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.

12/06/2019

Robin Hubbard

Robin Hubbard

Head of Real Estate Capital

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

Introduction

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

20190612_hk_eng_chart_1.JPG

Source: MSCI, May 2019.

Figure 2. Real Estate Institutional Investor Trends Survey

20190612_hk_eng_chart_2.JPG

Source: Probitas Partners, 2019.

 

Read the full report

 

Important Information
Any security(s) mentioned above is for illustrative purpose only, not a recommendation to invest or divest.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Opinions stated are matters of judgment, which may change. Information herein is believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. Exchange rate changes may cause the value of the overseas investments to rise or fall. For risks associated with investment in securities in emerging and less developed markets, please refer to the relevant offering document.
The information contained in this document is provided for information purpose only and does not constitute any solicitation and offering of investment products. Potential investors should be aware that such investments involve market risk and should be regarded as long-term investments.
Derivatives carry a high degree of risk and should only be considered by sophisticated investors.
This material including the website has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.