2 EuropeanHotelTransactions2007 HVSLondonOffice · group,paid`833million(Ä36,000room)for the 132...

2 European Hotel Transactions 2007 HVS London Office

approximately €613 million. Spain continuesto account for 20% of the total single assetinvestment volume. The value ofundisclosed transactions in Spain amounts toan estimated €235 million.

Berlin proved to be the transaction hot spotin Germany in 2006, whereas in 2007transaction activity was spread across thecountry. Germany continued to prove astrong contender for investment, with anincrease in transaction volumes. FifteenGerman properties (3,116 rooms), accountingfor 13% of transaction sales (€471 million),were sold compared to nine (2,063 rooms) in2006. HVS estimates a total of €120 millionfor undisclosed transactions.

Behind Germany, in fourth place, Francemaintained its investment activity with thesale of important luxury assets such asParisian hotels Hotel Le Parc Trocadero andthe Radisson SAS Hotel Champs Elysees.HVS has recorded a total investment of €322million in nine hotel assets (1,449 rooms) inthe country, indicating a share of 8% of thetotal single asset activity.

In 2007, a total of nine qualifying transactionswere made in central and eastern Europe,down from 11 transactions in 2006. Thisdecrease is understandable as, particularlyoutside capital cities, the focus in thesemarkets remains very much on thedevelopment of new hotel assets. A largeproportion of assets are already owned byinvestors who are not the hotel’s operator,and thus there is limited opportunity for saleand leaseback (or sale and manageback)deals.

We note the following significant singleasset transactions in 2007.

• High barriers to entry make Paris a classictransaction hot spot. Strategic Hotels &Resorts acquired the distinguished Hotel LeParc Trocadero from Accor for €66.5 million,or €573,000 for each of the hotel’s 116 rooms.Located in the 16th arrondissement, thehotel, with its extensive private garden, willbe operated by Marriott International. The46-room Radisson SAS Champs Elysees,boasting a Haussmannian facade on Paris’most famous boulevard, was sold to LuxuryHotel Group for €21 million, or €456,500 aroom;

• Located on Sardinia’s southern coast, the758-room Forte Village Resort was sold toFIMIT, an Italian private real estate fund,for €312 million, or €411,600 a room. Thevendor, Lehman Brothers, had acquired theproperty in 2003. The resort consists of sevenluxury and upscale hotels, 30 food andbeverage outlets and extensive leisurefacilities;

• London & Regional Properties paid areported €311 million (€ 502,000 a room) tothe co-owners of the 619-room Fairmont

Monte Carlo: Bank of Scotland Corporate,Fairmont Hotels and Prince Alwaleed.Luxury hotel group Fairmont has beenmanaging the Monte Carlo Grand Hotelsince March 2005. The hotel is set to undergorefurbishment to the tune of €45 millionincluding the addition of a new spa;

• One of the highest values per room in 2007was achieved by Amberley Castle inArundel, in the English county of WestSussex. Von Essen Hotels acquired thefourteenth-century fortress for €17.7 million,or €934,000 a room, with a view to includingit in its 25-strong chain of boutique hotels.Earlier in the year, von Essen acquired the 25-room country mansion Hunstrete House for€8.8 million to turn it into a 70-roomboutique hotel;

• Scotland appeared with increasingfrequency on the transaction radar in 2007.The 251-room, five-star Caledonian Hilton,on Edinburgh’s famous Princes Street, wassold for €76.4 million, or €305,000 a room.Vendor and operator Hilton invested arenovation budget of close to €10 million in2005. Nevertheless, new owner TheCaledonian Operating Company Ltd UKplans to invest a further €18 million in theGrade II listed property. Hilton acquired theproperty from Queens Moat Houses in 2000for more than €72 million. The RadissonSAS Hotel Glasgow earned its previousowners WG Mitchell (a Northern Irishproperty company) €103.3 million (or€418,200 a room) when it sold the 247-roomproperty to Strategic InvestmentManagement Ltd barely a year afteracquiring it from Marylebone WarwickBalfour for €76.6 million;

