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Analysis

Does the value of hotels still rely on fundamentals?

During the second edition of Tourinvest Forum, Vanguélis Panayotis, Director of Development at MKG Group, spoke of different driving forces in the evolution of market values of hotels during a detailed presentation based on data from MKG Hospitality.

Hotel results are up in Europe, but France is still waiting for a recovery

Since mid-2013, there has been a rebound in hotel performances throughout Europe. On the period from January to July 2014, the Revenue per available room (RevPAR) for hoteliers on the continent increased by 2.4%. This growth is driven by an increase in occupancy rate.

Meanwhile, the hotel industry has not yet entered the road to recovery in France. In the first seven months of the year 2014, the country's RevPAR dropped by 2.1% because of the drop by 0.4 points in occupancy rate and by 1.4% for average daily rates. Hotel results in France thus contrast with those of its European neighbors, such as the United Kingdom (+6.6% for the RevPAR on the period), Spain (+6% for the RevPAR), Italy (+4.9% for the RevPAR) and Germany (+2 .9% for the RevPAR).

Markets in Paris and Greater Paris resist nonetheless, with a change in their Revenue per available room by -1.3% and -1.1% respectively. Inversely, hotels in the provinces experience increasing difficulty and pull national down, with a 2.1% drop in RevPAR. The trend is different from one region to the next, however, and, while the drop is more pronounced in the Southeast, the Northwest does better. The Loire Valley, Lower Normandy, Nord-Pas-de-Calais and Alsace regions show positive growth in their RevPAR.

The increase in VAT slows activity on the French market

The increased VAT applied to the hotel and restaurant industries on January 1, 2014 slowed France's hotel activity. It could not be added to the prices paid by clients (VAT incl.), as was the case in 2012, due to the dull economic context. This increase thus directly affects the turnover of hoteliers, particularly at the beginning of the year. Germany did exactly the opposite in 2010: the rate dropped from 19% to 7%, allowing the turnover at properties to increase throughout the year. Germany supported the activity of German hotels during the slump in market demand, allowing them to gain in terms of profitability.

More generally, obligatory taxes (sojourn tax + VAT + employers' social contributions + property taxes, waste removal taxes, Audiovisual taxes, SACEM..., and corporate taxes) are particularly heavy in France, compared to other European countries. For every 100 euros paid by the guest, 25.2 euros are deducted by public authorities (not including taxes paid by households), versus 19.6 euros in Germany and 23.1 euros in Spain. Once the wage bill is deducted the resulting net income for French hoteliers is thus 5.1 euros for every 100 euros paid by guests, versus 10.3 euros in Germany and 5.8 euros in Spain. There is thus a lack of competition for France when it comes to the bottom line.

Valorization levels remain high

In France the steadily growing "Top line" nonetheless provides interesting levels of absolute value. Since 1984, results in the country have mostly been driven by average daily rates, while we may observe a resiliency for occupancy rates due in particular to the lack of new supply.

The levels of valorization also remain high thanks to favorable conditions for financing: the actors work in a world where yields are low. The ten-year drop in sovereign interest rates combined with the drop in hotel real estate interest rates supports acquisition EBITDA multiples.

Moreover, potential buyers are increasingly numerous and gaining buying power. The base of potential buyers - institutional and private alike - has grown with the explosion of High Net Worth Individuals (HNWIs) in the world. The example of American REITs (their market capitalization exploded since 2000) also shows us that actors already present grew stronger. Moreover, the hotel industry is less and less often considered "exotic" by these investment funds: 8% of the REITs from the American sector index have turned to the hotel industry.

Valorization also benefits from the rarefaction of available assets on the French market. In fact, the number of rooms on the territory is down since 2009. All these elements have thus made it possible to sustain a high level of valorization [contact us if you wish to receive an estimate for a sampling of hotel transactions on the market /segment/asset profile of your choice, ex: Paris luxury properties and palaces, high capacity, Alps...].

To close, it is important to observe that outside France and Europe, other zones are interesting as well, although they involve higher levels of risk. This is particularly true for sub-Saharan Africa, where occupancy rates for the international hotel chain industry have progressed significantly since 2010. The dynamic sub-regions are, more specifically, West Africa, Southern Africa and the Isles (Seychelles, Maurice, Cape-Verde, etc.). On the other hand North Africa (with exception to Morocco) has not yet risen back up after Arab Spring.

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