EHL’s Institute of Real Estate, Finance & Economics is pleased to present the first update of the European Hotel Transaction Price Index that was initially launched last year. In 2020, European hotel transaction prices decreased on average by 11.1% vs. the prior year. The total transaction volume recorded by Real Capital Analytics (RCA) decreased to EUR 10.5 bn, which is 59% lower than the record transaction volume of 2019.
A smaller drop than expected
To date, the impact of the Covid-19 crisis on the European hotel real estate sector is significantly smaller than the -30% drop associated with the 2009 global financial crisis. This may be surprising, given the fact that the global pandemic has hit the hospitality industry at its core. Besides the outlook for a recovery on the back of accelerating vaccination campaigns, two major factors have contributed to the relatively modest price declines so far. First, government support for hotel staff and owners in many countries has preserved a more severe wave of bankruptcies and forced selling in the European hotel real estate sector. Secondly, liquidity interventions by central banks and policy makers have led to record high stock market indices and record low bond yields in the credit markets. As a result, cash rich investors are waiting on the sidelines, ready to invest in higher yielding investment alternatives such as hotels.
On a cautious note, governmental support programs will eventually expire. Moreover, business travel and international travel may be structurally challenged for sustained periods of time. The fundamental recovery of the hotel real estate sector may thus be more bumpy than implied by current transaction price levels. We look forward to providing the next update of the European Hotel Transaction Price Index in spring 2022.
Full service vs. limited service hotels
To the best of our knowledge, this is the first transaction-based price index of the European hotel investment market documenting a significant decline of hotel prices following the Covid-19 pandemic. In our sample, the average transaction price per hotel room in 2020 increased by 17% compared to 2019. However, rather than an increase in the price level, this surprising result reflects the higher quality of hotels transacted in 2020. In fact, our 2020 hotel transaction sample is characterized by a higher share of full service vs. limited service hotels, more transactions in the central business districts of a city, and significantly higher location ratings.
The hedonic regression methodology that is the basis for our European Hotel Transaction Price Index allows for the estimation of yearly hotel transaction price levels, while controlling for the qualitative attributes of the hotels sold in a particular year. In turn, we report year-over-year price changes for a constant quality set of hotels.
About the index
EHL’s European Hotel Transaction Price Index is estimated based on a hedonic regression model. To understand the merits of hedonic regression-based indices, consider a simplistic “average transaction price per room”-index as the counter example. Over time, with many upscale hotel transactions in expensive cities such as London or Paris, such an index will tend to record unusually high levels of average transaction prices. In the given example, this is however largely because of the specific characteristics of the transaction sample in that period, and not necessarily because of the general hotel transaction price level in that year. Note that the latter should be the ultimate objective of a well-constructed index. The hedonic regression approach circumvents this problem by explicitly taking into account the characteristics of all hotels sold in a given year. In particular, EHL’s European Hotel Transaction Price Index takes into account 10 different hedonic factors, ranging from variables capturing a hotel’s location, building quality and size, to its operating structure.