More than just Paris

Some EUR 1.8 billion was invested in hotel properties in France in 2018. In the same year, around twice that amount was invested in hotels in Germany – and three times as much in the UK. A similar imbalance is likely in 2019. Nevertheless, investors who want to diversify and expand their portfolio in Europe shouldn’t overlook France.

Millennials helping to fuel growth in Paris

When talking about France, we inevitably think of Paris. The city is the second largest European hotel market after London and roughly on a par with Berlin. Although the number of new builds in the pipeline is far greater in Berlin than in Paris, and the German capital is set to overtake Paris soon, there is also considerable new construction activity in Paris, which has sparked investor interest. Hopes are largely focused on the new hospitality demands of millennials. According to experts, they favour lifestyle hotels for shorter stays and extended stay formats when working on longer projects.

“Alongside new lifestyle brands, the extended stay segment of the hotel sector is definitely one of the most attractive asset classes,” says Asli Kutlucan, Chief Development Officer at Cycas Hospitality. “I firmly believe that the trend towards a sharing economy will change the European hotel market. Our strategy of creating modern hotel clusters provides an excellent opportunity to generate synergies, from co-living to co-working.” Kutlucan explains that the cluster approach primarily means combining different hotel types at one location – and often even under one roof. Dual-branded hotels are a good example of this, such as the combination of Hyatt Place as a lifestyle brand and Hyatt House as an extended stay concept. Cycas Hospitality is lined up to operate a dual-branded Hyatt hotel in the Paris Nord 2 Business Park near Charles de Gaulle Airport, with the hotels due to open in 2020.

Connecting hotel properties with their surroundings

Other industry commentators believe it’s possible to take this approach even further. Romain Gowhari of the Hotels & Hospitality Group at JLL, for example, explicitly mentions “Co Co” strategies that will further invigorate the hotel investment market in Paris. The idea here is to add co-working spaces and co-living areas to hotel properties in order to integrate hotels even more effectively into their urban surroundings. Ultimately, in Paris the aim is also to make hotels a more attractive fit with modern urban planning strategies. It is important for hotel properties to become better connected with the local area and contribute to the creation of vibrant mixed-use neighbourhoods.

The persuasive potential of new concepts could then also help to ease building law regulations in Paris and generally speed up construction work. Alexandre Couturier, a partner at Clifford Chance, notes this weakness in the Paris real estate market and adopts a somewhat more reflective attitude: “I ask myself how we can take account of the new trends being driven by the sharing economy. I believe that is only possible in new hotel properties, but construction activity is strictly regulated in Paris.”

Investors also show interest in projects

The legal complications around planning and construction may be one of the reasons preventing hotel investors from seeing France as a viable option. At the same time, however, there has been an increasing willingness to invest in development projects at an early stage. In 2017, only 16 per cent of total hotel investment in France related to development projects, whereas in 2018 the equivalent figure was 24 per cent.

Union Investment, for example, is planning to acquire more hotels in France as part of its diversification strategy. Of the 75 hotel properties currently held by the Hamburg-based real estate investment manager across nine countries, only two are located in France. The intention is to change that. “We’re currently preparing to make a comeback in France,” says Andreas Löcher, head of Investment Management Hospitality at Union Investment Real Estate GmbH. “Paris is right at the top of our list when it comes to investment, and that includes development projects. France’s regional markets also offer attractive opportunities, with a new fund providing one option for taking advantage of them. We also see strong potential for portfolio acquisitions, which could include smaller hotels.”

Are portfolio sales being planned?

The proportion of portfolio sales in the French hotel market hit a record low in 2018, at 6.1 per cent. However, this could also be interpreted as a sign that new portfolio sales are currently being planned and the corresponding portfolios will appear on the market shortly.

The attraction of secondary markets

Romain Ghowari points out that international investors should not restrict themselves just to Paris for hotel acquisitions in France, but should also consider a range of attractive secondary locations. “Out of all the second-tier locations, Nice is the market that investors ought to focus on over the next few years. It offers considerable potential for RevPar growth.” Alongside Nice, the JLL expert names Bordeaux, Lille, Nantes, Lyon and Toulouse as locations that are worth a closer look from an international perspective, due to positive regional developments.

Property broker Christie & Co. also has Marseille on its radar in its analysis of France. A report for 2018 confirms RevPar growth of 7.4 per cent year on year in Nice, followed by Nantes with 7.2 per cent. Lyon with growth of 3.5 per cent and Marseille with 2.8 per cent are clearly some distance behind the frontrunners, but are also making progress.