Investment overview

Investment volumes have been rising steadily since the last market trough in 2009, when just €6.9 billion worth of logistics transacted across Europe. In 2017, a peak year that was boosted by some large deals, trading volumes hit €40.4 billion. Interest in the sector has continued at very robust levels over the last couple of years, with €35.8 billion transacting in 2019 with the UK, France, Germany and the Netherlands consistently amongst the most active markets in Europe, also recording some of the highest penetration of online retailing.

There is, of course, the much talked about slowdown to the European economy hitting markets hard, although there has been a much swifter reaction by Central Banks than was seen during the GFC which, it is hoped, will go some way to supporting the weakening economic situation. But there are still a lot of unknowns: the main factors being the length of lockdowns, the impact of the gradual lifting of measures being seen across a number of European countries, the possible resurgence of the virus and when and how much consumer demand will be impacted, with the acceptance that a proportion will be permanently lost.

While the market drivers are there, real estate fundamentals underpinning the sector are healthy, capital is waiting on the sidelines to deploy when appropriate opportunities present themselves, the full-year 2020 trading volumes are expected to be subdued. While Q1 numbers are looking relatively healthy with €7.6 billion changing hands and above the long-term quarterly average of €6.2 billion. Activity levels are largely reflecting the conclusion of deals already in the pipeline pre-COVID-19 and a truer picture is likely to emerge as Q2 progresses. Indications thus far are for a much slower quarter as less product is openly marketed – stymied, for now at least, by the inability to view potential assets, conduct technical due diligence and the gap between buyer and seller expectations on pricing.

Once a new pricing benchmark has been established, capital is likely to react quickly, but during times of uncertainty, investors will favour core assets in strong locations. These will include assets close to infrastructure hubs as carbon emission regulations bear down and are now higher up the agenda and/or gateway cities, which service the growing demand for last-mile logistics. In addition, the wall of global capital headed to Europe is expected to ease, at least temporarily, providing a buying window for domestic institutions and cross-border European capital familiar with their local markets to take a larger share.

What next for occupiers?

COVID-19 has been a shock on both the supply and demand sides. One of the interesting questions this throws up is what occupiers are doing with their supply chains. Historically, companies have minimised supply chain inventories, keeping them flowing at low, but continuous levels, so they can remain competitive.

An additional consideration if there are ongoing shortages to disruptions in global supply chains is a potential shift to re-shoring or near sourcing, as companies bring their supply chains closer to home. This could translate into demand for more warehouse space near ports and airports, and rising demand for distribution hubs along the supply chain.

In summary, COVID-19 is expected to result in higher inventory volumes and a reassessment of business continuity plans, which will create stronger demand for warehouse space. Whatever the outcome of the COVID-19 pandemic, and despite current economic demand side pressures which has suppressed economic activity, when the risk subsides, the expectation is for a rebound in activity.

Hotel service classifications

Hotels are categorised in numerous different ways, including star ratings, size of hotel and number of rooms, location, ownership and affiliation, and also the type of hotel which is aligned to its offering.

The most common types of hotel markets include business, airport, resort or leisure, casino, convention and conference hotels.

Hotel dynamics

The hotel asset class possesses a number of key differences when compared to some other real estate sectors.

Owner or operator

All hotels require an operator, but whilst the operator and underlying investor (or owner) can be one and the same, particularly for boutique hotels, this is not necessarily always the case.

Many larger branded or chain hotels tend to have a mix of several ownership types including direct ownership, management contracts or franchise arrangements. For example, just because the name says Hilton, does not mean the Hilton Company owns the property.

Hotel rooms are perishable goods

A hotel room, like an airline seat, is a perishable good. That is, once a specific date occurs, every room not booked for that night perishes. Similar to airline seats, there is no market for yesterday’s rooms.

This presents a challenge as every hotel obviously wants as many rooms as possible booked each night, albeit the temptation is often to discount the room. Ongoing discounting, however, can damage a hotel’s brand and lead to other challenges.

Pricing fluctuates greatly

Hotel prices are put through a rigorous prediction process. Pricing rooms is not as simple as knowing when peak and off-peak seasons are. Rather, the hotel looks at the past year’s demand and compares it to larger trends correlating with the wider hotel industry. These include the economy of the country in which the hotel is situated, competitors’ prices for similar rooms, and even weather patterns.

A hotel will also look at its booking history. In doing so, the hotel seeks to identify the ‘booking curve’ in order to understand the optimal number of rooms that should be booked at certain intervals in advance (generally one, two and/or three months).

The overarching goal for every hotel is to ensure the most rooms are booked per night, at the highest price possible. As such, during stretches of lower demand or if actual bookings are lower than projected, room prices can be decreased to incentivise last-minute booking. On the other hand, prices are generally raised when demand is high.

Booking platforms are important

Online booking platforms have become an important tool to ensure the greatest possible number of rooms are occupied on a nightly basis, particularly when demand is low during off-peak times.

Third party agency sites such as Booking.com act as an intermediary between guests wanting to make a reservation and a hotel. These platforms also have a broader reach compared to a hotel’s own website, so while they can direct additional bookings to a hotel, they also charge for the privilege. This, in turn, eats into the hotel’s profit – hence why hotels usually advertise that the best rate is obtained by booking direct.