• London saw three major transactions in2007. Kingdom Holding Company, chairedby Prince Alwaleed, announced the sale of

the Four Seasons Hotel London for €103million, or €472,000 a room. The luxuryhotel in Mayfair was acquired by a Bahrainiinvestor. Elsewhere, a consortium ofinvestors including InterContinental HotelsGroup and two Middle Eastern investorsdivested itself of the Crowne Plaza HotelLondon City for €123 million, or €606,200 aroom. The buyer, Gruppo Statuto, is anItalian real estate company that acquired the118-room Four Seasons Hotel Milan in 2006for the record sum of €1.7 million a room.Famous luxury hotel Blakes, in London, wassold by Sir Mark Weinberg and his wifeAnouska Hempel for €49 million, or€999,000 a room, making it the highest salesvalue per room achieved in our survey. Theyhad acquired it from Atlan Holdings only ayear previously, for €33.3 million. PurchaserGuestInvest is to add the 49-room propertyto its condo hotel scheme, with rooms costingfrom €1.4 million;

• The Blackstone Group parted from its first-ever hotel investment in Germany, theNikkoDüsseldorf, when it sold the 301-room hotelto Benson Elliot for €114 million, or €378,700a room. The property is part of the 12,000 m2

mixed-use Deutsch-Japanische Center.

Portfolio TransactionActivity

Portfolio transactions were thestrongest driver of total investmentvolume in Europe in 2007, as they had

been in 2006. Yet again, the Hilton portfoliofeatured prominently in the total volume ofinvestment with the purchase in June ofHilton Hotels Corporation’s portfolio byprivate equity company The BlackstoneGroup for a total of roughly €19 billion. Thistransaction involved Hilton’s worldwideportfolio. After apportioning an appropriate

Figure 2 European Single Asset Hotel Transactions 1997-07

Source: HVS - London Office

€Millions Number of Transactions

5

6154 European Hotel:Layout 1 22/2/08 10:48 Page 2

Table 1 Portfolio Transactions 2007

HVS London Office European Hotel Transactions 2007 3

sum to the European portfolio, HVS estimatesthe total volume of investment in European hotelportfolios to have been approximately €14billion. This total is only marginally below therecord volume of €14.5 billion recorded in 2006.

In 2007, HVS recorded 52 portfoliotransactions, compared to 32 transactions theprevious year. A summary of the portfoliotransactions is shown in Table 1.

As it had done for the previous two years,the UK continued to lead portfoliotransactions activity, with a 20% share of thetotal portfolio investment. This share is halflast year’s figure, when the UK accounted for40% of total portfolio activity. However,transaction activity remained at similarlevels, with a total of 13 deals recorded overthe year. Noteworthy UK portfoliotransactions include the following.

• Land Securities Trillium paid €711 million(€142,200 a room) for 30 Accor hotels invarious locations in the UK. This portfoliocomprised roughly 5,000 rooms in hotelsbranded as either Ibis or Novotel. VendorAccor secured 84-year leases with 12-yearbreaks on variable rents. Land Securities

Trillium has agreed to upgrade the hotelswith a budget of roughly €47 million;

• Irish private equity group Quinlan acquiredthe Jurys Inn Group (a portfolio of budgethotels in the UK and Ireland) for €1.16 billion,or €241,000 a room, from JDH Acquisitions, thecompany which took Jurys Doyle Hotel Groupprivate in 2007. Quinlan is expected to continuethe plans Jurys Inn had for expansion intocontinental Europe;

• Moorfield Real Estate Fund (MREF) acquired24 hotels from Macdonald Hotels Ltd for €608million, or €242,000 a room. The portfoliocomprised 2,511 rooms of a three-star or four-starstandard in hotels located in provincial UK cities.

Another trend that has become more evident isthat investors have recently started to turn toalternative hotel investments, focusing on otherhotel segments as luxury assets become scarcerand the availability of such properties becomesmore limited. The number of transactionsinvolving the budget and mid-market segmentsgrew in 2007. The following are examples.

• As part of its strategy of growing in theUK budget hotel segment, private equity

firm JER Partners completed its acquisitionof 11 Express by Holiday Inn assets ownedand managed by Morethanhotels.Conversely, JER Partners is understood to beselling its stake in the Great Eastern Hotel inthe City of London to Hyatt, its partner in theproperty. Hyatt has recently rebranded thehotel under its boutique Andaz brand;

• In the first half of the year, Accor sold 72properties in Germany and 19 in theNetherlands to Moor Park Real Estate(MPRE) for €863 million. MPRE will leaseback the properties, which are operatedunder the Novotel, Mercure, Ibis and Etapbrands, on 84-year leases to Accor. Theaverage price paid was €72,000 a room;

• With a business strategy geared towardsthe acquisition of underperforming hotels,Dynamique Hôtels, a hotel investmentcompany established in 2006, acquired 19budget hotels (a total of 1,000 rooms) thatoperate under the brands Bonsaï Escale,Bonsaï Etape and Bonsaï Relais. Earlier in theyear, Dynamique Hôtels bought ten AkenaHotels in France. Dynamique Hôtels nowowns a portfolio of 78 multibranded hotels.



