If anyone has been left in any doubt as to how tough it’s been out there over the last 12 months, just take a look at the figures. EMEA hotel investment volume fell to €2.9bn in 2009, a drop of 63% on the previous year and the lowest level of transactions since the late 1990s. While $24.8bn worth of hotels exchanged hands worldwide in 2008, that figure nosedived to around the $9bn mark in 2009. Despite all the talk of ‘green shoots’ appearing, confidence has clearly been slow returning.
Jones Lang LaSalle’s Hotel Investment Outlook 2010 certainly paints a rather bleak picture of the past year. And yet – whisper it softly – there might also be some scope for optimism over the year ahead. A forecast increase of 20 to 40% might not take us back to the levels seen during the boom years, but anything that bucks the trend of ever lessening returns has to be welcomed with open arms.
One major shift highlighted in the report is the changing buyer profile entering the market. While cross-border activity saw a major drop last year, Asian conglomerates are poised to emerge as one of the primary global acquisition groups in 2010, so perhaps it is unsurprising that I catch up with Jones Lang LaSalle Hotels CEO, EMEA, Mark Wynne Smith, between meetings in Hong Kong.
“It’s not just happening in Asia but the Middle East as well,” he agrees. “I would say that we’re more in a moment of analysis rather than purchase right now, but expect to see more deals done by Middle Eastern and Asian investors than has been the case over the past few years; to an extent they’ve been priced out of the market up until now by more aggressive, local figures.”
Broadening buyers market
While the trend will continue to favour smaller, local deals, the shift in buyer profile may actually result in a healthier variety of players over a longer time period. The disappearance of certain interest groups so dominant until recently will at least lead to a degree of democratisation.
“The private equity buyers who competed hard against one another to secure product will in all likelihood raise new funds and come again,” Wynne Smith acknowledges.
“But they’ll have to be less aggressive in how they price it. The buyer pool got very concentrated in the hands of a select few with tremendous spending power; over the next few years the buyer base will become a lot broader and those funds won’t exercise the same level of dominance they once did. At one point 40% of our deals in EMEA were done with private equity investors. That was down to 15% in 2009 and should stay at around that level this year.”
While the market waits on transaction volume to show genuine acceleration, there remains a significant gap between what sellers want and the price investors are willing to pay. Wynne Smith put this down to continuing low levels of confidence on both sides, but believes we will see a pick up as the operating environment becomes clearer.
“We’ve done some marketing recently where if I multiply the bottom bid by three I still don’t get to the top offer,” he reveals. “You can see how broad the conception of price and value currently is. I don’t think the market will change much over the next 24 months, it’s going to be tough to sell things and you won’t see much credit around, but I do expect interest to increase as confidence builds. Most of that will come from stabilisation or growth in the trading markets. Certain cities or even regions will still have good and bad months, but it won’t be a question of the uniform falls we’ve seen previously.”
While much will depend on the markets, the behaviour of banks will also have a great effect upon how the year ahead plays out. While foreclosure activity has yet to get to anywhere near the critical levels many were predicting 18 months ago, some uncertainty remains.”
At the moment it’s a drip feed of assets into the market and we’re seeing a pretty even match between supply and demand,” Wynne Smith explains. “If a number of banks decide to put a number of assets into the market at the same time then we’ll suddenly see a lot more stock than equity.
“But it is not in their interest to put reasonable assets into a distressed position without thinking very carefully about the impact on value. Banks are still managing things in a very sensible way, as are their borrowers, and planning and predicting behaviour is easier now as the range of possibilities decreases. We think the status quo will be maintained.”
Access to credit does remain an issue, however, and helps explain a drop of 80% in portfolio activity in 2009 – single asset transactions accounted for 72% of total volume. This is a trend that Wynne Smith does not see changing anytime soon. “
Portfolio deals require equity and that’s hard to come by,” he explains. “Accor did a large portfolio deal last year and Starwood is following its ‘asset right’ strategy in the US, but I don’t foresee any panic selling into this market and operating performance will stabilise throughout the year. Smaller, single transactions will continue to be the norm.”
Hotel Investment in Europe and the Middle East
There may be fewer grey areas around the subject of lending and banking behaviour in general, but forecasters are still waiting for signs of how Dubai’s financial institutions will react to their recent cataclysmic shock.
“That’s the one major uncertainty in our region,” Wynne Smith agrees. “As for the market itself, people are quickly forgetting what happened for the positive in Dubai – just look at the infrastructure. It’s one of the few places around the world where people can fly in for a board meeting without having to change planes. It wasn’t the idea but the extent of the idea that gave them problems.
At heart, Dubai has a lot to offer and when the banking side is clearer I would expect it to receive a lot of interest. However, that is unlikely to happen in 2010.”
As our focus shifts to Europe, the CEO sounds slightly less hopeful. International interest is wavering as attention is drawn elsewhere and the market needs to catch up fast.
“If you have a trophy asset to sell you’ll always get interest from an international investment pool – gateway cities may still be pretty expensive but they’re cheaper than they were two years ago,” he explains. “With a management contract asset in a secondary European city we’re now almost certainly looking at a local buyer. The issue for Europe from an international investor perspective is that the US looks as though it offers better value. Yields are generally higher, the dollar is strengthening and European growth is comparably sluggish. Europe may have to sit tight and wait for its turn to come around again.”
A little help
In the interim, Wynne Smith believes operators have a greater part to play in ensuring that the deals that do get done are being done right. Demanding extra help should now be seen as the norm.
“Understandably, the plan is for a return to business as usual within three years or so,” he acknowledges. “What we are seeing now, however, is operators recognising that they simply have to help in some form and that the expectation of that help on the part of the investor is an understandable one to have. Clearly a development asset will require more assistance than an established property experiencing less strain, but operators have a role to play in facilitating transactions and it’s okay to ask.”