As a result of this increasing demand, five of the 22 markets tracked by Savills saw yield compression across all operating structures in Q3. This includes Madrid, Lisbon, Warsaw, Dublin and Copenhagen. In Q2, only Lisbon saw compression across the board.
Richard Dawes, director in the Savills hotels team, comments: “This yield compression across the various operating structures is being driven, in part, by increasing investor appetite for hotels, lack of stock and cheaper financing, which is particularly acute within more mature markets in Germany, Paris and London.”
Savills reports that 12 cities saw a 25bps downward shift in prime yields on Vacant Possession/Franchise operating structures during Q3 up on the three cities that reported compression in Q2 (averaging 5.34% across all cities). Similarly eleven markets reported compression in Management Contract prime yields (averaging 5.81%) compared to two markets in Q2. According to Savills, this highlights the appetite investors have to move up the risk curve by investing in non-leased assets, in the pursuit for higher yielding assets.
Prime hotel yields on leased operating structures continue to see the keenest yields, averaging 4.26% across the 22 European markets tracked by Savills, with nine markets seeing a 25bps compression in Q3 2019. As a result there are now seven cities with prime yields for leased assets at sub 4%.
Marie Hickey, director in Savills research team, says: “Investors seeking higher yields are either moving to non-leased operating structures in established markets or opting to look at growth tourist cities. This includes cities such as Prague, Lisbon, Warsaw and Vienna – all of which have experienced larger than average hotel investment volumes this year.”
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