Southern Europe’s investment potential grows

As the Fund Principal at Arrow Global Group, I have the privilege of witnessing firsthand the evolving dynamics of the hospitality and leisure sector in Southern Europe. Over the past few years, we have observed significant shifts in market trends, driven by the resurgence in travel post-COVID-19 and the increasing interest from North American tourists. These changes present unique opportunities for repositioning and value creation within the industry.

The hospitality landscape in Southern Europe has undergone a dramatic transformation. Expectations about service levels have evolved considerably, driven by a more discerning traveller demographic. When visiting a Greek island or parts of Italy and Spain, it’s evident that the quality of hotel stock has improved immensely compared to 20 or 30 years ago. Yet, there remains substantial room for further enhancement.

One of the key trends driving market consolidation is the increased connectivity and accessibility of previously hard-to-reach destinations. For instance, Faro, the capital of Portugal’s Algarve region, traditionally a gateway market for European cities, now acts as an overflow hub for international travel. With new direct services from North America, including United Airlines’ inaugural flight set from New York’s Newark Liberty international airport to Faro in May 2025, we are unlocking the full potential of these markets, reducing seasonality, and attracting a new clientele.

In terms of international travel, Spain continues to dominate as the most visited destination in the EU, with 271 million nights spent by international guests in 2022, accounting for 22.4% of the EU total[1]. Popular regions include Mallorca, Tenerife, Barcelona, Gran Canaria, and Malaga. Portugal, though smaller in scale, has seen significant growth and offers unique opportunities, especially with its rich cultural and historical sites including the Douro Valley, Óbidos, the Porto Ribeira District, the University of Coimbra and numerous UNESCO World Heritage sites.

The rise in short-haul travel, driven by increased flight costs and capacity constraints post-pandemic, has prompted us to diversify our hospitality offerings to meet the needs of this new wave of travellers. American tourists, in particular, represent a relatively new and lucrative market. Their travel patterns differ, often involving extended family trips that span 7 to 10 days, making them higher-spending visitors.

To capitalise on this opportunity, we focus on developing locations, amenities, and hotels that cater to these evolving demands. Our strategy includes creating multi-site, multi-purpose resorts that extend beyond traditional hotel offerings. This approach not only helps mitigate the impact of seasonality but also attracts a broader range of guests. Facilities such as equestrian centers, marinas, and golf courses enhance the appeal of our destinations, drawing in visitors who might not otherwise consider these locations.

Our value-add strategy involves consolidating various components of a destination to create a cohesive ecosystem. By owning and controlling multiple aspects of a location, we can cross-sell services and elevate the overall standard. This synergistic approach is crucial for creating value and ensuring a superior guest experience.

Having a strong local presence is essential when entering or expanding in new markets. Since 2008, we have operated in Portugal with specialist local teams supported by our headquarters in London. This local expertise has been instrumental in our success, particularly with large-scale developments in the Algarve. Our luxury hotels in Vilamoura and Palmares exemplify this strategy, offering a comprehensive ecosystem that includes residential properties, hotels, restaurants, sports facilities, and leisure experiences.

Despite the numerous opportunities, the hospitality sector in Southern Europe faces several challenges that are not unique. Renovations are a significant part of our operations, and the supply chain has been less efficient than anticipated due to the lingering effects of COVID-19, the war in Ukraine, and other global disruptions. These factors have put pressure on costs, necessitating careful project management and accurate underwriting to ensure profitability.

Another major challenge is the shortage of skilled labour, affecting all aspects of our operations, from hotel staff to construction workers. Our local presence provides a competitive edge, enabling us to navigate these challenges more effectively. For instance, we addressed the housing issue for our employees by converting a small hotel into affordable apartments, ensuring we can attract and retain the best talent.

While Southern Europe offers unparalleled opportunities, we are also exploring markets in Northern Europe on a case-by-case basis. The potential for repositioning and value-add investments exists, albeit not as prominently as in Southern Europe. The region’s more institutionalised nature and lack of the sun, sea, and beach appeal means the opportunities are different in offering compared to southern Europe.

Sustainability is a core focus for us, particularly in areas like water and solar energy. In Portugal, we have initiated projects to create solar communities and reduce water consumption through modern irrigation systems and the use of treated wastewater for our golf courses. These efforts align with our commitment to ESG principles, ensuring our developments are environmentally responsible. As we reposition and recapitalise ageing assets, ESG certification becomes a priority. Collaborating with programmes like Green Key, an internationally recognised environmental certification programme designed to promote sustainable practices within hospitality and tourism industries with a key focus on water, energy and waste management, helps us achieve these standards, enhancing the appeal and sustainability of our properties.

In conclusion, Southern Europe’s hospitality sector is on the cusp of significant growth, driven by evolving traveller demands, improved connectivity, and strategic consolidation. At Arrow Global, we are well-positioned to capitalise on these opportunities, leveraging our local expertise and commitment to sustainable practices. As we continue to expand our hospitality and leisure platform, we remain dedicated to delivering superior returns and exceptional experiences for our guests.

John Calvao is Arrow Global’s fund principal