that of an investor to that of a hotel operator. We are convinced that the combination of these two areas of expertise will enable us to improve hotel performance, reposition them and create real estate value. "

"To achieve the returns expected by the market today - yields of 7% and IRRs of at least 12% - you have to be prepared to bear a little more risk, which in the hotel business translates into an operational dimension," adds Gauthier, estimating the performance gain from owning goodwill at around 200 basis points. "By way of example, with the Turenne Hôtellerie 1 fund, now fully invested and liquidated, we have achieved a net investor IRR higher than forecast, close to that of classic private equity, coupled with much lower levels of security and risk," adds Carbonel.

Paul Darribère, who has also noted the growing popularity of the "walls and funds" model, recognizes the importance for his management company of incorporating into its roadmap the evolution of hotel ownership and operating methods, which will redefine the way investments are deployed in the sector in the future: "Historically, we have mainly invested in assets operated by operators through commercial leases. To take this a step further, we have formed partnerships with the operators running our assets, who are also investors in our funds, enabling a better alignment of interests."

As such, he is aware of the need to extend his playing field to more core-plus, or even value-added, strategies, adding that "hybrid lease models with a variable portion or even broader exposure to operational risk are part of the field of possibilities, and that these holding/operating modes currently account for a very significant proportion of transactions carried out on the market." However, he also points out that not all investors will necessarily be interested in being exposed to this type of risk: "A very core investor will not necessarily seek exposure to the operator's business, and will prefer to stay with a leasehold model, which is more protective in the event of temporary air gaps in the market."

With this renewed attractiveness, the market "is very favorable in terms of disposals," agrees Sarah Carbonel, whose group is carrying out a "fairly active" arbitrage program in 2025, having already carried out several sales last year. "This facilitates our liquidity, but the deal flow is perhaps more complex to find, as there is more competition. So we need to differentiate ourselves and be relevant in our search for opportunities," she adds.

The influx of new investors can only be accompanied by increased competition in the most buoyant market segments. There is very strong competition for Parisian hotels under €50 million, where it has become almost impossible to have a value-added thesis," reports Hélène Gauthier. And there are fewer players in the more business-oriented hotels in business parks, but this segment is essentially based on the French economy, which is currently experiencing sluggish growth, and therefore entails greater risks. "

Moreover, Honotel's managing director argues that "growth today is very clearly driven by leisure," but that the lines separating it from the business segment are becoming increasingly porous. "In many respects, we've noticed that Friday has become a weekend day in hotel terms, and similarly, our occupancy rates have climbed by 10 bp on Sundays because many customers return on Mondays instead."

An opinion also shared by BNP Paribas REIM, which for several years now has held a strong conviction in the leisure hotel sector in general, and the open-air sector in particular, agrees Paul Darribère: "When you see the figures and the development of the open-air hotel sector, which are quite good and even excellent in the top-end segment where we are invested, we are happy to have positioned ourselves early on, and we will continue to develop in this market." With this in mind, the management company is also preparing the imminent launch of a new thematic fund in the spa and wellness segment.

In a market that has become more competitive, a new pool of opportunities could also be found within the obsolete office stock, the transformation of which is often evoked as a solution to the housing shortage, but can very well serve the hotel industry. "In addition to existing assets, we also try to find assets for conversion, typically office buildings where the PLU allows," says Gaultier Perchenet, investment director at Turenne Hôtellerie, who deplores the fact that the numerous administrative constraints can become real obstacles to conversion operations. "Tertiary buildings often offer fairly large floor plates, allowing us to sequence the size of rooms as we wish. They can therefore represent new market opportunities when price expectations are consistent," he agrees.

In the same vein, Darribère notes that "operators of hotels or serviced apartments may find it easier to play with the constraints of existing buildings in the context of asset reconversion, because they will have more latitude in the size and layout of rooms, compared with conventional residential properties, for example." Not to mention that "a square meter of hotel space can be more profitable than a square meter of residential space."