Navigating change in the European hotel investment landscape

The appeal of the hospitality sector has grown as real estate investors seek topline growth in a rising yield and inflationary environment. The Deloitte 2023 EHIC survey results demonstrates this shift in investor preference away from passive investments, with hotels, serviced apartments, and student housing predicted as being the top three most attractive real estate asset classes to invest in Europe for 2024.

The post-pandemic bounce and continued performance of the hospitality sector have reinforced the resilience of the asset class in navigating rising interest rates and inflation through increased room rates across Europe. Previously seen as cumbersome and complex, the operational aspects of the hospitality sector have proven to be valuable in the current economic climate. The industry’s performance was boosted by pent-up demand created by lockdowns, coupled with government support throughout the pandemic. Beyond the post-COVID recovery, future growth will depend more on capturing market share and outperforming competition through differentiated offerings or better operations.

A strong management team is paramount to helping investors navigate the market and gain a competitive edge. Identifying strong management teams with a proven track record has become fundamental to navigating evolving consumer preferences, technological integration and economic fluctuations. Good management teams can help address the key challenges in the industry including managing operational complexities and cost increases, embracing innovation, including the use of AI, while maintaining the quintessential human touch of hospitality. Good management teams will become invaluable assets in steering the hospitality sector towards sustainable growth and resilience.

Figure 1: 2023 EHIC survey | Most attractive asset classes to invest in Europe for 2024

Average Daily Rate (“ADR”) levels have peaked, so what will drive the top line from here?

Europe’s ADR for 2023 was €143, 26% ahead of 2019 levels, with European occupancy rates at 69%. With ADR levels performing at their peak, further top-line growth will depend on the recovery of occupancy to pre-pandemic levels. While outside of Europe, particularly in Asia, it could be argued that both business and leisure travel sectors have mostly seen a return to normality, the return to pre-pandemic occupancy levels is still pending in Europe. With the Chinese outbound market resuming and demand growth from India, occupancy should benefit, albeit more challenging visa restrictions into Europe may prove a hurdle. The key trends expected to impact demand patterns in the future are:

• Hybrid working and blurring lines between corporate and leisure travel
  • In a post-pandemic world, the demand for corporate trips has waned as businesses adapt to hybrid working patterns and use technology to conduct virtual meetings, coupled with cost savings as a result of lower business travel. Deloitte’s Corporate Travel Study 2023 expects the average person to work 2.2 days per week from home, 3.2 times higher than pre-pandemic levels.
  • This ability to work remotely has changed occupancy patterns, increasing demand for both mid-week only business stays, as individuals choose to work remotely, e.g. Monday and Friday, but also increased occupancy from Thursdays to Mondays, as individuals can work remotely during weekdays from hotels and can extend their leisure trips beyond just the weekend.

• Growth of regional and domestic group travel
  • Deloitte’s Corporate Travel Study 2023 indicates that overseas corporate travel spending is expected to decrease to 28% of Europe’s total corporate travel spend, six percentage points lower than the 2019 levels.
  • There is an increasing trend for businesses to host larger regional events, with budget being reallocated to regional accommodation and event spaces compared to associated international travel costs.
  • The disruption in the aviation sector, such as strikes or staff shortages and the importance of ESG have driven demand for more domestic and regional trips.
  • As of September 2023, European group travel demand was still 15% below 2019 levels based on STR, a global data intelligence and benchmarking service provider.

The battle between personalisation and cost

Most executives in the hospitality sector cite rising costs, higher interest rates and increased staff costs as the top risks hindering growth this year. The 2023 EHIC survey found that four out of the top five key priorities for the next 12 months emphasised the importance of cost management: managing inflationary pressure, maintaining or increasing profitability, cash flow and cash management, and performance improvement. Demand fluctuations (48% of survey respondents), the inability to raise prices (45%), and lack of economic growth (39%) are all perceived as key risks for the industry over a one to three-year timeframe.

Figure 2: 2023 EHIC survey | What are your organisation’s key priorities in the next 12 months?

Hospitality executives are intensifying their focus on crafting unique and personalised products and services, aiming to enhance competitiveness and boost guest revenue generation. Driving higher utilisation, functionality and revenue per sqm has become more important to justify cost and investment returns. The appeal of commoditised and undifferentiated hotels is gradually losing favour with consumers and investors, given lack of personalised service. Today’s application of personalisation differs between luxury and non-luxury segments:

• “Premiumisation” of products and services in non-luxury segment | The top cost control measure for corporate travellers in 2023 was picking cheaper, alternative lodging options (59% of respondents) based on Deloitte’s Corporate Travel Study 2023. In response, the industry increasingly sees more budget ‘premiumisation’ of products such as budget-plus room offerings to target budget-luxe customers. Even though there is pressure on corporate travel budgets, consumers still expect some level of premiumisation. The same expectations apply to leisure guests in limited-service hotels, focused on selected benefits such as accessibility or convenience with offerings like swift personalised check-ins and check-outs or easy availability of lifestyle food and beverage options.

• Seamless experiences drive growth in the ultra-luxury segment | In the US, post-pandemic room rates of the luxury and ultra-luxury sectors have grown near to twice and four times faster than the industry average growth rate, respectively. The industry recognises a potential market gap in the luxury segment where room nights can be sold above USD 2,000 for an all-inclusive experience. Ultra-High Net Worth (UHNW) customers are frustrated with paying for extras in the luxury segment and expect effortless personalisation to be included.

What are the top three key trends ahead of us?

The industry is at a pivotal juncture, where traditional paradigms are being redefined. There is a shift in both consumer preferences and market demands, paving the way for a broader discussion on the key trends that will shape the industry's trajectory.

• Flexible and adaptive growth structures | Hospitality businesses with strong management teams are in demand. These businesses have seen high levels of capital-raising activity, particularly from indirect players looking to passively invest in more operationally intensive assets. A good management team’s ability to adapt and optimise growth through execution is likely to trump any boardroom thematic or strategic decisions.

• Redefining work and talent | One of the top five key priorities identified in the 2023 EHIC survey is hiring and re-staffing. The hospitality industry faces critical workforce challenges in attracting and retaining skilled staff amidst evolving guest demands. To address this, businesses must redefine job roles and descriptions, creating dynamic and engaging work environments that offer development opportunities and align with the expectations of a new generation of talent. As consumer expectations shift, particularly among younger guests seeking unique and authentic experiences, there is a significant opportunity for businesses to innovate and use this as a key differentiator in the market. Read more here .

• Inclusion of Artificial Intelligence (AI) | In the hospitality industry, integrating AI is crucial for enhancing guest experiences. Yet, it is essential to maintain a balance between technology and human interaction. Tailoring AI solutions to cater to the diverse preferences of consumers is critical to its successful implementation. Equally important is preparing the workforce for this technological shift, ensuring employees are technologically literate. Addressing ethical and privacy concerns, particularly regarding sensitive guest data, is critical to maintaining trust and compliance. Furthermore, managing the rapid advancement of AI technology while ensuring the stability of guest services and operations presents a significant challenge that demands a strategic and thoughtful approach. Read more here .