Following a very challenging year in 2009, characterised by frozen liquidity, stalled transactions and drastic drops in hotel performance and values in many hotel markets globally, 2010 signalled dramatic improvement and a fresh pace for opportunistic, cashed-up buyers.
The across-the-board rebound in operating fundamentals and the broad cross-section of equity capital in the market is motivating both buyers and sellers. Having gathered pace in 2010, volumes are expected to continue to rise substantially in 2011, reaching $28 to $30 billion.
Among the active buyers, the firm anticipates to see REITs, institutional investors and private and high net worth investors with opportunistic capital investing next year.
“With more stock hitting the market in 2011, there will again be an increased depth and breadth of opportunities for investors,” said Arthur de Haast, global CEO of Jones Lang LaSalle Hotels.
“Until liquidity improves in the debt markets, however, the most acquisitive hotel investors will likely be those that make all-equity purchases or structure acquisitions with low leverage levels.”
Debt remains selectively constrained in the markets which relied heavily on leverage in the lead-up to the global recession, such as the US, UK, Ireland, Japan and Spain, but it is easing. Nevertheless, new lending will remain fairly limited until lenders fully rebuild their balance sheets and write down asset values, a delicate process which needs to be carefully balanced and is taking longer than expected.
“In several markets, banks and special servicers have an opportunity to register gains because of their aggressive loan write-downs,” said de Haast.
“Those who have made reasonable write-downs through 2009 and early 2010 and are now selling assets or loan notes, or putting properties into receivership, often getting proceeds above expectations, signalling that values are on the rise, and the price gap is narrowing. However, much of the equity is focussed on quality assets in prime locations, so there is still likely to be trauma for difficult assets in secondary locations, or those markets that are still struggling with supply issues or continuing weakened demand.”
When considering the Middle East and North Africa, the hospitality market is polarizing with some early positive signs emerging in select countries like Morocco, Saudi Arabia, Qatar and the UAE.
“Compared to the broader region, these markets show greater political stability, have generally better or improving supply-demand dynamics, and benefit from government initiatives to support development, facilitate investment and generate demand. Long term hospitality development in Qatar, for example, has been bolstered by the 2022 FIFA World Cup. The UAE hospitality investment market seems to show positive signs as demonstrated by the $115 million of financing from Standard Chartered Bank secured for the Fairmont Palm Jumeirah by IFA Hotel Investments in late 2010 as well as by the recent sale of the Ritz Carlton DIFC by Union Properties PJSC for $300 million” said Jalil Mekouar, Managing Director of Jones Lang LaSalle Hotels Middle East and Africa.
While hotels have become a more mainstream asset class over the past decade, the combination of property and business risk makes them inherently complex. Investors who have a strong track record in the sector will be most successful.
“Early movers and risk takers will often be rewarded, but the likely common theme across all markets and segments in 2011 will be to focus on hotel property investment fundamentals,” said de Haast.