Marten Foxon

If borrowers were under pressure from their lenders last year, this did not manifest itself in any material degree of distressed pricing in this hospitality sector. Trading performance was robust, generating sufficient cash to service debt and most sellers, such as there were, were not under the sort of pressure which necessitates distressed pricing. Whereas for buyers, the increased cost of borrowing meant a materially lower level of bid, if one was to be made at all.

The bid-ask spread widened, and deals did not get done.

Will 2024 be a repeat of 2023? The answer is probably not, but neither should we expect a tsunami of distressed assets to wash up onto the shores of the hospitality market. Dealflow is likely to increase, but for more nuanced reasons.

Firstly, and so as not to discount debt-induced distress entirely, there will be an element of distress creeping into the market as more debt reaches its maturity date. But this will not be the main driver of increased dealflow.

Secondly, it is generally accepted that interest rates have peaked, and debt pricing is already showing signs of a downwards trajectory which, in itself, should result in a tightening of the bid-ask spread.

Thirdly, inflation is also on a downwards trajectory, but indications are that RevPAR growth may well exceed the rate of inflation, giving rise to attractive increases in net operating income. If this happens, hotel assets will look relatively attractive to those investors seeking cash yield, bringing more buyers into the market and adding to buy-side pressure on asset pricing.

Lastly, there are genuine sellers out there, which are not distressed, and which have been able to sit on the sidelines for the last 18 months or so. They will no doubt be tempted to offer their assets for sale as buyer and seller expectations start to converge.

Sun and beach

This begs the question: where in Europe will the transaction hot spots be in 2024? It would be foolhardy to ignore the old favorites of London, Paris and Rome. All three have high barriers to new entrants, all deliver the potential for inflation-busting RevPAR growth and thus superior returns, and all offer a high level of market liquidity if an investor wishes to exit.

The star of the European show in 2023 was Portugal, specifically the Algarve. A number of high-profile transactions were announced or completed, such as the acquisition by Arrow Global of the Villamoura portfolio. The Algarve should remain a hot spot in 2024. The quality of product and trading performance, varies significantly across the market and therefore is of interest to capital at most points on the risk curve, from core to opportunistic.

Spain also saw some action during 2023, for reasons similar to Portugal with the added benefit of Barcelona, and to a certain extent Madrid, being perceived as highly desirable locations for capital seeking both cash yield and capital growth. The fact the Mandarin Oriental in Barcelona changed hands in June and a portfolio of 17 Melia hotels were purchased by ADIA in September is testament to the attractiveness of Spain in an otherwise quiet market.

Continuing the sun and beach theme, Greece and the Greek Islands offer attractive investment opportunities. The hotel ownership landscape is fragmented, with most properties still privately owned, and as such many hotels are under-exploited, opening up significant potential for value-add and opportunistic-level returns on the coast and in the islands, as well as core and core-plus opportunities in Athens. Greece is a country which has very firmly set its economic course, inter alia, on inbound tourism.

Of course, just one inept move by a central bank or a government could very quickly cool any or all of these hot spots. But provided central bankers and politicians can refrain from doing anything too irrational, these are the places on which the transactional sun will be shining in 2024.

Marten Foxon was a member of the Abu Dhabi Investment Authority’s Real Estate Department Executive Committee until late 2022, where he ran the global hotel investment portfolio for ADIA