Driven by bank sales, hotel investment volumes are expected to remain stable across Europe, the Middle East and Africa (EMEA) region during 2011 with €8.3 billion worth of deals forecast for the year, up 18% per cent on preliminary volumes recorded for 2010 (€7 billion), according to Jones Lang LaSalle Hotels’ latest Hotel Investment Outlook report.
Jones Lang LaSalle Hotels anticipates that investment activity will be strongest in highly-leveraged markets such as the UK and Ireland.
The year 2011 will be characterised by those markets which carry risk but also offer real opportunities. The bulk of investment activity will be driven by the distressed asset workout activity of financial institutions as they look to retrieve capital to achieve regulatory targets. In some markets, it will be difficult for banks to exit assets as they will need to continue to support incoming purchasers given the absence of alternative debt, particularly for large portfolios. Hence, existing lenders will focus on reducing exposure and improving terms and conditions to avoid risk in the short-term.
“Throughout 2011 more hotels which cannot be refinanced at current loan-to-value ratios are expected to be put on the market. Banks, lenders and special servicers attempting to clean up balance sheets will be the most motivated sellers this year. Not all of the stock expected to enter the market will be prime; a growing number of secondary assets and those requiring capital expenditure are likely to become available and may sell at discounted prices, putting pressure on the wider recovery of asset values. However, this is unlikely to derail investor demand for trophy assets in prime cities which will continue to attract competitive bidding and high pricing,” said Mark Wynne-Smith, CEO for Jones Lang LaSalle Hotels EMEA.
Deals are forecast to continue at a steady pace through 2011 to reach €8.3 billion by year-end. A small portion of this volume (7%) will be driven by debt restructuring transactions, which will continue to offer excellent opportunities in a market characterised by limited funding. Investment activity over the next 12 months will be supported by strengthening trading fundamentals across the region, and investors will be increasingly willing to underwrite future growth into their pricing. Also, as corporate demand and events-related business recover further, market performance will continue to strengthen and drive growth in room yield by year end 2011.
“Investment activity in 2011 will be most prominent where investors understand the market and asset values. This year will bring a broad range of capital looking to invest in real estate and hotels, driven by the establishment of new capital funds. Key gateway cities such as London and Paris will continue to attract the bulk of investor interest. Market dynamics will drive more prime assets on the market in London, attracting high values. These could represent great opportunities when taking a long-term view as they will offer a steady return. However, with demand for core assets already starting to intensify, investors might be willing to look further afield,” added Wynne-Smith.
The buyer pool is set to remain largely stable during 2011 with investment and equity funds and property companies in search of attractive investment opportunities at a discount. The more conventional institutional investors will to look for a secure income stream.
“The gap between core and weaker assets will widen during 2011 as more stock in secondary markets becomes available. This could adversely affect cap rates and drive yields into double digit figures for poorly located, underinvested hotels,” said Wynne-Smith.