In 2007, hotel operators continued to divesttheir assets in order to become more asset-light, and thus undertook sale and leasebackor sale and manageback transactions. Thefollowing are examples.

• Continuing its strategy of asset disposal,Accor announced the sale of 57 hotels (8,200rooms) in France and Switzerland for €518million. The purchaser was a real estateconsortium that included the institutionalinvestor Caisse des Dépôts et Consignationsand two funds managed by AXA Real Estate.The vendor will lease the hotels under itsNovotel, Mercure, Ibis, All Seasons and Etapbrands on 12-year variable leases;

• In September the privately owned Spanishhospitality group Barceló signed a long-termagreement to lease and manage 20Paramount Hotels in the UK that had beenacquired by Dawnay Shore Hotels. Thehotels are to be rebranded and they will be asignificant step into the UK market forBarceló;

• In an attempt to change its structure in theUK, Travelodge disposed of 17 of its assets ina sale and leaseback deal with PrestburyHotels Ltd. The agreement will see theproperties leased back for periods of between25 and 35 years. About €150 million of themoney raised will be used to reduceTravelodge’s debt and the balance will beinvested in further expansion;

• Property investor and fund aAIM madeone of its largest purchases in January,acquiring six four-star properties fromPermira. aAIM invested €410 million in aportfolio of 1,310 rooms, which have alreadyseen a €70 million investment inrefurbishment; aAIM is willing to invest afurther €28 million in improvements andadditional facilities. The transaction is part ofa 25-year sale and leaseback deal withPrincipal Hotels.

Other noteworthy portfolio transactionsinclude the following.

• Aside from selling the Nikko Düsseldorf,The Blackstone Group was active elsewherein Germany. The private equity groupinvested €757 million in the 4,500-strongDeutsche InterHotels portfolio in citiesacross the country that included Berlin. Thevendors included Aareal Bank and DeutscheBank. The 14 hotels included in the deal arebranded by Accor, Starwood and Rezidor;

• The second major company taken privatelast year was Four Seasons. Bill Gates,through his Cascade Investment vehicle, andPrince Alwaleed, via Kingdom HotelsInternational, offered US$82 (€120) for eachshare in Four Seasons, valuing the chain atalmost €3 billion. We have apportioned anestimated 20% of the transaction value toFour Seasons’ 13 hotels in Europe;

• Following the Hilton merger, Hilton

Hotels Corporation decided to sell theScandic hotel chain. EQT, a private equitygroup, paid €833 million (Ä36,000 room) forthe 132 hotels in nine European countries.The majority of these 23,000 rooms areleased, with a few under management orfranchise contracts. Hilton is planning tointroduce its successful US mid-marketbrands Hampton by Hilton and HiltonGarden Inn in the near future;

• Ireland-based Prem Group can look backon a very active investment year in 2007;following to single-asset deals in Liege andAntwerp, it acquired the 9-property strong‘Global Hotel Group’ portfolio in France andBelgium for €65 million or €75,000 perroom.

In 2008, we consider that the abundance ofportfolio transactions will experience aslowdown, given the nature of the currentglobal economy. Large-scale investments ofthe scale of the Blackstone/Hilton deal arelikely to be postponed as banks become morecautious about debt in the short term. Forsmall-scale and medium-scale deals,however, there is a certain flexibility for long-term investments. In general, the first half ofthe year looks to be more difficult forinvestors, and it is predicted that towards theend of the year the market should begin torecover.

Profile of Investors

In 2007, investor profiles were differentagain; private equity companiesappeared at the top of the list with a share

of 44% of the total transaction activity (seeFigure 3). However, it should be noted thatThe Blackstone Group transaction accountedfor 5% of the total portfolio activity and anotable 4% of the total investment volume inEurope in 2007. As The Blackstone Group is aprivate equity company, such activityresulted in the increased presence of privateequity companies as an investor type. Privateequity groups acquired assets worth €9

billion in 2007, compared to just over €5billion the previous year. We note that thetotal investment value of the Hilton HotelsCorporation portfolio relates to tradedEuropean assets only.

