MR 2018

64

Copenhagen Property Market Report 2018

Prime yield estimates in Europe’s mature markets (hotels let on long leases)

The current pipeline seems to indicate that the new supply will be varied, featuring a relatively diverse mix of concepts and brands. Furthermore, we see an increase in operator demand for so-called long-stay concepts, involving small-sized hotel apartments for long-term rent. Outlook remains bright The record-breaking supply pipeline may give rise to speculation that the uptrend in hotel KPIs may be tapering off. Analysing the added supply, however, it seems to largely fill capacity shortfalls to meet recent years’ mounting demand. As a result, only a limited measure of cannibalisation is expected among the new hotels. At the moment, we therefore see no major risk of any structural oversupply in terms of Copenhagen hotel rooms. Obviously, competition will become more intense, imposing stricter demands on hotel operators. Similarly, KPIs are expected to come under pressure in the next three to five years, although we believe that the most important KPI, RevPAR, will edge down only slightly. With occupancy rates in excess of 80%, hotels are practically as fully booked as can be. Furthermore, when occupancy rates are this high, price elasticity incentivises operators to achieve higher turnover levels by increasing room rates at the expense of a slight decline in occupancy rates. We therefore expect hotel operators to raise rates (ADR) over the next 12 months before the greatest proportion of added capacity hits the market. There is little doubt that the fiercer competition will slow the pace of growth in hotel KPIs and weaken average performance, presumably only temporarily over the next three to five years. After that, the market is expected to stabilise. More investors and rising transaction volume In the period from December 2016 to December 2017, the Copenhagen hotel transaction volume was at an all-time high of approximately DKK 4.85bn, reflecting an increase in both the size and number of hotels traded last year. The ranks of investors in the hotel market have swelled considerably too. Just a couple of years ago, domestic pension funds were averse to hotel property investments. However, yield compression in other prime property segments, along with the fact that hotel operators more readily accept long-term lease agreements as opposed to management agreements, have made investors view hotel investment properties as much more attractive investment opportunities, offering highly competitive risk- adjusted returns. In 2017, several international investors, including KEVA, Balder and Midstar, entered the Danish hotel investment property market. Both pension funds, property companies and operator chains are active investors in the hotel market. Because of the favourable trend in KPIs, hotel market rents have been climbing.

4.00%

Barcelona

3.75%

London

3.50%

Paris

Note: In the most mature hotel investment markets, it is much more common for investors to acquire hotels on management contracts rather than fixed lease agreements. Source: JLL