Global hotel investment volumes recovered strongly in 2010 after reaching the lowest level of the decade in 2009. Following this strong bounce back, Jones Lang LaSalle Hotels forecasts that global hotel transaction volume will increase a further 30 to 40 percent in 2011, according to initial results from the firm’s Hotel Investment Outlook 2011 report. The expected increase marks the second consecutive year of improvement.
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 U.S., U.K., 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.”
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,” concluded de Haast.
