Switzerland – a strong and stable hotel market

The 2022 data of the number of arrivals and overnight stays at open hotel establishments demonstrated a positive post-covid demand recovery being respectively only 7.32% and 3.34% behind the 2019 values.

While occupancy levels in 2022 were still 6.45% behind the 2019 data mostly due to the slower recovery of group demand, Average Daily Rates (ADR) experienced a significant growth. Almost all local hotel markets recorded an ADR increase in July 2022 by minimum 1% to maximum 39% compared to July 2019 (Source: STR and OFS).

Source: OFS

Despite the economic headwinds, the Swiss hotel market still remained strong compared to other European destinations. With a quarterly inflation rate at 3.2% in Q1 2023, Switzerland still recorded the lowest inflation rate in the European OECD countries, which position it has been holding since 2021 (Source: OECD). In April 2023inflation rates have experienced a decrease across all European OECD countries, whereby Switzerland recorded a rate at 2.6% maintaining its position. Although numerous international investors’ yield-appetite has grown over the past months, Switzerland remained a popular target thanks to its economic stability and strong currency promising a more secure real estate value preservation and higher real-value turnover than other European markets.

From a multi-segment real estate investment perspective, hotels historically contributed with only a smaller percentage to the investment portfolio of institutional players not only given hotel assets are considered a riskier asset class due to their unique structure requiring specialist knowledge, but also as until recently the macro-economic environment with relatively low inflation rates was stimulating investors to seek more fixed-income opportunities. However, in a fluctuating inflation-rate environment, hotel investments, especially from an owner-operator, hybrid- or variable-lease and hotel management agreement operating aspect, can become increasingly interesting given their ability to adjust their rates on a daily basis making it an inflation hedge (especially in the less price-sensitive upper upscale and luxury segments), hence a more resilient sector and an attractive investment target.

Although in Switzerland long-term fixed lease agreements are still considered the most popular operating structure, the strong reliance on domestic tourism (with an average of 47.1% between 2005-2022) with higher disposable income and convenient accessibility, as well as the although rising, yet still relatively low inflation rate and cost of borrowing when comparing to other European countries are still allowing fixed leases to remain a popular operating structure for institutional investors in Switzerland promising income stability.

Furthermore, when comparing to other commercial leases, although decision-making processes are complex and can differ per asset, one interesting factor to count with can be that hotels, by nature aim to maximize their surfaces to optimize operational efficiencies via a higher room count. On that regard, owners not only have the advantage of managing one tenant only, but can also secure a 0% vacancy rate over a long-term (avg. 15-20 year) period.

Independent Players and Unexploited Opportunities

With 88.6%of the Swiss hotels being independent and with an average room count of 46.2 rooms per open hotel establishment (Source: SPGI and STR), the Swiss hotel market is largely characterized by independent and boutique players with a healthy mix between resort and city locations allowing for portfolio diversification. Besides some key international actors, hotels in Switzerland rather belong to small local or international groups, private individuals or private families creating a key challenge – market opacity.

Databases regarding ownership, cadastral or transactional information as well as regulations regarding the publication of such data generally differ between the Swiss cantons. While the Federal Statistical Office and HotellerieSuisse are working towards a more centralized and homogeneous information access, market opacity remains a central topic.

Hence, for investors, owners, developers and operators, partnering with local specialists in possession of a rich, aggregated database, local exposure and wide-spread network becomes a crucial element in the successful realization of an opportunity.

While independent players dominate the market, their capital limitations compared to institutional investors, coupled with the ageing stock, the scarcity of curated hotel concepts and the phenomenon of a generational shift in proprietary interest of family-owned assets provide an exciting playground for value-add investors.

Focusing on the ten most sought-after cantons’ local market dynamics, it is possible to define the niches each market offers creating an opportunity for investors and developers to set their product apart from the competition. As an example, it can be noticed that although the Economy segment is the most exploited one in the Swiss hotel supply, the canton of Geneva is lacking of Upper-Midscale (only 6.9% of total rooms in Geneva) and Economy (only 9.2% of total rooms in Geneva) positioned products, while Basel-Stadt, Luzern, Ticino and Zürich markets have the lowest percentage of rooms in the Luxury segment respective to the total number of rooms in their markets. It is logical to observe that Geneva, Zurich and Basel-Stadt offer the highest number of rooms per property, yet, it shall be kept in mind that the hotels are spread across the canton and that old town city centre locations typically house smaller establishments due to historical and zoning restrictions.

Source: STR, SPGI

Source: SPGI, STR

While a boutique-scale owner-operating structure can be an attractive income-preservation strategy, smaller players whose main focus lie on the real estate value preservation may miss out on operational upsides provided via a well-thought-of concept or by specialized hotel operators offering brand recognition, innovative cost optimizations (through back-of-house technology), strong loyalty programs and marketing and distribution channels.

As such, together with the post-covid recovery mostly demonstrated in the ADR growth and in the leisure segment, the creation of destination hotels and strong, appealing concepts are attracting brands and investors to set foot in the Swiss market. Further to long-term income stability, value-add investments generally grant more room for yield-negotiation more suiting foreign investors’ current appetite. Yet, it shall be noted that in high-demand locations, such as Geneva or Zurich, private owners are likely to consider the “upside” in their pricing expectations.

Selected Recent Openings and Pipeline Projects

Source: SPGI

Selected Notable Recent Transactions

Source: SPGI

Although off-market opportunities are popular, a structured approach to transaction or operator search processes supports the interest of both the disposing and receiving parties, as all project information are curated not only providing a realistic picture for investors, owners and operators, but also supporting increasing the level of trust between the parties, therefore, reinforcing the motivation in perusing and realizing a deal. Besides, the competitive nature of the process can maximize owners’ return expectations.

Creativity and research are key in designing an exciting and financially feasible product that could set apart the bespoken hotel from its competitors and fill a niche market positioning. Understanding the supply and demand dynamics, investors’ search criteria, relevant benchmarks, a buildings’ potential through different key elements, such as the famous “Location, Location, Location”, the particular and strict communal regulations and local area plans including the buildings’ redevelopment potential, its relationship with the neighbourhood, the local community, are important in defining its unique selling propositions.

We are here to help:

Rooted locally with a Swiss identity, SPGI possesses a perfect understanding of the local market with established and strong relationships both in private and in institutional networks and is here to help to navigate through the complex nature of hotel-deals, let it be:

• Transaction (buy or sell-side representation)
• Operator selection (repositioning, rebranding)
• Advisory (development, feasibility, rent level-evaluation, commercial due diligence, etc.)
• Valuation services (RICS accredited)

SPGI offers a boutique-institutional methodology in a family-style environment enabling to remain flexible, think out of the box and offer a tailor-made approach leading your project to success.

In case you are considering a strategic move, we would be delighted to support you in your hospitality journey.