• Hotel investment companies finished insecond place with 18% of the totaltransaction value, a total investment of €3.3billion. The contribution to investmentshowed a significant increase in absoluteterms (it was €2.8 billion in 2006);

• Hotel operators showed the largestdecrease in investment. In 2006 theyaccounted for 34% of the total transactionsactivity. As hotel operators continue todetach themselves from asset ownership, adownward trend in this category’sinvestment activity is likely to continue in thefuture. Consequently, hotel operatorsaccounted for 11% of the total transactionvolume, equating to a value of €2.0 billion;

• Institutional investors followed closelybehind with a share of 11% of the totaltransaction activity, a noteworthy increase inhotel investment on a share of 6% in 2006.Absolute investment values alsodemonstrated a significant increase,representing 60% growth on the previousyear to a total value of €1.8 billion (€1.3billion in 2006);

• Investment made by real estate investorsamounted to €1.5 billion, or 10% of the totaltransactions made in 2007. Over the past twoyears, overall investment made by suchbuyers has decreased as other types ofinvestor have arisen. Notable transactionsmade by real estate investors included thepurchase of 30 Accor properties in the UK byLand Securities Trillium; the purchase of theCrowne Plaza Hotel London City by Italianinvestor Gruppo Statuto; and the purchase ofthe Fairmont Monte Carlo by London &Regional Properties;

• High-net-worth individuals accounted fora total share of 7% of the total transaction

Figure 3 Single Asset and Portfolio Investment Activity by Buyer Category2007 (€ millions)




activity in 2007. It should be noted that high-net-worth individuals were more active intransactions activity in 2007. Buyers in thiscategory demonstrated a slight increase intheir total share compared to the previousyear (3%), and they contributed greatly interms of absolute values with a 78% increaseon the previous year: a total investment ofjust over €1 billion (€585 million in 2006).This has been the greatest amount ofinvestment by such investors since 2004.

In contrast to 2006, 2007 saw an increase inlarge-scale investment made by privateequity funds, as hotel operators moved awayfrom asset ownership and disposed of theirproperties by management or sale andleaseback contracts. As a result of suchagreements, hotel operators gain aconsiderable sum of capital that can be puttowards refurbishment or be used to fundacquisition and development activity in newmarkets or brands. We expect the presence ofprivate equity and institutional investors in

hospitality investment to increase in thefuture. We expect to see too the emergence ofhigh-net-worth individuals as prominentinvestors, as such buyers are less dependenton debt.

• In regard to single asset transactions, hotelinvestment companies led the investors’ tablefor the first time after showing a sharpincrease on the previous year (see Figure 4).With a share of 22%of all single assettransaction activity in 2006, their relativeshare increased to 31% and a total investmentof €1.9 billion. Major investmentsundertaken by hotel investment companiesinclude the acquisition of the Hilton HotelLiverpool and the Cambridge Garden Houseby the Ability Group;

• Investment activity by hotel operatorsaccounted for 16% of all single assettransactions (€819 million), which is lowerthan the 27% share the previous year.Significant transactions included the

acquisition of the Radisson SAS HotelChamps Elysees in Paris by Luxury HotelGroup, Amberley Castle by von EssenHotels, and numerous transactions in theUK and Spain;

• Real estate investors were not as active in2007 as they had been in the previous twoyears. Real estate investors’ share of the totalsingle asset transactions value decreasedfrom 28% in 2006 to 14% in 2007. The totalmonies invested by this category amountedto €746 million;

• High-net-worth individuals increasedtheir share of single asset transaction activityfrom just above the 10% seen in 2006 to 17%.The acquisition by Bahraini investors of theFour Seasons Hotel London and the purchaseof Dublin’s landmark hotel The BurlingtonHotel are examples of investments made byhigh-net-worth individuals in 2007:investments that totalled €827 million;

• Although institutional investors andprivate equity firms were not particularlyprominent in acquiring single assets in 2006,increased activity by both categories,especially private equity companies, wasseen in 2007. Institutional investors andprivate equity firms together accounted foraround 21% of the total single asset activity,with private equity alone accounting for 16%.In terms of value invested, there was a 59%increase, amounting to a total single assettransaction value of just over €1 billion (€617million in 2006).

