Hotel Investment Outlook

With the hotel industry facing tough economic times, we ask how hotel investment will fair.

Mark Blick, managing director at Soric International talks us through his views on hotel investment in the current economic climate. Can you give me an overview of how the economic climate has affected hotel property sales and investment?

Blick: There are a number of answers to this question:

Primarily, the European and international banking crisis means that money for financing is not available, or if it is, it is only available on terms that make the acquisition of hotels un-economic and not logical for the expected returns.

There have been some distressed sales through receivership, which are the result of funds or high net worth individuals being forced to sell their assets. For example, through The National Asset Management Agency, or NAMA, the ‘bad bank’ association, created in 2009 by the Irish government to acquire property development loans from Irish banks in return for government bonds.

However, there aren’t a lot of distressed assets because banks, even though trying to improve their liquidity as opposed to holding assets, are adverse to re-valuing assets as the debt may be higher than the current market value and worth of the asset.

Fuelled by a shortage of supply and strong demand from international buyers from less stable markets, the most resilient markets are London, Paris and New York. In these locations, values are being pushed up, with a number of assets trading on and off market as investors look to capitalise on a stable market.

Meanwhile, the secondary and provincial markets are only trading if in distressed situations or at heavy discounts.

Examples of assets in the London market trading at good prices include the Hisperia, Victoria; the Hoxton Hotel; the W Hotel, Leicester Square; and the Berkeley Brothers’ attempts to acquire the Connaught, the Berkeley and Claridges.

Poor pricing includes, the recent acquisition of the De Vere estate and also the Von Essen receivership, with a number of assets selling in key locations.

If you are to analyse the year of 2010 in terms of hotel transactions within Europe, the figures show a healthy increase in volumes with the total amount of transactions equalling around €6.5 billion an 110% increase over 2009. However this figure still remains well shy of the 2006 peak of €20 billion and the ten year average of €10 billion since 2001.

Below shows the overall trend of transactions within Europe over the last 10 years: Where are we now with hotel property sales and investment?

Blick: Trading is active in key markets; otherwise it is considerably down due to lack of debt. The performance of provincial and non-core markets is lower than in previous years.

Below shows a comparison of the investment, activity across different sectors, from 2007 to 2010: In your experience, how does the UK compare to other markets in terms of hotel property sales and investment?

Blick: In terms of sales, the UK market has been fairly active in the key city markets. Probably London and Edinburgh are the two key markets that international investors are keen to gain access to.

The UK market is similar in single asset transactions to other markets in Europe, although there are less portfolio deals and more receivership or distressed transactions.

In 2010 the UK was the most active market for hotel transactions within Europe. The UK topped Europe with a figure of €1.9 billion. Scandinavia was second with a transaction volume of €1.2 billion. Other key markets were France (€772m), Spain (€680m) and also Germany with close to €200m.

Below shows a further breakdown of this activity: Will new supply in the UK cause problems?

Blick: New supply will not cause problems in key city markets, as these are performing reasonably well, with London leading the charge but in provincial markets, new supply will simply impact further on the current mediocre to poor performance of the hotel sector.

However, new supply is being strongly curtailed by the unwillingness of banks to offer terms to developers to build new properties.

The general feeling amongst hotel operators, in relation to the high supply in the UK, is that the rooms can be absorbed fairly easily, especially during the Olympics or in central London locations. However it is pre and post Olympics where headaches may be felt, this is due to the new supply repositioning the London market making it hard for hoteliers outside central London locations. It is also noted that the re-openings of iconic London hotels such as The Savoy and Four Seasons can provide a halo effect and help the city compete with the major global locations. (HVS European Hotel Index Valuation 2011) Do you think that investors and developers are considering alternative business models like mixed-use developments in the UK?

Blick: Yes. A mix of residential, hotel, retail, leisure and office components are being considered as these dilute risk. The structure of office and retail also means that provided tenants are blue chip, they can be guaranteed in the form of a structured lease. How confident are you for 2012?

Blick: It’s not really a question of confidence, it’s whether or not the external market will be able to assist in returning to logical and stable financing conditions that allow businesses to grow as opposed to fire fighting as they are in the current environment.

Even assets held in key markets could run into further difficulties next year if their financing conditions are due for re-negotiation.

An obvious area for optimism is the UK hotel market, already key in terms of sales and investments the promising year ahead with the Olympics offers many opportunities to developers, hoteliers and investors. It is estimated that the Olympics games could see the UK top the chart for hotel room values in 2012. Below is projection of the UK hotel market performance in 2012 compared to 2011.

The statistics show values for low, medium and high number of visitors in relation to the Olympic Games:


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