European Hotel Investment, the New Eldorado?

An op-ed on European hotel investment by Jean-Marc Palhon, President of EXTENDAM, originally published in French in La Tribune Dimanche on 1 November 2026.

For several years, the European economy has been operating against a backdrop of considerable uncertainty. Modest economic growth has been compounded by successive periods of inflation, rising interest rates, domestic political tensions and an increasingly unstable geopolitical environment. In 2026, the conflicts in Ukraine and the Middle East continue to weigh on Europe’s economic outlook, particularly through their implications for energy prices, inflation, confidence and financing conditions.

Against this backdrop, the performance of Europe’s hospitality industry may seem somewhat paradoxical. In 2025, tourist accommodation establishments across the European Union recorded nearly 3.1 billion overnight stays, a new record and an increase of 2.2% year on year. This momentum continued in the first half of 2026, with 1.3 billion overnight stays, representing a further 1.7% increase compared with the same period in 2025.

It would nevertheless be wrong to conclude that the hospitality industry is entirely insulated from economic conditions. Rather, the sector has certain characteristics that distinguish its response to economic cycles from that of traditional real estate.

Beyond real estate

This is perhaps one of the most important distinctions to understand when assessing the hotel investment market today.

In the hospitality private equity model we pursue, we invest in hotel companies that own both the properties in which they operate and the businesses themselves. Our investments therefore extend beyond the acquisition of real estate assets: we invest in operating companies whose value is directly linked to their ability to generate revenue, improve operating performance and increase margins. This distinction is fundamental.

A hotel’s value depends on its EBITDA, commercial potential, market positioning, management expertise, brand affiliation, pricing strategy and the investor’s ability to influence each of these factors. These considerations are far more significant than a simple assessment based on price per square metre or capitalisation rates. Ownership of both the property and the operating business allows investors to implement improvements across both dimensions simultaneously.

This also explains why comparisons with traditional real estate investment have their limitations. While conventional property investors are largely dependent on contractual rental income and underlying property values, hospitality private equity investors can draw on a broader range of value-creation opportunities, including refurbishment, repositioning, rebranding, operational improvements, revenue management and changes to the guest mix.

A different response to inflation and interest rates

The operational nature of hotel investment is particularly relevant in an inflationary environment. Unlike contractual property rents, hotel room rates can be adjusted on a daily basis.

This pricing flexibility enables hotel operators to pass on part of the increase in costs through higher average room rates, helping to protect operating margins.

This does not, of course, mean that inflation has no consequences for the sector. Labour costs are now a major concern for hotel operators, particularly those with substantial food and beverage operations. Energy prices, raw material costs and refurbishment expenditure also affect profitability. Nevertheless, hotels have considerably greater flexibility to adjust their revenue than many other asset classes.

The impact of rising interest rates must be considered in a similar light. Higher rates increase borrowing costs and make acquisition pricing discipline all the more important. Yet hotel valuations have remained relatively stable, in contrast to other real estate segments that have been more significantly affected by higher financing costs.

Between the fourth quarter of 2021 and the fourth quarter of 2025, capitalisation rates rose from 2.90% to 4.25% for offices in the Paris Central Business District, and from 3.25% to 4.90% for logistics properties in Greater Paris. Over the same period, rates for Paris hotels, including both the real estate and the operating business, increased from 4.93% to 5.53%. In regional French markets, they remained virtually unchanged, moving from 7.35% to 7.39%.

These figures illustrate how the hotel sector has responded differently to the cycle of rising interest rates.

This relative resilience should not encourage complacency. On the contrary, it reinforces the importance of maintaining rigorous investment discipline. The resilience of an asset class can never justify paying an excessive price for an asset.

The Structural Strength of Travel Demand

Beyond its financial characteristics, the resilience of the hotel industry is primarily supported by the depth of underlying demand.

Over recent years, travel has assumed an increasingly important place in consumer behaviour and spending. This trend is not simply a consequence of the recovery that followed the pandemic. It reflects longer-term demographic, economic and social developments.

The strength of this demand has been evident in European hotel operating performance for several years. Occupancy rates recorded between 2022 and 2025 were substantially higher than in 2019, which had already been regarded as a record year before the pandemic. Over the same period, average hotel room rates across Europe increased by 35.0%.

Growth continued into 2026. During the first half of the year, European hotel revenue per available room continued to increase across all hotel categories, with particularly strong performance in the upscale segment, which recorded growth of 5.8% in the first quarter and 2.6% in the second.

The world’s population is expected to grow from approximately 8 billion today to nearly 10 billion by 2050. International travel is also projected to continue expanding. Following approximately 1.5 billion international travellers in 2025, forecasts suggest that this figure could approach 2 billion by 2030.

This expansion is being accompanied by significant development in transport infrastructure and capacity. Across Europe, projections indicate that air traffic could double and high-speed rail traffic could triple by 2050.

Alongside increasing travel volumes, the composition of demand is also undergoing a structural transformation. As global wealth increases, so does the number of travellers with greater spending power. Growth in this customer segment has outpaced the expansion of hotel supply in the upscale and luxury categories.

Demand is therefore evolving beyond the simple need for additional accommodation capacity. Travellers are increasingly seeking well-located, better-equipped hotels offering higher levels of service. This shift is one of the main drivers of the move towards higher-quality hotel offerings currently observed across Europe’s leading destinations.

