Hotel investment in 2011 expected to build on improvements of last year

A new report from property consultants shows that 2010 proved to be a year of recovery in EMEA region for both hotel operators and investors alike, with investment volumes across the region totalling €7.7 billion, compared to €3 billion in 2009.

The Hotel Investment Highlights report by Jones Lang LaSalle Hotels also identifies five key trends which analysts say dominated the market in 2010.

‘As corporate travel began to recover and investor confidence strengthened, last year marked the turning point for the EMEA hotel market. The year started off revitalised with a 36% increase in investment volumes in the first quarter year on year and continued to accelerate throughout the course of 2010,’ said Mark Wynne-Smith, chief executive officer for Jones Lang LaSalle Hotels EMEA.

During 2010 the European hotel market experienced an improvement in both occupancy and average room rates. As trading fundamentals improved in most markets, room yields across Europe increased on average by nearly 10%, according to STR Global. However, despite the positive results at year end, room yields in almost all markets remained below peak levels seen in 2007.

‘Only Frankfurt, London and Munich proved to be an exception to this rule. Market conditions proved more challenging for hoteliers in regional cities, the majority of which depend on domestic tourism demand. While trading fundamentals also strengthened, the level of increase has generally been more subdued,’ said Wynne-Smith.

As investor confidence intensified, portfolio activity became more pronounced during 2010 reaching €2.8 billion, some 37% of the total volume. Single asset activity was largely driven by several trophy assets appearing on the market and attracting strong investor interest in particular from Asian and Middle Eastern high net worth individuals.

‘While overall investment volumes increased substantially, the level of new liquidity entering the market was limited. Many deals included a transfer of the debt already linked to the asset. 2010 saw the induction of debt transfer sales, which involved reassigning debt with limited fresh equity being invested,’ explained  Wynne-Smith.

But a lack of new financing resulted in deal sizes remaining small. Just over 70% of all transactions had a purchase price below €50 million, while only seven deals were recorded with a price tag above €200 million.

The majority of investors were firmly focused on gateway cities, with London and Paris firm favourites. Across the UK, investment volumes reached €2.4 billion, compared to only €400 million in 2009 with London accounting for over 80%.

‘The UK capital has proved to be one of the best performing hotel markets in the recent downturn and seemed to fit the bill for investors who continued to search for some level of security in the market. A similar picture was apparent in France, with nearly 85% of investment taking place in Paris,’ added  Wynne-Smith.

The availability of trophy assets in 2010 attracted a number of international buyers, eager to take advantage of  one off opportunities. Although the majority of transactions were funded by European or domestic capital, Asian capital more than doubled, accounting for 12% of investment.

With travel patterns steadily returning to historic levels and a subdued supply pipeline, trading performance is anticipated to strengthen further in 2011 but the pace of recovery may slow down later in the year.

The report predicts that the first quarter is likely to show strong year on year growth and this will continue in to the second quarter which was adversely affected by the ash cloud in 2010. Growth will, nevertheless, be driven by occupancy as travellers continue to focus on cutting costs, prohibiting hoteliers from substantially increasing average room rates other than during peak demand times. Those markets that have already experienced an uplift in occupancy during 2010 may well experience stable performance in the coming year, it concludes.

‘We expect market performance in 2011 to be built upon the strong market dynamics of 2010, although the structure of the market is likely to change substantially. While the previous year was characterised by a number of rare opportunities in main gateway cities, 2011 is not on course to see the same level of trophy assets enter the market. Rather, 2011 is set to see a growing number of secondary assets becoming available as financial institutions concentrate on releasing capital. The UK, Spain and Ireland are expected to generate the bulk of this activity. The market poses a risk of a double dip in pricing if assets are not discharged gradually,’ concluded  Wynne-Smith.