Investors stay in bed to beat inflation

#Week22 was half-term week in the UK, which can mean only one thing: a dash to Europe’s holiday hotspots as families seek a bit of early-summer sun. And who can blame them – with prices in the July and August peak hitting ever-higher levels, there’s some (relative) bargains to be had with an early-season break. Expect to see some suntans on display when everyone is back in the office next week.

But it’s not just holidaymakers who have been trawling the continent looking for a keenly-priced hotel. Investor interest in the hotel sector has rarely been higher, with the latest research from Cushman & Wakefield revealing some €4.1 billion of investment transactions during Q1, 18% up on the same period in 2022.

The sellers’ market is tempting some existing owners to profit-take, with recent weeks seeing ‘for sale’ signs hoisted above major assets, such as the W in Ibiza, Lake Garda’s Grand Hotel Gardone Riviera, the Paris Mandarin Oriental and of course Brookfield’s Center Parcs portfolio.

So, what’s driving this uptick in interest? Partly, it is old-fashioned fundamentals: development of new hotels is going through a lean patch, tourist demand remains high and well-located assets operated by premium brands have delivered reliable income streams. But arguably just as important are hotels’ reputation as a good hedge against inflation.

Where rents on office, industrial and retail assets are by definition ‘sticky’ – usually reviewed at best every five years – hotels can increase room rates and ancillary prices (restaurants, bars and other services) literally overnight. At a time of high-inflation, this ability to peg income to wider price indexes is very attractive indeed.

Other sectors are benefitting too, such as build-to-rent (BTR), student accommodation (PBSA) and care homes. Rents here might not be quite as responsive as hotels – once a year, typically – but they are certainly more effective as a hedge than a traditional institutional-grade lease.

“Beds”, as these sectors are collectively known, have been one of the compelling investment stories of recent years, even in low-inflation environments as often subdued supply is outpaced by growing demand. In parallel, increasingly sophisticated operators and tech-enabled management has helped transform an asset class that was once seen as more trouble than it was worth.

Given these dynamics – not to mention the chance for some ‘factfinding’ site visits to European holiday hotspots – it’s no surprise that interest in hotels is so high. But as with any sector, this demand will at some point tip into exuberance – investors need to check in soon, before all the best sunbeds are taken.