Europe is particularly well positioned in this respect. It benefits from both a substantial domestic customer base and its position as the world’s leading tourism destination. European travellers account for 84% of hotel guests across the continent, while Europe attracts approximately half of all international tourist arrivals worldwide. This combination of domestic and international demand reduces the sector’s dependence on individual source markets.

Yet despite sustained demand growth, hotel supply remains structurally constrained.

Land scarcity in city centres, planning and development restrictions, the relatively small size of many European hotels and the closure of properties that are no longer economically viable all limit net additions to accommodation capacity. New hotel developments are therefore not always sufficient to offset the loss of existing properties.

This persistent imbalance between growing demand and supply that struggles to keep pace is arguably one of the strongest foundations of the European hotel industry’s resilience.

Understanding Europe’s diverse hotel markets

The importance of selectivity is equally apparent when considering the geographical distribution of investment opportunities.

Europe is far from being a homogeneous hotel market. A particularly attractive segment can be identified across approximately 25 European cities, primarily capital cities, major metropolitan areas and a select number of internationally recognised destinations.

These markets share several important characteristics: substantial year-round demand for accommodation, limited seasonality, a balanced mix of business and leisure travellers, high occupancy rates and average room rates, considerable pricing flexibility during major events and limited new supply due to land scarcity and development restrictions.

They also benefit from more liquid transaction markets and a broader range of potential buyers.

The limited availability of hotel accommodation in these locations is particularly important. Across Europe, land constraints and regulatory requirements restrict new development, while the relatively small size of many existing hotels and the ageing condition of part of the hotel stock contribute to property closures. As a result, accommodation supply is growing significantly more slowly than demand.

It is within these markets that the shift towards higher-quality hotel accommodation is also most evident.

In the centres of major European cities and internationally established destinations, high property values, substantial demand and the purchasing power of guests make midscale and upscale hotel developments particularly relevant.

Recent performance illustrates this evolution. Throughout 2025, the upscale segment consistently recorded stronger RevPAR growth than the budget segment, outperforming it in each of the four quarters, with particularly pronounced differences during certain periods.

This should not, however, be interpreted as a distinction between attractive upscale hotels and less attractive budget properties. Both segments have their place in the market.

A well-positioned budget hotel can represent an excellent investment. What matters is identifying the right hotel, in the right location, for the right customer base.

Political risk calls for a European perspective

Political and geopolitical uncertainty is one of the reasons why we believe hotel investment should be considered from a European perspective.

A pan-European investment strategy reduces dependence on the economic, political and regulatory conditions of any single country. It does not eliminate risk, but it allows investors to diversify their exposure.

National and local policy decisions can have very tangible consequences for hotel operations.

In the Netherlands, for example, the VAT rate applicable to hotel accommodation increased from 9% to 21% on 1 January 2026. A change of this magnitude inevitably affects a hotel’s financial and operating assumptions and must be reflected in investment decisions.

The same applies to tourist taxes, local regulations, urban planning policies and measures governing short-term tourist accommodation. Investing across Europe therefore requires a detailed assessment of the regulatory and political environment in each market, rather than assuming that conditions are uniform across the continent.

These domestic policy considerations must also be viewed against the backdrop of an exceptionally uncertain geopolitical environment.

The tensions in the Middle East have once again demonstrated in 2026 how international conflicts can affect the European economy through energy prices, inflation and financial conditions. The war in Ukraine also remains a major source of uncertainty.

Nevertheless, available tourism data indicate that underlying travel demand across Europe has so far remained strong. This distinction matters: political and economic crises may alter travel patterns and destination choices, but they do not necessarily lead to a lasting decline in the need or desire to travel.

The events in Paris in October are a reminder that such risks are not merely theoretical. However, the French capital has experienced significant periods of social unrest before. Despite the disruption caused by the Yellow Vest protests in 2018 and 2019, the overall impact on hotel demand ultimately remained limited, particularly when considered over a full year. This illustrates the resilience of Paris as an international destination.

Resilience isn’t immunity

It would be equally misleading to suggest that the hospitality industry is immune to crises.

The principal risks are well understood. Public health crises can make travel effectively impossible, as demonstrated in 2020. Security-related incidents can temporarily affect a destination’s attractiveness. Geopolitical conflicts can disrupt travel flows, transport networks and energy supplies.

Climate-related risks are also becoming increasingly significant. Wildfires, flooding, extreme heat and other physical risks must now be fully incorporated into investment due diligence, refurbishment and capital expenditure programmes, as well as the day-to-day management of hotel properties.

The resilience of the hospitality sector does not, therefore, stem from any supposed absence of risk. It rests on the strength of its long-term fundamentals: increasing mobility, the enduring appeal of European destinations, constrained accommodation supply and the need to modernise an ageing hotel stock.

Investing in European hotels today does not require a belief that the continent is on the verge of a significant acceleration in economic growth.

Rather, provided investors maintain strict acquisition pricing discipline, select markets with sound fundamentals and have the expertise to create value through both real estate ownership and hotel operations, it is the depth of underlying demand, more than the prevailing economic environment, that underpins the resilience of European hotel investment.