When we consider portfolio transactions, thedominance of private equity companies asthe main investor type is evident; theyaccounted for most of the value of portfoliostraded in 2007 (see Figure 5). This is less of asurprise, however, given the purchase ofHilton Hotels Corporation by The BlackstoneGroup. This deal had a great impact on totalportfolio transaction activity.

• Private equity companies’ share of totalportfolio activity soared from 32% to 54%, onaccount of the acquisition of Hilton HotelsCorporation (HHC), as explained previously.Other activity included the acquisition ofFour Seasons Hotels & Resorts by CascadeInvestments; the purchase by EQT of ScandicHotels from Hilton Hotels Corporation; andthe sale of 28 Thistle Hotels in the UK to CIT.Private equity companies’ investment inportfolios totalled €8.7 billion. Althoughtotal investment by private equity has beenslightly influenced by the HHC transaction,we note that by factoring out this prominentdeal, private equity investment remainssignificant, with a 52% share of total portfolioactivity and total value of €7.6 billion,compared to €4.6 billion in 2006;

• Institutional investors accounted for a 13%share of the total portfolio activity. This is aslight increase on the 8% of 2006, thusproving such investors will be active buyers


Figure 4 Single Asset Investment Activity by Buyer Category 2003-07 (€ millions)


Figure 5 Portfolio Investment Activity by Buyer Category 2003-07 (€ millions)


Hotel Operator

Hotel Investment Company

Real Estate Investor

Institutional Investor

Private Equity

High-Net-Worth Individual

Hotel Operator

Hotel Investment Company

Real Estate Investor

Institutional Investor

Private Equity

High-Net-Worth Individual


and future contenders in the hotelinvestment market. Total investments madeby institutional investors amounted to €1.8billion. Major deals include the sale of tenHilton hotels to Morgan Stanley Real EstateFund, and the acquisition of 57 Accor hotelsby AXA REIM and CDC;

• Investments made by hotel investmentcompanies totalled approximately €1.8billion, or 13% of the total portfolio activity.Highlights were deals such as the acquisitionof 20 Paramount Hotels in the UK byDawnay Shore Hotels; the acquisition byPrem Group of nine of InterContinentalHotels Group’s properties; and theacquisition by MBI International, aninvestment company from the Middle East,of the five UK properties in The EtonCollection;

• Hotel operators invested a total of €1.2billion. Their relative share of 9% of the totalportfolio transaction value was a decline onthe previous year to levels similar to thoseseen in 2005. More than half of this amountwas spent on deals in the UK;

• High-net-worth individuals continued tomake little impact on portfolio activity interms of value, with an estimated total of€319 million and a 2% share of portfolioactivity. We note, however, that there was anincrease in activity by this group of investors,with four transactions recorded over thecourse of the year, the price of only one ofwhich was disclosed.

Cross-BorderActivity

European hotel assets continue toattract investors from all over theworld. In the first half of the year,

cross-border deals continued to be facilitatedby the euro, as it allowed greater

transparency and increased the pool ofpotential lenders and investors seeking toinvest in European markets.

In 2007, 42% of all acquisitions, a total of €7.9billion, were made by buyers in their homecountries. Acquisitions made abroad totalled€10.9 billion, or 58% of the total transactionvalue. Among single asset transactions, theproportions shift towards a higher domesticshare (60%) whereas portfolios tend to beacquired by foreign buyers predominately(64%). This is illustrated in Figure 6.

The investment trend has thus practicallyreversed in recent years, with 69% of totalinvestment volume undertaken abroad in2006, and 2007 proving to be anotherimportant year for acquisitions abroad, witha share of 58%. However, there are somemarkets, such as Italy and Spain, wheredomestic transactions in both the single assetand the portfolio sector remain dominant,with the exception of trophy assets thatattract a lot of interest from foreign buyers.

