At the end of 2013 and the beginning of 2014, there was a sense that things were finally changing for Europe. For the third consecutive quarter, the eurozone economy had grown, and key countries like Germany, France and the UK were all recording strong figures.

"The eurozone’s recovery has moved up a gear," the chief economist of Markit, Chris Williamson, said at the time. "Not only has the pace of growth picked up to its fastest since the second quarter of 2011 but the recovery is also becoming more broad-based, encompassing core and so-called ‘periphery’ countries alike."

Only 12 months have passed since that was said, and his positivity now seems beyond optimistic; deflation is looming on the continent. In the second quarter of the year, Germany’s economy stagnated, and France and Italy’s shrunk. Interest rates have been slashed to 0.05%, and the prospect of a fresh round of quantitative easing is being floated.

"At the beginning of 2014, everybody was very optimistic," says Timothy Lloyd-Hughes, head of Deutsche Bank’s European hotel, leisure and gaming investment banking division. "The macroeconomic statistics at the time looked good, and people thought that Europe had turned a corner and was heading upwards. But sitting here towards the end of November 2014, looking at the more recent macroeconomic statistics, I think people are less confident. Italy has got major problems, France has got major problems and now Germany is slowing down."

"We’re already five years into what has historically been a seven-year cycle, so investors are going to be thinking about how much longer this is going on."

These figures are a serious concern. In 2013, in a speech to the IMF, the celebrated economist Larry Summers posited the idea of a secular stagnation – an economy locked into years of low growth, hampered by a crisis far worse than the repeating business cycles we’re so used to hearing and seeing.

But how should the hotel industry take this kind of news? For the past two years, the talk among Europe’s hoteliers has been about green shoots and new opportunities. Is that period of hope coming to an end or is the industry as strong now as it was in 2013?

"The pace of economic growth in Europe is certainly on investors’ minds," says Mark Wynne Smith, head of hotels at Jones Lang LaSalle, "but it’s not driving a buy or not-buy mentality. The real questions people are asking are what price they should pay and to what extent should they underwrite these risks in their projections?"

"The supply-and-demand dynamic remains untouched, despite the headwinds," adds Lloyd-Hughes, "The deal flow is unaffected. There’s an excess of capital still looking for a place to be invested given the availability of assets."


The seven-year itch
For all the Christmas gloom, it seems that the European hotel market is doing just fine. According to the latest figures from Deloitte, total transaction volume for 2014 is $11.5 billion. The UK makes up around 40% of that figure, with transaction activity for the first half of the year rising by 65%; France is the second-highest achiever, with $2.4 billion changing hands as of October.

Even those areas that have been badly affected by the crisis have been attracting attention. In Ireland, 13 hotels were sold in the first three months of the year alone, a 150% increase on the previous year. The Westin in Dublin was sold to US business magnate John Malone for €65.0 million, and the Shelbourne in Dublin was sold to the investment fund Kennedy Wilson for €110.0 million.

"We’re already five years into what has historically been a seven-year cycle, so investors are going to be thinking about how much longer this is going on."

After years of decline, Spain has also had a strong year. Hispania Activos Inmobiliarios paid €21.5 million for Hotel Guadalmina in Marbella, Barcelona-based real-estate fund Emin Capital paid €150.0 million for the Torre Agbar building and Katara Hospitality, a part of Qatar’s sovereign wealth fund, bought Madrid’s InterContinental Hotel for €60.0 million.

"I think people are looking for opportunities and are very keen to get into that market," says Lloyd-Hughes. "Having snapped up what’s around in the UK, this is the next place they are going. Revpar is coming off the bottom and is heading upwards; in the UK, we’re already five years into what has historically been a seven-year cycle, so investors are going to be thinking about how much longer this is going on in the UK, whereas in Spain, we’re where the UK was three or four years ago."


Phasing out the portfolio
Some pundits called 2013 "the year of the portfolio". Although transaction volumes increased by 40% to $46 billion in Europe, most of the growth was clustered in a flurry of activity in Q1 – almost all of it from multi-asset transactions. The normal phase of the market is that those portfolios get broken up into smaller chunks, with more single-asset deals and fewer of the large, big-money transactions. 2014 has followed a slightly more complex course, however.

In Europe, the first quarter was dominated by Starwood Capital Group’s acquisition of Four Pillars’ portfolio and De Vere Venues’ London-based collection.

"There is significantly more debt around in the market today," Wynne Smith says. "That means the opportunity to do the larger deals is better now than it was 12 months back, and the appetite for the larger transactions is still pretty strong.

"We’re in a situation where portfolios that might have held for a good while longer are coming to the market, because investors can get good value today. A lot of this debt is coming from new-entrance US private equity investors with the perception that their home country is too pricey and worse value than Europe.

"That’s not to say there aren’t a lot more single assets appearing as purchasers take the opportunity to sell off some of the weaker, non-core assets, but we’re not quite through the portfolio phase yet."

As well as private equity debt, much of the direct investment this year has been driven by sovereign wealth funds, usually from Asia and particularly from China. Indeed, one of the key themes for 2014 has been the amount of Chinese capital finding a home in the global real-estate market. In 2013, $8 billion of capital was placed by Chinese insurance companies; this year, it’s expected to hit $15 billion.

"We’ve had a big uptick in investment capital from Chinese companies," says Wynne Smith. "It’s all part of the state encouraging these enterprises to go offshore. We saw a Chinese insurance company purchase the Waldorf Astoria in New York for about $1.9 billion, and we’ve sold the Marriott Champs-Elysées in Paris to a Chinese investor.

"Over the next 12 months, I think we’ll see more local investment houses partner up with Chinese capital on a more frequent basis. These investors like to have an asset-management partner with skin in the game as well."


Don’t get sentimental
If outbound Chinese capital is something to get excited about, growth from within China should be a source for more caution. Revpar has dropped to just 0.8% this year as a wider slowdown affects the hospitality market. And nor is China the only fast-growing economy to be giving hotel owners and operators a headache.

"Emerging markets are obviously less attractive and more challenging than they were in the past," Lloyd-Hughes says. "Whether it’s hotels or anything else, over the past five or ten years, one of the big plays was that everyone had to be in emerging markets. That’s where the growth is. But more recently, China has slowed down, and Brazil has faltered too. That has affected sentiment and deal volume to some extent."

However unstable the emerging markets might be, and despite continued economic challenges across the continent, Europe’s outlook is likely to remain positive in 2015. With investor confidence high and even distressed countries starting to look positive, the next 12 months promise to be full of interest and activity.