Europe’s booming supply pipeline

Europe’s hotel market is facing a bumper crop of 2021 openings, as projects delayed by the pandemic open alongside an already strong development pipeline.  

According to statistics from STR, this year’s opening figure of more than 100,000 new rooms will be a record figure – and will be followed by a further strong year of additions in 2022, expected to be at a similar level. The previous peak year for openings was 2019, when 74,852 rooms were added.  

“The pandemic led to far more delays than deferred and abandoned projects in Europe—yes, performance has suffered during the pandemic, but many investors are still counting on the resilience of the sector,” said Robin Rossmann, STR’s managing director. “While the impact of this supply influx will of course vary by market, there will be even greater competition for properties that have weathered the pandemic and hope to achieve meaningful levels of recovery over the coming years. These new openings will not be replacement supply as most properties that closed because of the pandemic have reopened.” 

STR’s statistics point to strong growth in emerging European markets such as Albania and Georgia, as international brands start to make their way into such countries. Total volumes of hotels remain low, however.  

Across established markets, Ireland’s pipeline represents one third of the current total stock, while in Israel and Poland, new supply is around 29% of current hotels. For the UK, the figure is 21% while in Poland and Germany are similarly around 14% and just above 4% in France and Spain.  

In absolute pipeline numbers, the UK has the largest pipeline at 146,540 rooms, ahead of Germany with 94,940 rooms; with this pair being substantially ahead of Spain with 37,921. 

Beneath the headline country market numbers, it is individual city and regional market supply that is likely to impact performance. Several German cities, for example, have strong pipelines, and a recent report from Christie & Co notes that this is going to hit returns – not least as business travel and German trade fairs make their slow return to business calendars.  

The report warns: “While stock in Dusseldorf has remained quite stable since 2015, the economic powerhouse of the Rhine-Ruhr area is seeing supply grow by over 40% in 2021, which will put further pressure on performance.” 

Similarly, hoteliers in Hamburg may have little to celebrate: “Despite strong supply growth since 2014, the pipeline for Hamburg, the city with Europe’s third largest port, foresees an increase in room supply of 10% in 2022. As we do not expect demand to recover in line with those supply additions, KPIs in Dusseldorf, Hamburg, Munich and Frankfurt are likely to stay under pressure in the medium term.”  

Agents at Christie expect Hamburg and Munich to recover ahead of the curve – despite the threat of new supply – given their favourable demand composition. But they warn: “Dusseldorf, on the other hand, is expected to recover much slower, given its high share of business demand and strong active pipeline.” 

Rossmann said he still expects most of the listed projects to proceed: “We haven’t seen a lot of abandonments yet. For me, the key takeaway is, from a supply perspective, the vast majority of hotel have reopened – so there’s not a big dropout of supply.”  

Rossmann said investors are staying on board with hotels, watching for the return of business travel. “We’re still in a phase where the shape of the recovery is uncertain. And nobody wants to sell out at the bottom of the market.”  

He is also sceptical that there will be wholesale repurposing of pipeline properties, into alternative uses, suggesting there is limited, anecdotal evidence of conversions: “Hotels are built for purpose.”  

STR’s modelling suggests the hotel market will see leisure back to full market strength next year; with domestic business fully recovering for 2024, and international business travel volumes back on trend in 2025. “I certainly hope it’s better than that,” opined Rossmann. 

HA Perspective [by Chris Bown]: What, no big reset? Plenty of investors believe their new hotels will deliver them a decent return, it seems – they’re backing a substantial growth in demand from travellers.  

They might be right, and in three years we’ll all have forgotten the pandemic, and those demands to continue using Zoom for business meetings. Or maybe we’ll be using hotels in a different way, commuting for three midweek days, and staying over.  

Other scenarios are available. As Christie point out, some German city markets really feel like they will be under pricing pressure as new hotels arrive in large numbers. Maybe that forces the older, less attractive properties from the market, for redevelopment into buildings that aren’t hotels. But, with German funds still happily buying off plan – so long as someone has been signed up to pay a lease – there’s no slackening of investor appetite, it seems.  

Cost inflation, and supply issues, are also conspiring to make new hotels harder to build. So we ought to expect some of the pipeline projects to fall away, having been rendered uneconomic by higher delivery costs. And as other sectors, such as student accommodation, and co-living, appear to shine brighter, investors could be calling on city planners to allow them to flip their projects into other buildings with beds.   

Additional comment [by Andrew Sangster]: STR’s figures are the best available when looking at new supply. But they do not capture the full picture, particularly of the small, privately held accommodation that is exiting the market. 

When more detailed and comprehensive studies are done – I can only think of Whitbread’s efforts a few years back in the UK – then a more nuanced picture emerges. There is certainly plenty of new supply entering the market but there is also a lot of older and tired stock leaving. 

This net balance is of course critical, particularly in markets like Europe which are dominated by these unbranded, family-run hotels. 

In the longer term, the increase in institutional quality assets for the hotel business is good news. It should make the sector more efficient, thanks to access to cheaper capital enabling more investment, and operating standards ought to improve with more professional managers. 

The short-term challenge is going to be overcoming the potential indigestion of too much supply. The German market in particular has suffered from this in the past. If the fears about the slow return of big events and fairs prove correct, then investors in hotels in some big German cities will have a lot to worry about. 

Another factor is the shift in supply type, with full-service business hotels facing a challenge from the surge in supply from limited service players like Premier Inn.  

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