HVS: Budget hotels will dominate European development

Source: HVS – 06 October 2010

As the hotel market starts to recover across Europe but credit for new development remains scarce, budget and limited service hotels will continue to be the dominant sector for investment, accounting for a greater proportion of new projects than more upmarket hotels, according to a new report from hotel consultancy HVS and construction consultancy Davis Langdon.

The lower building costs, the shorter development and market penetration time and the fact that financial backers see a safer and faster return on their investment mean that developers and operators are finding it easier to attract funding for budget hotels.

HVS research for the year to August 2010 shows that business travel across the European hotel sector is recovering and many midscale and upscale hotels have registered double-figure RevPAR (revenue per available room) growth. However, this growth has been mainly driven by occupancy rather than average rates, showing that the economic recovery is still fragile and business and leisure travellers remain price-sensitive.

“Developers, investors, lenders and operators want to take advantage of the opportunities for growth in the current market,” commented report co-author Arlett Oehmichen, associate director, HVS London Office.

“Hotel developments have been in decline since the second half of 2008 which was the peak of the most recent hotel development cycle. Since then, the European hotel pipeline has declined at a compound annual rate of 4%, primarily due to a lack of available funding for new projects and lower confidence in the hotel investment market. This decline is expected to continue until 2013-14 when the more recent hotel builds start to trade profitably and development lending becomes more widely available again.”

According to data from Lodging Econometrics, currently 33% of hotels planned or under construction in Europe are branded budget hotels – a total of 242 – while just 100 are mid-market properties. This will bring approximately 10,700 budget rooms on stream. The majority of planned branded budget hotels are in mature markets such as the UK (38% of those planned), Germany (13%), Spain (13%) and Russia (10%). Mature markets are more likely to see growth in the budget sector as operators establish their core upmarket brands in capital and secondary cities before expanding their limited service and budget properties to create critical mass.

“Hotel operators have embraced the opportunities of the current market focusing on optimising their budget brands and developing new concepts that are viable solutions and match the priorities and tastes of modern hotel guests,” commented report co-author Ana Campos-Blanco, associate, HVS London Office.

“This is a resilient and very exciting segment of the market. The budget hotel sector has proved its worth and become revolutionary introducing a wide range of innovative solutions in terms of space, design and cost that require a reclassification of brands between ultra-budget, core-budget, upper-budget and design-budget.”

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