For those that followed the European hotel market in 2015, it wasn’t exactly a shock, but when HVS published its latest annual European Hotel Transactions report in March this year, it was hard not to read it with a wide smile. At €23.7 billion, the year’s total transaction volume was, according to HVS, the highest on record, outperforming pre-downturn levels and improving on 2014 by a staggering 66%.

What caused 2015 to be such a bumper year? One obvious reason was that the high level of performance made hotels look like a particularly attractive investment. According to a report by PWC, the year saw a record number of tourist arrivals in Europe. Combined with weak supply, that meant sustained RevPAR growth across almost all of Europe’s top destinations – from London, which saw the highest volume of investment, to Spain and Germany, which doubled their transaction volumes on the previous year.

Another prominent driver was the large number of hefty portfolio transactions. Though single-asset deals did grow by 21% on 2014, portfolio volume accounted for €14.6 billion of the €23.7 billion spent on hotels – just over 60%. The purchase of Louvre Hotels Group by Jin Jiang International Hotels, the acquisition of the Maybourne portfolio by Qatar’s Constellation Hotels Group for a reported €2.75 billion, and Lone Star’s £676-million acquisition of the Jury’s Inn chain were just a few of the large-scale deals that took place over the 12 months. And all of this before the numbers for AccorHotels’ acquisition of Fairmont Raffles Hotels International had even been added – with the deal not having been completed in time – and Marriott International’s likely purchase of Starwood Hotels & Resorts still to go through.

For Wynne Smith, the broader macroeconomic picture is working well for the hotel industry, even if 2016 is unlikely to reach the heights of 2015.

The question on everyone’s lips is whether 2015 can be replicated. Was it a freak year of large portfolios or part of an ongoing upward trend?

"We think 2016 is still going to be busy but we don’t think volumes are going to be at the same level they were in 2015," says Mark Wynne Smith, global CEO at Jones Lang Lasalle Hotels & Hospitality. "Obviously, we had some exceptional transactions that went through last year and a lot of portfolios changed hands at pretty large prices. That process is now calming down but we do think there will be an increase in the volume of single assets."

Take in the bigger picture

For Wynne Smith, the broader macroeconomic picture is working well for the hotel industry, even if 2016 is unlikely to reach the heights of 2015. "The good thing that EMEA has over the US, and indeed parts of Asia, is that the level of new supply across the whole region is fairly low: about 2.8%," he says. "The things that normally cause down-turns – new supply or demand shocks – aren’t there. Clearly, we also have positive GDP growth around EMEA and the other factor that could work in our favour is the strong dollar. It’s cheaper to come to Europe at the moment and it’s certainly cheaper to come to the UK if you are a dollar holder. That does tend to encourage the leisure market. Of course, there are some cities that are obviously more challenged than others. London doesn’t have any major events to look forward to this year, for example, so that might be one of the weaker performers but it’s all relative. I think overall we are still feeling very positive about income growth."

Not everyone is so optimistic though. Last year, Hotel Management International reported on chairman of HVS London Russell Kett’s view that despite the positive numbers and robust performance, the peak of the industry cycle may well be with us.

"The general view is that we are close to what might be in hindsight the top of the market," he said at the time.

That view now seems increasingly popular and, looking at the wider economic environment, it’s not hard to see why. At the beginning of the year, RBS warned its clients that a ‘cataclysmic’ 12 months lay ahead: stock markets could fall by 20% and oil slump to $16 a barrel. The bank advised its clients to "sell everything except high-quality bonds". Elsewhere, headlines like ‘Apocalypse now: has the next giant financial crash already begun?’, published in the Guardian late last year, seem to have become part of the daily news cycle.

"If you’re looking for a host of black swans, they are out there," says Nick van Marken global head of hospitality at Deloitte. "Recently, we’ve had two terrorist attacks in Ankara and Ivory Coast. Also, we’re not clear about what impact the Zika virus will have. The Chinese Government is trying to guide a soft landing in an economy where there is no precedent for any guiding or policy whatsoever. The strength of the dollar is a concern. And in Europe we have a host of issues we need to grapple with: everything from the refugee crisis to Brexit [Britain’s potential exit from the EU] and the Grexit question, which remains unanswered.

"With the hotel market – if you’re looking for something that really suggests we are at or past the peak it’s a big transaction. And we’ve had a lot of them. When you think of 2007 and the crisis, it was pretty much directly at the time of the Blackstone deal for Hilton.We have just seen Accor acquire FRHI and a tussle between Marriott and Anbang was underway for Starwood. I think the consolidation that we have seen occur in most other consumer-facing industries could now be reasonably said to have started in earnest. It’s been a very strong transaction year and RevPAR has been growing non-stop. The last time Europe saw these numbers was the previous peak. So you look at all these things and you think, ‘Hmmm, haven’t we seen these signs before?’ And didn’t we interpret them incorrectly then?"

A hotelier with a view

So is Kett right in van Marken’s view? And with all the black swans and market parallels he identifies, could we be heading for a sharp decline? "If you look at some of the comments made, it would suggest that the industry is literally about to fall off a cliff but, despite the signs, it doesn’t quite feel like that to me," he says.

"It does show some signs of slowing down but there’s quite a few people out there doing fairly well, in secondary markets in particular. If you look at what’s being said by some data commentators, they’re suggesting there is a way to go and there is no doubt that profits haven’t recovered to where they previously were. Germany has had a spectacular year and that seems to have continued in the first quarter. Spain is performing well. Ireland has just reported the highest GDP growth in its history."

On top of these success stories, there’s also an argument that the transactional market is performing well; not in spite of the turmoil but, partially, because of it. And it’s not just hotels that the case can be made for. The more volatility we see in the stock markets, the more attractive real estate appears to be as an asset class.

If you look at some of the comments made, it would suggest that the industry is literally about to fall off a cliff but, despite the signs, it doesn’t quite feel like that to me.

"You’d have to say that real estate is a safer investment than the stock market and other forms of investment at the moment," van Marken says. "The types of investors that are active like bricks and mortar; they like to be able to kick something and find that it’s solid. If you own Claridge’s in London or the Waldorf Astoria in New York, you’d feel that it was a pretty solid investment. And there’s not much by way of history of the buyers of those types of assets ever selling them for less than they actually acquired them."

So who are these investors?

Last year, one of the main stories was the uptick in investment capital from China. The recent ratcheting up of capital controls may make it harder for Chinese investors who haven’t already converted yuan to get permission, but the general desire to place money offshore seems unlikely to go away.

"If anything, the impetus to get capital out of China is greater than ever," van Marken says. "The Chinese Government wants Chinese capital to be invested elsewhere. It’s not sound macroeconomic or monetary policy to have all of your money tied up in one country, and if you look at Indonesia, Malaysia and the other Asian powerhouse economies, you see they are all trying to do the same thing."

On top of Chinese capital, the European market has seen a growing number of institutional investors, many from other parts of Asia and the Middle East, targeting luxury hotels in gateway cities where capital can be parked and protected. It is, according to Wynne Smith, part of a wider shift in the composition of investors away from short-term opportunism and towards long-term commitment.

"If you look at where we are in the cycle, we’ve had a number of new entrances recently from institutions looking for longer-term, steadier growth," he says. "It’s a new trend because we are seeing increasing allocations to real estate by these funds. Again, it’s not hotel specific; this is sovereign wealth funds and other institutions raising their real-estate allocation, and it’s coming from all over the place."