PARIS—In the City of Light, solid occupancy and rate performance from global leisure and business demand has resulted in a flurry of transaction activity making the Paris hotel market a safe investment, according to sources.
The overall transaction volume in France in 2012 was €2.1 billion ($2.7 billion), according to Catherine Rawanduzi, director of CBRE Hotels in Paris. While CBRE does not have exact figures for Paris, Rawanduzi said the city accounts for most of the transaction volume.
“The trend … is that you have a huge tendency of hotel groups selling out their real estate assets for numerous reasons,” she said. Many, including Accor with its asset-light strategy, want to focus on hotel management and do not want their profit-and-loss statements to include real estate. Accor declined an interview for this report.
Because hotels continue to perform well in Paris with occupancy coming in higher than 80%, those transactional figures are expected to continue, Rawanduzi said.
“(Revenue per available room) is really good in Paris. We’re among the first in Europe. Therefore, investors … who do not have hotel real estate (in the market) are more and more looking into it because they consider it a safe investment,” she said.
Performance in the upper segment of the market is driven by global travelers, according to Philippe Doizelet, managing partner of Horwath HTL in Paris. The lower end of the market is more related to domestic demand and is being impacted by the fragile economy throughout Europe.
Upscale properties are in a position where they can raise rates even further as demand is high and the market is under capacity, Doizelet said.
He added that a substantial part of the upscale market is now owned by investors from the Middle East. Many of these investors are willing to pay a premium for existing hotels they can rebrand and experience the upside of a renovation, Doizelet said.
Developers reliant on conversions
Although there are 846 rooms in the total active pipeline in Paris, according to STR Global, sister company of HotelNewsNow.com, over the past 20 years, ground-up development has been relatively static, Rawanduzi said.
Doizelet said there are a number of regulations and a lack of land that inhibit developers from building new projects.
“(Developers) are limited to six stories … except in one or two areas,” he said. “All of the (central business district) is protected from any high-rise construction, and you can’t do anything.”
Moreover, there’s very little, if any, new land available for construction within the city limits of Paris. Where the market can expect to see new construction is in the northern outskirts of the city and near Paris Charles de Gaulle Airport, Doizelet said.
The majority of new supply will come from conversion projects.
Hyatt Hotels Corporation announced in February it signed management agreements with affiliates of Constellation Hotels Holding Limited for four hotels in France, two of which are in Paris; the conversions will begin April 2013. The 950-room Concorde Lafayette will be rebranded as the Hyatt Regency Paris Etoile, while the Hotel du Louvre will be renovated and rebranded to an Andaz property.
Paris has stronger brand penetration than other cities in Europe, Doizelet said. “It’s about 45%, where the average in Europe is around 45%.”
Developers also are interested in adaptive reuse, which is becoming more of a trend in the market, Rawanduzi said, particularly with the conversion of state buildings into hotels.
The 81-room Shangri-La Hotel Paris, for example, was created after the sale of a landmark building built in the late 1800s, she said. Also, the Centre de Conferences Kléber conference center was recently purchased by Peninsula Hotel Group from the French government with the intention of converting it into a luxury property.
Recent policy changes are allowing developers to convert residential buildings to hotels. “This has allowed for the creation of new hotel units, and Paris needs new hotel units,” Rawanduzi said.
More stability ahead
Société Foncière Lyonnaise’s sale of the 138-room Mandarin Oriental Paris in February is a sign of how well the market is expected to perform going forward, Rawanduzi said.
The property, which was renovated and rebranded as the Mandarin Oriental Paris in 2011, sold for €290 million ($377 million), an upside of 30% of what it cost to renovate the building, she said.
“This says a lot about how secure and profitable investment is in the top-end luxury hotel market,” Rawanduzi said. “Prices are not due to collapse.
“We believe that 2013 will be stable,” she said. However, “in the view of the present economy context, no one wants to be too positive and optimistic.”