Interest in hotel properties is growing

The hotel market has suffered from a historic double-digit decline, Covid-19 and the geopolitical crisis. Despite economic, geopolitical and climate challenges, the tourism market is now showing positive signs globally.

Globally, tourism has already exceeded 2019 levels. The Middle East has continued its record growth (+29% compared to 2019). Europe (+1%) and Africa (+6%) also exceeded 2019 levels. The Americas have recovered by 97% and Asia and the Pacific by 85%.

There were 18.28 million hotel overnight stays in Finland last year. In 2019, the figure was 18.45 million. The average room occupancy rate for Finland as a whole in 2024 was 52.9% (52.6% in 2023). In Helsinki, the occupancy rate was 59.2%, which was still significantly lower than in 2019. In the largest cities, the occupancy rates were 70.2% in Oulu, 63.7% in Vaasa, 61.4% in Rovaniemi, 60.5% in Jyväskylä and 60.2% in Tampere.

Tourism demand in Lapland is growing very strongly and, for example, in December 2024, the occupancy rate of Lapland hotels was over 80%, while the corresponding figure for the whole country was 49%. According to preliminary data from Statistics Finland, the number of foreign overnight stays increased by +11.2% throughout the year. The share of international overnight stays in Lapland hotels was 64.2%, and domestic overnight stays were 35.8% of all hotel stays. The largest number of foreign tourists came from Britain, France and Germany, who are greatly fascinated by the wonderful and diverse experiences of Lapland. In addition, the growth in demand for exotic experiences in Lapland is being driven by tourism trends, such as “Accessible Adventure” tourism, experiential tourism (snow, northern lights, reindeer rides, Santa Claus, husky dog ​​sledding and snowmobiling), and the new “Coolcations”, where tourists seek cooler climates for their summer vacations.

The capital region also continues to recover, and the latest statistics show that the number of overnight stays in 2024 will be higher than the all-time record in 2019. Overnight stays in Helsinki on the rise as passenger numbers and demand increase, room prices in Helsinki are already reaching pre-pandemic levels. The average daily room rate (ADR) in 2024 was €126.77. In 2019, the ADR was €127.09.

The supply in Helsinki has grown strongly in recent years. Many hotels were decided to be built before COVID-19 and the geopolitical crisis. In recent years, these already decided projects have opened for operations and increased the total room supply by approximately +28.4%.

The total demand for overnight stays is therefore expected to be higher than in 2019, but the increased capacity (+28.4%) will still affect the development of the room yield (RevPar - revenue per available room). RevPar in Helsinki was €76.08/room in 2024, which is still -20.2% compared to 2019.

Although there is a temporary oversupply in the market, tourism is expected to continue to grow in the coming years. Before the COVID-19 crisis, global tourism grew by around +5.0% per year. The CAGR (compound annual growth rate) in the metropolitan area was +3.7% (2010 vs. 2019). Including the COVID-19 years, the CAGR is still +2.1% and the number of overnight stays will now be higher in 2024 than the all-time record of 2019.

Helsinki is currently short of approximately 70,000 Japanese and 140,000 Chinese overnight stays. This is in practice due to Russian overflight restrictions. Market demand is currently growing mainly from travelers from the United States and the EU. Asia is recovering somewhat more slowly, but is still growing year on year. It is also important to note that Helsinki has traditionally received approximately 200,000 overnight stays from Russian tourism. This is naturally expected to recover at some point in the future. Asia and Russia are major future opportunities in the market.

Real estate transaction volumes are growing, yield requirements are declining

Investment in hotel real estate in Europe has increased. After low volumes post-Covid, the Hospitality sector grew significantly in 2024 (+42%). Despite ongoing economic and geopolitical uncertainties, according to the Cushman & Wakefield Hotel Investor Compass 2024 report, most investors plan to maintain or increase their allocations to the hotel sector. Transactions in the sector are expected to reach EUR 20 billion by the end of 2024 and volumes are expected to exceed EUR 25 billion in 2025. Despite the attractiveness of the hospitality sector, rising construction costs, reduced leverage and access to debt financing, and higher debt costs have slowed the development of new hotels in recent years. While the conversion of underutilized office space into hotels has been significant, the pace of change is expected to slow down by 2025, especially in key cities, due to, among other things, a potential recovery in the office sector.

Overall, supply growth is forecast to remain moderate across Europe’s 15 largest city markets. Destinations favoured by Chinese and Indian tourists in particular are seeing strong growth as they return in large numbers. Overnight stays from Southeast Asia are expected to grow by almost 18% and from China by 48% in 2025. Markets with strong international appeal and a balanced mix of leisure and business demand are expected to see solid growth.

Opportunities now available in hotel properties

As tourism increases, interest in hotel properties is slowly creeping from the West towards Finland. A good example of this is the recent major transaction in the Nordic countries, when the CapMan Hotels II fund acquired Midstar Fastigheter, whose property portfolio includes 28 hotel properties in Sweden, Denmark and Norway. Otherwise, a total of 37 hotel property transactions were made in the Nordic countries during 2024 (excluding Finland).

The yield requirements of alternative investments, such as real estate, fell sharply during the strong economy in 2010–2019. The yield requirements of the hotel sector did not fall as much as the rest of the real estate market. As a result, the yield requirements of the hotel sector also rose less than the rest of the market in 2020–2024. The rents and occupancy rates paid by operators have remained stable during the pandemic, the war in Ukraine, rising interest rates and high inflation. Some smaller operators struggled, but all the larger ones survived. The hotel sector has delivered positive returns thanks to lower yield requirements and stable cash flows.

As statistics show, only a handful of deals have been made in Helsinki in recent years, and investors have been more active in converting older properties into hotels. A total of 27 new hotel properties have been built in Helsinki over the past ten years. Active construction and conversion projects have contributed to Helsinki’s transaction volumes, which have been lower than in other Nordic cities.

Hotel yields have represented good cash flow and returns in the long term. The Rakli and KTI Kiinteistötieto rental market barometer also found the rental market outlook for hotel properties to be cautiously positive. A quarter of respondents estimated that the hotel market outlook would improve within the next 12 months.

We already know of several investment interests in hotel properties and several operators looking for properties. Whether buyers and sellers' prices will meet and whether operators' rental payment capacity and market assumptions will be trusted is a good question. And will the Finnish financial sector provide financing for hotel property transactions after the quiet years? In any case, now could be the momentum!

Blog written by Timo Rantala and Jarkko Härmälä