Asset ownership in Europe has primarilybeen dominated by European hotelcompanies. As capital becomes more readilyavailable in locations such as the MiddleEast, including Israel, this trend is likely tocontinue changing and we expect to see evenmore Middle Eastern investors (such as MBIInternational, the buyers of The EtonCollection in the UK) and Israeli investors(such as Jelmoli Holding, which acquired theportfolio of Seiler Hotels) trading hotel assetsin Europe. The emergence of easternEuropean investors is another trend likely tobecome commonplace in the future asinterest in the sector rises and investment inthe region increases. Examples oftransactions made by such investors includethe acquisition by Russian real estate andconstruction company Mirax Group for €250million of the Sungate Port Royal Hotel inTurkey.

Credit Crunch -Investor Scare?

Until the end of summer 2007, theyear performed well, keeping up theinvestment levels of the previous

year and proving to be another record yearfor hotel transactions. As hotel operatorsdownsized their ownership portfolios bydivesting assets, new investors, such asprivate equity companies and institutionalinvestors, became solid partners,demonstrating a continued strong appetitefor hotels. With buyers outnumbering sellersand RevPAR growing, hotel values increasedstrongly. This, in turn, resulted in significantgeneral yield compression, with yields beingpaid for mainstream hotels that several yearsago were only in evidence for true trophyassets.

As their enthusiasm for hotel investmentincreased, investors were more prepared topay out large sums of cash for hotel assets. Somuch so that, in the first half of 2007, thestrength of the hotel market resulted in anumber of major transactions taking place.Private equity companies and institutionalinvestors became increasingly more activeand demonstrated their influence on thehotel investment market by securing anumber of portfolio deals for high prices.This strong trading environment is furtherexemplified by transactions such as theHilton/Blackstone deal, the Four SeasonsHotels portfolio deal, as well as Hilton’sdisposal of Scandic Hotels.

The credit crunch started to show signs oftaking hold at the end of the first half of 2007;this in turn had an impact on investmentactivity for the remainder of the year, as lendersbecame more cautious over hotel investmentcredit. As a consequence, fewer deals wereconcluded in the second half of 2007, with manyinvestors adopting a ‘wait and see’ attitude, bywhich deals were postponed or withdrawnfrom the market. Such was the case in the saleof the Malmaison and Hotel du Vin portfolios,which had the remarkable asking price of €1billion. Potential buyers, including RobertTchenguiz and Derek Quinlan, decided towithdraw their bids as credit availabilitydecreased. RBS also suffered from the impact ofthe ‘crunch’ when it decided to sell 15 of itshotels, of which 12 were Hilton properties, tothe bank’s former head of principal finance forapproximately €1.6 billion. The deal waswithdrawn on account of debt marketturbulence. aAim is another investor that feltthe impact of lenders’ resistance. Its €870million deal on 18 Queens Moat Houses andKew Green had to be postponed on account ofthe difficulty it had in raising debt through itsfinancier.

We have seen too a sharp fall in loan to value(LTV) ratios. The crazy days of LTVs of up to


Figure 6 Single Asset and Portfolio Transactions 2002-07 (€ millions)


Home Abroad



90% (and higher) are gone and whereas a fewmonths ago an LTV of 70% or 75% for anestablished hotel in a mature market seemedperfectly reasonable, today 70% seems to bethe absolute maximum, even for the surest ofbets. At the same time, the cost of debtfinance has increased and financial marketsseek increased margins on base rates, with130 to 140 basis points seeming to be thestarting point of the range on offer. The costof equity has remained fairly constant onaccount of the availability of cash-richprivate individuals and private equity firmsthat have entered the hotel investment arena.Furthermore, we have witnessed anarrowing of the yield gap between leasedand managed hotels. Hotels on heavy leaseagreements have typically sold forsignificantly lower values than managedhotels have.

Despite tougher recent market conditions,hotels continue to attract investors’ interest,as the overall European hotel marketmaintains its levels of performance.Although it is undeniable that as a result ofthe subprime crisis there is less debtavailable for investors, it should be notedthat opportunities in the market remain. Theluxury segment is expected to feel less of animpact from the current situation, asbillionaire Middle Eastern investors, withincreasingly liquid prosperity, continue togive preference to trophy assets and areready to put their money into suchinvestments. These buyers may well bejoined by new-found billionaires in emergingcountries such as India, Russia, and Chinawho will be keen on European investments.We expect to see further opportunities incentral and eastern European markets asthese countries still show considerableupside potential.