Loyalty programmes

Almost every major hotel chain has a loyalty programme to encourage travellers to stay with their chain wherever they travel across the globe. Similar to airline loyalty schemes, their hotel counterparts offer varying levels of membership and rewards for staying with a particular chain, or group of hotels.

Key growth drivers and future trends

Mixed-use: Work, stay, play

Mixed-use buildings, combining hotel, residential, office and/or retail space in a single building or precinct have gained increased traction in recent years. Mixed-use buildings increase diversification for investors and allow them to blend their offerings to meet the increasing demands of their guests.

Millennials moving in

Demographics are a major consideration for all hotel investors and operators. In Australia, millennials on average spend the most on accommodation per night. This gives rise to an emerging challenge, particularly given the growing rise of Airbnb amongst this demographic. Hotels must create a point of difference to ensure they continue to attract customers in the face of this popularity.

Rise of the global middle class

The rise of the global middle class also shows no signs of slowing, increasing from 1.8 billion people in 2009, to a forecast 3.2 billion in 2020 and 4.9 billion in 2030. The bulk of this growth comes from Asia, which will represent two-thirds of the global middle-class population by 2030. As a result of this rapid rise, the sheer number of people looking to travel, and stay at a hotel, is growing quickly.

The experience economy

Consumers are also placing less emphasis on acquiring material goods, and more on seeking out experiences. This is particularly evident in the global luxury travel market, which is forecast to reach US$1.1 trillion by 2025, representing a compound growth rate of 4.3% between 2017 and 2025.

This growth is driving demand for hotel stays and investors are looking to capitalise. In 2018, the US saw luxury hotel transactions rise by 76% year-on-year. In Europe, investors are looking to deploy capital to meet this demand in key destination cities such as Paris, Rome and Florence.

Investor diversification

Investors are also seeking alternative options to the traditional real estate sectors of office, industrial and retail to diversify their returns. As pressure mounts to deploy capital, the positive longer-term dynamics continue to heighten the appeal of hotel assets. Across the five years to 2018, 70% of hotel investments were made by investors looking to diversify, rather than those seeking hotel-specific funds.

Hotels, like any other asset class, have positives and negatives as an investment option. However, there is a lot to like about the sector, including its ability to diversify investor portfolios and sustained medium-term growth in demand off the back of the experience economy, tourism boom and continued rise of the global middle class.

However, in 2016, the International Monetary Fund called the Chinese economy the world’s largest when adjusted for purchasing power parity (which allows you to compare how much your money can buy in relative terms).

Perhaps a more telling statistic is that per capita disposable income is US$39,513 in the US and just US$2,993 in China. This more aptly illustrates just how far China has yet to go to give its citizens a similar quality of life.

The next two largest economies are Japan (US$4.9 trillion) and Germany (US$4.6 trillion). It’s India (US$2.6 trillion), however, which has now passed France and, given Brexit, probably also the UK, which is increasing the fastest. Brazil, despite its very recent economic woes, surpassed Italy in GDP rankings to take the number eight spot overall. Canada rounds out the top ten.

Australia’s GDP was US$1.32 trillion or 1.67% of the global economy, which just about puts it on par with Spain. While punching above Spain and most others in terms of GDP per capita, Australia remains a relatively small economy in global terms.

The infographic below shows the composition of the US$80 trillion global economy in 2017, the most recent year in which comprehensive figures were available. In nominal terms, the US still has the largest Gross Domestic Product (GDP) at US$19.4 trillion, making up 24.4% of the world economy, nearly 60% larger than China at US$12.2 trillion.

However, in 2016, the International Monetary Fund called the Chinese economy the world’s largest when adjusted for purchasing power parity (which allows you to compare how much your money can buy in relative terms).

Perhaps a more telling statistic is that per capita disposable income is US$39,513 in the US and just US$2,993 in China. This more aptly illustrates just how far China has yet to go to give its citizens a similar quality of life.

The next two largest economies are Japan (US$4.9 trillion) and Germany (US$4.6 trillion). It’s India (US$2.6 trillion), however, which has now passed France and, given Brexit, probably also the UK, which is increasing the fastest. Brazil, despite its very recent economic woes, surpassed Italy in GDP rankings to take the number eight spot overall. Canada rounds out the top ten.

Australia’s GDP was US$1.32 trillion or 1.67% of the global economy, which just about puts it on par with Spain. While punching above Spain and most others in terms of GDP per capita, Australia remains a relatively small economy in global terms.

Why diversify?

Australia has often been called the lucky country, given its more than 25-year run without recession. Luck, however, is not a strategy, nor is it sufficient to build a business, execute a strategy or pay distributions. Luck can run out and, diversification, whether or not it’s for personal investing or growing a business, is important.

Diversification doesn’t mean turning your back on what you know or are familiar with (Australia), but it does mean prudently assessing opportunities which can diversify investment portfolios or business income streams both by sector and by geography.

The European real estate market, for example, comprises approximately 350 million sqm of office stock, over 14 times more than the Australian equivalent. The market comprises more than 34 different individual office markets, each with more than 2 million sqm of office space.

To put it in perspective, that’s 34 different markets the size of Brisbane or Canberra that you can choose to invest in. All of these locations will have different local market dynamics, are at different points in the real estate cycle and are in differently performing countries, some of which, like Poland, currently have better prospects than Australia. Diversification matters.