In focus - Thought Leadership
Uncovering value at the top of the real estate cycle: Owner-operated hotels in European
While yields have compressed in the wider hotel market, the European owner-operator segment still offers considerable value, not least because of this area’s attractive yield premium.
With the majority of commercial real estate sectors at their peak globally, especially in gateway cities, Schroders Real Estate has been hunting for specific segments which are not just attractive today but, in the context of our ‘mega-theme’ framework, have structural support reasons which should mean they will sustain their value in future and offer upside potential.
Owner-operated hotels in Europe (branded under hotel management agreements or franchise agreements) is a sector that has these characteristics and represents a compelling investment opportunity for investors seeking:
- Exposure to a large ‘alternative’ property sector
- A premium yield and total return compared to similarly-located office assets as well as leased hotels
- Positive structural changes to demand and supply
Total returns in the UK and European commercial real estate markets are forecast to weaken over the next five years compared to the last five. Prime yields are at an all-time low across many sectors (figure 1) and rental growth is starting to slow. This is concerning investors (figure 2) and pushing them to consider investment opportunities in alternative, non-mainstream sectors that offer comparatively attractive income and/or total returns and are driven by long-term structural changes which are independent of the economic cycle. These sectors should be relatively defensive and offer portfolio diversification.
Some segments such as student accommodation and build-to-rent residential, for example, have already seen significant yield compression as institutional investors have entered those markets. However, there are still several segments which have yet to gain the attention of professional investors and which offer not just attractive risk-adjusted returns today, but may also benefit from future yield compression as they become mainstream.
Figure 1: Net initial yields by sector in the UK
Source: MSCI, May 2019.
Figure 2. Real Estate Institutional Investor Trends Survey
Source: Probitas Partners, 2019.
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