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HAF "Can this supply growth still be supported by the different markets?"

Market update at the Hospitality Asset Forum with Sylvie Bergeret, COO at MKG Consulting. After a look back, she shared the major challenges for gauging investments in the hospitality industry.

The rebound is well underway with growth confirmed from March-April in Europe, depending on the country. The changes in RevPAR between June 2021 and October 2022, compared with the same period in 2019, show that the countries are gradually emerging from the crisis. Spain was the first country to rebound in March, followed in April by France. The situations were very different, with some countries coming out of the crisis earlier and others, such as Germany, being affected for longer.

The most interesting observation is that the countries that progressed best between April/May and October were those that had a good balance between business and leisure customers, which boosted their performance.

On the French market, for the entire period from January 2020 to October 2022, the recovery is driven by average daily rates. In the high season periods of May, July and August, average daily rates are 25% higher than in 2019 for the same periods. In some cities, this average daily rates have doubled compared to 2019. These very high prices are notably due to the return of national and European leisure customers who wanted to take advantage of the summer after two years of crisis. The euro/dollar exchange rate, which is favourable to the Americans, is also leading to the return of this clientele. The return of leisure and business groups has also allowed hoteliers to increase their prices.

There are contrasts between the different categories, with the budget segment growing the fastest compared to the other segments. The upscale segment has had the most scope to increase its RevPAR. The impact of leisure periods is also visible on performance, with school holidays or bridging in May. Comparing the periods of RevPAR growth between weekdays and weekends, it appears that growth was driven by the return of leisure customers.

Focusing on a longer period, there are strong fundamentals. The market has been affected several times by crises (financial, economic, political or security) and each time occupancy rates and midscale prices were down, but growth has returned fairly quickly. On the French market, RevPAR grew by 14.5% between 2001 and 2007, then by 18.7% between 2008 and 2019. In the European market over the same periods, growth was 15.8% between 2001 and 2007 and 25.8% between 2008 and 2019. The observation is that after each sharp decline, the rebound is significant.

By comparing these performance data with the evolution of GDP, we can see that the market anticipates the evolution of GDP. RevPAR is systematically down one year before the GDP contraction. This cyclical market has fundamentals that remain high.

The market was initially structured in the first phase with a growth in supply which resulted in a fall in the average daily rates because the development of the budget supply weighed on average daily rates. This new supply replaced ageing properties. After this period of cannibalisation, the supply stabilised with a strong increase in average daily rates(+3.8% over the period) and an occupancy rate that remained relatively stable. This was followed by a new period of growth in demand, which was the corollary of a fall in supply. This decline was caused by the closure of certain ageing properties or those unable to meet safety and accessibility regulations - an effect that we can compare with the tertiary sector decree today. We then returned to a growth in supply. Today, the question is whether this growth in supply can be supported by the different markets or whether we will once again see cannibalisation.

The challenges for the hotel market today are of three kinds.

  • Investment: whether it is for construction or acquisition, investment is required and financial organisations are now more and more careful. In addition, there is an increase in costs. In 2022, we have seen more acquisitions than creations of properties ex-nihilo.
  • Rising land costs: in France, development zones are highly concentrated in areas where land costs have risen enormously. In Aquitaine, for example, land costs have almost doubled in 10 years, as well as in Brittany and Normandy. This is in addition to the increase in construction and operating costs.
  • Differentiation: today you have to innovate to stand out. If you are not a property with a differentiating offer, it is illusory today to think that you will be able to enter a market and obtain the same occupancy rates as the properties already on the market.

If we focus on the Bordeaux market, the destination is characterised by relatively high occupancy rates over the period and a supply that has progressed significantly since 2017. When comparing the performance of the new brands that have arrived on the market with the more traditional ones, if the differential was strong during the crisis period, the delta is reduced after the crisis period with the same levels of activity.

This exercise on the Toulouse market, which is totally different with lower ORs than in Bordeaux and a more balanced leisure/corporate clientele, thus a weaker business clientele than in Bordeaux, shows that the new brands stand out from the traditional ones even outside the crisis period. This factor is therefore important for leisure customers.

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