The end of the travel boom brings opportunities for hotel investors

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The worst thing about vacations is usually coming home. Markets are facing the same discouragement as the post-pandemic boom in leisure travel comes to an end. Shares in the sector have struggled this year. But a slowdown could open a new door for those who want to know some of the strongest fundamentals in the property world.

Hotel companies have had a blast as a combination of inflation, excess savings and pent-up demand has pushed sales growth to double digits in recent years. The inevitable slowdown has arrived: Holiday Inn owner IHG said this week that revenue per available room rose 3.2% in the second quarter. That’s higher than in the first quarter, but a fraction of the 16 percent RevPar growth it achieved in 2023. Marriott cut its growth expectations last week, citing a slowdown in the United States and China. Shares of the two have fallen by a tenth in the past month on fears that the travel bubble may have burst.

It’s not all bad news. The Olympics mean a golden spell for Europe, with sector-wide RevPar expected to grow 5% this year, compared to 2% in the US, says Green Street’s Edoardo Gili. He believes the European outperformance is likely to last.

An important reason is the lack of supply of new hotel rooms as regulatory and environmental concerns combine with tougher financing conditions and high construction costs. New European supply could grow by 1 to 2% per year over the next five years. This is well below demand growth, which is being pushed higher by factors such as demographic change and increased leisure spending.

In fact, Europe presents an opportunity for consolidators like IHG, which does not own properties but brings hotel owners under its franchises. The chains have a 40% market share in Europe, compared to 60% in the US. IHG registered a record 384 new hotels in the first half of this year, attracted by the prospect of lower costs and higher profits for their owners.

IHG’s rating may not have caught up with the new reality of travel. At 20x forward earnings, it’s still too rich if the cycle turns further. This is consistent with the past average, and minimum ratings have typically been about half of that. But the lack of new hotels in Europe could mean that this drop in travel remains a pretty smooth ride.

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