WORLDWIDE Following a strong recovery in global hotel transaction volume this year, Jones Lang LaSalle Hotels forecasts that deals will increase a further 30% to 40%.
After 2009 was characterized by frozen liquidity, stalled transactions and drastic drops in hotel performance and values in many hotel markets globally, 2010 signaled 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 US$28 billion to US$30 billion. Among the active buyers, JLLH expects 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,” says 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 that relied heavily on leverage in the lead-up to the global recession, such as the United States, United Kingdom, 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 that 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,” de Haast says. “Those who have made reasonable write-downs through 2009 and early 2010 and are now selling assets or notes, or putting properties into receivership—often getting proceeds above expectations, signaling that values are on the rise, and the price gap is narrowing. However, much of the equity is focused 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, de Haast says. “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,” he says.