European Hotel Investment: Emerging Markets vs. Traditional Favourites

Like most forms of property investment in the current climate there are 2 schools of thought on which markets you should invest in. You have those who believe that the flight to primary cities not only can't be ignored but shouldn't be strayed from, and those who continue to believe in emerging market growth potential...

Like most forms of property investment in the current climate there are 2 schools of thought on which markets you should invest in. You have those who believe that the flight to primary cities not only can't be ignored but shouldn't be strayed from, and those who continue to believe in emerging market growth potential.

At first it looked like just a flight to safety, but as the world's main city hotels (London, Paris, Beijing et al) have continued to see growth far outweighing their regional and secondary counterparts it has become apparent that it is more than that.

The Hotel Investor's Choice

In the modern world travel is cheap, so people who would once travel to the best part of their city or even the best part of their country to go to school or find work can now make this choice internationally. The world's wealthy are sending their children to the world's best schools and the world's best companies are attracting the world's most skilled workers into these cities.

But in the last couple of years the flight to safety has begun to die down and during this period we have seen certain emerging markets experiencing growth similar to and even exceeding that of established markets. And on top of that we have investors trying to choose the safe-havens and leading cities of the future, many of which are in emerging markets, and this has made the dynamic more, well, dynamic.

Investors could just spread their bets across the two, but while some are doing that using REITs and other investment vehicles, those who are investing in actual properties at the private investor level are tending to make a choice between the two and stick to it. That said let us explore that choice in the European hotel market.

In Europe it has to be said that the safe-markets have an advantage, because investment has looked particularly risky in Europe as it faced a sovereign debt crisis on top of the same financial crisis suffered by the entire world. But now hotels in emerging market cities are seeing growth matching or even exceeding that of the primary cities, and fear of the debt crisis is subsiding the choice is becoming much harder.

The latest STR Global report into the European hotel market contained no mention of London in its highlights, unlike at times during the height of the crisis. Indeed the highlights were dominated by three emerging markets: Bratislava (Slovakia), Tallinn (Estonia) and Istanbul (Turkey). The trio scored the top 3 in occupancy growth with Bratislava experiencing a 23.6% growth in occupancy to 45.1%. They also topped the tree in revenue per available room (RevPAR) growth, Bratislava with 23.6 percent to EUR29.22; Tallinn with 17.1 percent to EUR29.07 and Istanbul with 15.4 percent to EUR80.94.

So, the lack of London or even a major city in the report's highlights means that those emerging markets dominated growth in February, and this has been the case more times than not in the last 6-12 months of reports. But it is not just about growth.

The Nuts and Bolts

The overall figures are so much higher in the established markets, for example London, which has average occupancy of around 80% and ADR of £171.88 (as of December 2012). And then you have the safety and security of the established market. Investors certainly have favoured that of late: of the total 5.6 billion euros invested in European hotels last year some 1.4 billion euros went into UK hotels, mostly in London, according to HVS London's European Hotel Transactions report.

But in December London was still mentioned in the STR Global highlights with the biggest growth in ADR, now that emerging markets are taking over with growth we could well see this trend change, especially when you look a little deeper.

Tallinn might be technically an emerging market, but when you look at the economic and fiscal performance of Estonia over the last few years it has as much stability and security as any of the established markets, especially the swimming-in-debt UK. Estonia successfully joined the Euro in 2011 because it met the criteria of having annual government borrowing below 3% of GDP and accumulated debt below 60% of GDP. Even as governments and banking systems across Europe's established markets still struggle to make ends meet, in some cases despite one or more bail-outs, Estonia has shone out with a strong stable economy and banking system, with low public debt and a bright and solid future. Property (and therefore hotel) prices fell massively during the crunch and this now adds another benefit for investors brave enough to invest in emerging markets.

Then you have Istanbul, which benefits not from its fiscal record allowing it to join the Euro, but from the fact that it is in neither the EU nor the Euro, and so has no exposure to the EU debt crisis or any of its ramifications. In the last 10 years the Erdogan government has paid down a large chunk of Turkish public debt, reduced inflation and made the economy one of the strongest and most stable in Europe, with a banking system to match but on a global scale. On top of that Turkey has a growing tourism market, a growing and predominantly young population giving it a strong workforce and more strengths for interested investors to research. In the last 3 years scores of companies, including BT and Vodafone have chosen Turkey as a regional hub of operations, and dozens of top hotels have begun to expand into Turkey. The hotel market is just one Istanbul investment with a potentially very bright future indeed.


Ultimately the world is still a very scary place to have money in, and this fear will likely continue to drive most investors to the safety of established markets. But, if you can't afford established or key-market prices, or simply have the stomach for a little more risk for potentially greater returns then there are some hot emerging markets out there with growing hotel markets and some great opportunities to put your money into.

- Wednesday 03 April 2013

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