Hospitality: A vibrant sector that’s always on the move
Hospitality is a vibrant sector that’s always on the move and influenced by a multitude of economic, social and technological factors. As the world emerges from a global pandemic and faces surging interest rates, the hotel property market is drawing keen interest and promising opportunities for diversifying a real estate allocation.
Hospitality bounces back
In France and Europe, the hotel industry has demonstrated its staying power. Hotel performance is based on two main criteria: (i) occupancy rate – how full the hotel is each night, and (ii) average price per night sold.
Average room prices have climbed since 2019, partly due to inflation. Some regions in France have seen average prices jump more than 20% in 2023 compared to 2019, which is still used as the hotel industry’s base year. Occupancy rates have also shown real improvement, returning to 2019 levels across the industry.
In a complicated real estate market, hotels are decorrelated from other real estate assets, which has proven a good buffer against inflation. Prices can shift daily – well above the rate of inflation – based on supply and demand.
Industry trends
To stay attractive and competitive, hospitality must constantly adapt to new needs. New hotel concepts like RockyPop, Voco, Mama Shelter and Tribe are gaining traction. These hotels are becoming actual living and lifestyle quarters, bringing neighbourhood residents and hotel guests together. This optimises the use of hotel space all day long. The growing importance of online reservation platforms, changing consumer behaviours, and new business models like boutique hotels and alternative lodging (think Airbnb) are all challenges and opportunities for the sector’s traditional operators.
Covid also sent shockwaves through the industry, demonstrating the need to be adaptable and resilient. Social distancing, travel restrictions and changes in guest preferences have forced hotels to rethink their strategies and operations to adjust to this ‘new normal’.
And with these new trends, sustainability is emerging as a key factor for the hotel industry. Increasingly, consumers are tuned into environmental and social issues, driving hotels to adopt more sustainable practices when managing their operations and designing their buildings.
Hotel property in an asset allocation
Long under the radar, hotel real estate was strictly for insiders like hotel groups, professional investors or institutions. Because hotel properties are vulnerable to economic cycles, the risk of capital loss, volatile cash flows, high operating costs and the dual logic of real estate (operation/business), only seasoned investors could handle a hotel investment deal.
Even so, the hotel market is a viable alternative to traditional real estate markets and has its place in an asset allocation strategy. Including hotel property in a diversified portfolio, alongside other asset classes, and selecting investments that move with industry trends allows investors to take advantage of the asset class while also mitigating risk through a broader real estate allocation. Finally, when diversifying into this type of asset, guidance from industry experts is vital.
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