Resilience and Innovation in the European Hospitality Industry

The European hotel and living sectors are entering a new era, driven by shifting global wealth, a renewed focus on technology, and the rise of flexible accommodation models.

A recent discussion among real estate market professionals at GRI Institute’s Pérennité et innovation dans l'industrie hôtelière roundtable, co-hosted by JLL in Paris, revealed a polarised market, with a soaring luxury segment and a struggling traditional economy segment. Success now hinges on agility, optimal cost management, and the crucial element of prime location.

The Polarised Market: Luxury Soars, Economy Struggles

The most striking trend in the European hospitality sector is the widening gap in performance between the ultra-high-end and the standardised economy segments.

The luxury and ultra-luxury sectors are demonstrating remarkable resilience and pricing power, with significant increases in RevPAR (Revenue per Available Room), heavily driven by international tourism from high-net-worth travellers from the Middle East, Asia, and the US who seek branded, full-service, ultra-premium offerings.

Branded residences, which blend high-end hotel amenities with residential units, are a booming, high-value product being deployed by major international brands like Mandarin, Four Seasons, and Ritz.

In contrast, the standard economic and mid-scale hotel segments are suffering with the decline attributed to a combination of factors, including: 

• the diminishing purchasing power of the core users of these hotels;
• a strong decrease in industrial and VRP (Voyageurs Représentants Placiers or Sales Representatives) travellers; and
• high operational costs, including labour.

This segment is now considered a difficult investment in the worst affected markets, such as Germany and France.

The Rise of Flexible Living and Alternative Accommodation

Fuelled by urban housing shortages, mobility, and the demand for community-centric spaces, alternative accommodation classes are expanding rapidly, with experts predicting double-digit annual growth for the next decade.

These models, including flex living, co-living, and serviced apartments, are now gaining massive traction across Europe, with the UK cited as an important market for the development of alternative models, as the region’s student housing transactions are set to surpass hotel transactions by 2029.

A key area of innovation is the modern, hybrid 'hostel' model, which is completely reinventing the economy segment. By maximising the revenue per square metre and minimising operational costs, concepts like this are achieving high guest satisfaction and RevPARs comparable to four-star hotels, often targeting a younger, international, “eco-premium” clientele.

Crucially, the viability of all these new models, from hostels to flex-living, is deeply intertwined with technology. Advantages include streamlining operations, reducing expensive labour costs - which are significantly higher in Europe, particularly France, than in Southern Europe - and enhancing the guest experience through simplicity and convenience.

Location, Operational Costs, and the Investor's Dilemma

Despite the innovation in product types, certain fundamental investment criteria remain non-negotiable, while others are evolving to address economic pressures.

The Enduring Importance of Location

The long-held mantra of "location, location, location" is more reinforced than ever. For almost all segments, from luxury resorts to economic hostels, being in a prime location within a major metropolitan hub, such as Paris, London or Madrid, is a critical factor for success and profitability. Operators and investors alike note that stepping outside the intra-city core quickly compromises performance.

Optimising the Operating Model

The primary operational challenge is managing the EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortisation) margin. High labour costs in Europe, combined with staff quality issues, are seen as the single biggest factor eroding margins and even damaging the customer experience.

For urban hotels, the food and beverage (F&B) component is essential. When done well, it serves as a massive revenue driver on traditionally slow days, while also enhancing community engagement and often generating very high turnover

The Contractual Battle: Management vs. Lease

In terms of asset management, the value of a hotel is now heavily dependent on the flexibility of its operating contract, which enables a clear exit strategy. An unencumbered, vacant hotel asset is valued significantly higher - up to 30% more - than one with a long-term, rigid management contract in place. This allows investors to reposition the asset and field competing offers from multiple operators. 

As a result, investors are increasingly favouring Hotel Management Agreements (HMAs) or very flexible leases over traditional, long-term leases, viewed as a more difficult tool for long-term value creation.

The most sought-after structure is one that aligns the owner's and operator's interests, such as a lease with a low minimum rent and a high variable component linked to the hotel's revenue or profits. This model provides security for the owner while giving the operator incentive to maximise performance.

Furthermore, the need for constant innovation means renovation cycles have sped up from every 10 years to every five to seven years. This acceleration requires operators, even major global brands, to be flexible and accept deviations from their standard product to ensure owner investment.
 

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These insights were shared during GRI Institute’s Pérennité et innovation dans l'industrie hôtelière roundtable, with participation from Damien Ferrières (JOST), Dominique Ozanne (Hova Hospitality), Gwenola Donet (JLL), Hélène Gauthier (Honotel),  Louis Peres (JLL), and Stéphane Obadia (QuinSpark Investment Partners). Special thank you to our co-hosts, JLL.