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Hotel market update the Netherlands 2023

Hotel sector resilient despite low investment volume

December 20, 2023

A hotel guest checking in or out at the reception

Investments in real estate have dropped sharply, hotel sector hit hard

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The investment volume in real estate during the first three quarters of 2023 was only €5.5 billion, a substantial decrease compared to previous years when the volume during this period ranged between €9.6 billion and €14.6 billion. This reduction can be attributed to inflation, rising interest rates and a sharp depreciation in value in the real estate sector.

That said, the decline is not the same across all sectors. Offices, residential real estate and hotels have been hit hardest. The major drop in investments in office space can be explained by the effects of hybrid working, while the housing market is facing the threat of mid-market rent legislation and problems in the affordability of newbuild projects. The 70% reduction in investment volume in hotels during the first three quarters is even more remarkable in this context.


Figure 1: Evolution of investment volumes by sector first three quarters 2023 compared to 5-year average volume

Thus far in 2023, investments have stagnated at €241 million, and with only December remaining, this represents a significant decline compared to the €414 million recorded in 2022. The volume of investments in 2023 is largely down to a major deal agreed in Rotterdam: Annexum’s purchase of Inntel Hotels for €125 million. Additionally, this volume includes two deals that were agreed upon in 2019 but saw ownership transfer in 2023: M&G Real Estate's purchase of Motel One for €25 million and Corum's acquisition of the Ibis Styles Hotel for €51 million. Consequently, the actual investment volume realized in 2023 was even lower than the figures reported.

Impasse in the hotel investment market due to differences in the value perception of buyers and sellers

It is clear that there is more going on than rising interest rates and depreciation alone, which in the hotel market have been relatively limited at 10 to 15% since 2019. With around €800 million in investment products on the market, it seems as though there is more than enough on offer. Instead, the impasse appears to be caused by caution on the part of buyers, which has been prevalent since the pandemic. The annual investment volume has s significantly decreased since 2020, ranging from €200 to €400 million per year, compared to the record years of 2017 to 2019 when volumes reached €1.6 to over €2 billion per year.

Apart from the usual economic risks, investors consider the hotel business to be a particularly risky one. This hesitance is reflected in potential buyers taking longer to finalize deals. Investments in hotels have been categorized as high risk-return since the pandemic, making them attractive to more opportunistic investors, while institutional investors have slowed down their activities. However, the risk of another pandemic negatively impacting tourism seems manageable. With fixed leases typically spanning 20 to 25 years, any lean years can be compensated for over a longer period of time.

In the current market, there is a discrepancy between the valuation assigned by buyers interested in acquiring core hotel real estate with fixed leases and the perceived valuation by sellers. Buyers are cautious and aware of the deteriorated sentiment and risks associated with hotel operations, leading them to assign a lower value to the real estate. These buyers are primarily institutional organizations, but they have been inactive in the market during 2023. They are adopting a wait-and-see approach and closely monitoring the value development, as it significantly impacts their portfolios.

On the other hand, sellers are inclined to maintain higher valuations for their hotel real estate. They believe in the market's eventual recovery and anticipate an increase in values, making them reluctant to sell at a lower price. In addition to this, some investors purchased hotel real estate during the peak period of 2017 to 2019. Considering that hotel operations are currently improving, they are not in a rush to sell at a loss.

The contradiction in valuation and price expectations has created an impasse, resulting in a slowdown and reduction in investment momentum. However, the negative sentiment towards hotels as an investment product may not be entirely justified when considering trends in the occupier market. Ultimately, the truth lies somewhere in the middle.

Tourism exceeds all expectations

The tourism industry in the Netherlands has experienced a remarkable recovery in 2022 and 2023, surpassing all expectations. There is a strong upward trend in the number of overnight stays, reaching record levels in hotels, motels, guesthouses, youth accommodations, and bed and breakfasts throughout the country[1].

It is particularly noteworthy that the number of overnight stays in 2023 is 13% higher than the pre-pandemic level in 2019. Amsterdam, a popular tourist destination, has also seen a significant increase of 9% in bed nights. Furthermore, it is worth highlighting that the number of overnight stays for domestic tourists has grown at a faster rate (+19% compared to 2019) than for foreign tourists (+9% compared to 2019). This indicates a stronger preference for domestic travel within the Netherlands. Overall, the tourism industry in the Netherlands is experiencing a robust recovery, with increasing demand for accommodations from both domestic and foreign tourists.

[1] With at least five beds.

 

The positive trend in the tourism industry in the Netherlands is expected to continue, bringing opportunities for hotels to profit from the increased demand. Spending on hotels and restaurants in the Netherlands, as well as in the countries that contribute the most to tourism here, is forecasted to rise in the near future. However, it is important to note that there may be a period of stabilisation in 2024 due to rising costs and the depletion of savings accumulated during the pandemic. After this stabilisation, a sharp increase in spending between 2025 and 2027 is forecasted. Additionally, the expected increase in the number of tourists from Asia, particularly China and India, due to the growing middle classes in those countries, is not accounted for in the projections. This could further contribute to the positive growth in the tourism industry in the Netherlands.

Both domestic and foreign tourists show a strong interest in hotel stays in the Netherlands, and the outlook for Amsterdam and the rest of the country is very positive. The City of Amsterdam anticipates a 10% increase in overnight stays in 2025 compared to 2023. Based on spending in hotels and restaurants in the Netherlands, adjusted for inflation, there is an expected 11% increase between 2023 and 2025.

Hotels running at full capacity once again

The hotel industry in the Netherlands faced severe challenges during the pandemic, with the average occupancy rate dropping to 30% and hotels operating at a loss. To attract Dutch tourists in the absence of foreign tourists, hotels offered discounted room prices, which had a significant impact on profitability. However, the industry began to recover in 2022, with improved occupancy rates and normalized room rates. Despite the recovery, hotels faced challenges with rising energy, staff, and procurement costs, putting profitability under pressure again in 2022. 

However, with the resurgence of tourism in 2023, hotels were able to pass on these higher costs to guests through increased room rates. As a result, hotel room rates in the Netherlands in 2023 were, on average, 24% higher than in 2019, and revenue per available room (RevPAR[2]) increased by over 17% compared to 2019. The increase in room rates compensated for the somewhat lower occupancy rate in 2023, which was 6% lower than in 2019. This adjustment also helped offset the higher costs, which were 14 to 17% higher than in 2019. Additionally, the rise in turnover almost compensated for the 18.2% inflation since 2019. 

As a result, the hotel industry in the Netherlands has become healthy again after an unusual economic period of time. Looking ahead, the hotel sector in the Netherlands could benefit from the increase in tourism and the further recovery of business travel volumes in major Dutch cities. If occupancy rates and room rates continue to rise, operational profits from running hotels can be considerable. However, there are challenges to consider. The soaring cost of living may limit the prospects of unfettered increases in room rates. Additionally, labour costs are expected to continue increasing in 2024. This highlights the importance of good asset management to keep costs in check.

[2] RevPAR is the revenue per available room, a performance indicator that is calculated by dividing the total room revenue of a hotel by the total number of rooms and days available during the period measured.

Low risk, high returns?

With the positive outlook for the hotel industry in the Netherlands, including strong tourism figures, increased hotel spending, and recovering operating profits, it appears to be an opportune time for hotel real estate investors to enter the market. The risk of further depreciation in real estate values is low, and in many cases, it is possible to purchase properties at lower values than during the period from 2017 to 2019. Additionally, there is potential for a rise in real estate values in the future. It seems to be a matter of waiting until investor sentiment may improve and investors feel confident to start buying again. The demand from users in the hotel market will definitely not be the issue.

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