Conclusionsand Outlook

With the benefit of hindsight, it isnow clear that mid 2007 markedthe turning point in the European

hotel investment market cycle, with theprevious 18 months representing the peak inthe market. However, it ought clearly to benoted and recognised that two cycles affecthotels. The first concerns hotel tradingperformance and the second the investmentmarket and investor appetite. Although thereis an overlap of and a correlation betweenthese two cycles, unlike in previousdownturns hotel trading performance is forthe most part continuing to improve, albeit atmuch more subdued levels than in recentyears. In contrast, it is the meltdown in thedebt financing markets that has caused theinvestment market cycle to go ‘over the top’and cause a decline in hotel values, ratherthan a collapse in trading performanceprecipitating the fall.

Thus, readers of HVS’s sister publication theEuropean Hotel Valuation Index (‘HVI’) willnote that the decline in hotels values due tothe collapse of the debt markets has beencounterbalanced in many instances byimproved trading performance over thepreceding 12 months. Indeed, in somemarkets the end result has been an increasein value, albeit that the increase in most caseshas been marginal. Although there is nodoubt that had we published an edition ofthe HVI in mid 2007 the values reportedwould in all likelihood have been higherthan they were by the year end, the results ofour annual survey are, nonetheless,encouraging.

The biggest ‘unknown’ as this article goes toprint is how long the trading performance ofEuropean hotels can hold out againstdeclining economic prospects. Can theslashing of interest rates in the USAinvigorate the markets and investors acrossthe Atlantic and pull the USA quickly out ofrecession, or are the widely reportedstructural problems in the US economy toograve to be saved by interest rate cuts aloneand is a major correction on the horizon? Wemust question to what extent Europe canweather the economic storm and ask canEurope avoid being dragged down too andthus avoid a recession of its own?

As we move through 2008, we may findwhen we look back at the year in 12 months’time that the debt financing markets, havingchanged so dramatically, are unlikely tobounce back quickly enough to have a lastingimpact on the hotel investment market.Many banks have closed their doorscompletely to new debt financing and thesecuritisation players are well and trulyclosed for business for the time being.

On the positive side, the impact of the creditcrunch appears to be most severe in the UK.Its severity seems to lessen the further eastone moves across Europe. For instance, wesee a much smaller impact in eastern Europeand continued appetite for the developmentof new hotels in locations such as Croatia,and across provincial Poland and intoRussia. Meanwhile, in the Nordic hotelmarkets the impact seems to have beennegligible so far, as evinced by the sale of aportfolio of 39 hotels across Finland andSweden by Northern Europe Properties inJanuary 2008.

Although there were a handful of single assetdeals at the start of 2008, such as the sale ofthe Hilton Rhodes Resort in Greece and theMontcalm Nikko Hotel in London, CharlesHuman, of our sister company HVS HodgesWard Elliott, commented: “the Europeantransaction market has most definitelyslowed dramatically, and whilst it hasn’tcompletely ground to a halt, deals aredifficult to negotiate and take longer to

conclude in the absence of a healthy debtfinancing market.” Rudy Reudelhuber, alsoof HVS Hodges Ward Elliott, observed: “themajority of vendors remain in an excellentposition, with few needing to sell. This iscausing an imbalance in market pricing asvendors donít need to accept pricereductions whilst purchasers expect toachieve discounted prices on account ofhigher financing costs and uncertain futuretrading potential. This imbalance is thuscausing a stalemate with deals less likely tohappen until the two sides move closer intheir expectations.”

As we ponder our expectations for 2008 it isdifficult to conclude at this point in timewhether the markets really can weather thestorm for now and bounce back in late 2008or early 2009, or whether they are simplyadrift in the fog with little visibility as to theway ahead. In our opinion, there are deals tobe done but the smart investors will be thosewho carefully analyse the tradingperformance of the hotels and markets theyare considering and who in seeking debtfinancing are realistic in their expectations,paying close attention to debt coverage andserviceability of the loan, while not expectingto achieve unrealistic exit strategy positions.

In general, we expect that the first half of2008 will see a slowdown in the number ofdeals being completed, as many are currentlypostponed and investors have becomecautious about the current environment.However, it is expected that the market willstart to make its recovery in mid 2008.Solutions to the credit crunch may be foundso that once again we may be able to see astabilisation of interest rates and an increasein hotel property values and in the volume ofhotel transactions.

Cristina BalekjianMarket Intelligence AnalystElke GeiereggerAssociateKaren SmithDirector

March 2008



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