• Bumper deal year in 2005 and more to come

The European hotel investment market recorded a thumping Eu16.2bn of transactions during 2005, according to the latest Jones Lang LaSalle Hotels research.

This is almost double the level set in 2004 of Eu9.4bn and a full 42% ahead of what was achieved in 2001, the previous peak, and a year when the Meridien portfolio was in effect sold twice.

The record breaking figures have been achieved thanks to an abundance of stock for sale, said JLL, in its research document Hotel Investment Highlights. This was driven particularly by the desire of international hotel chains to sell hotel real estate.

A combination of private equity groups, high net worth individuals and institutions have snapped up what JLL describe as 'highly desirable and rarely traded property'.

Investor circumstance has been as much a motivator as the buying opportunity, conceded JLL. Opportunistic investors have been -actively seeking to place their funds before markets reach a plateau or interest rates threaten to rise?.

In addition, the ever decreasing yields and shortage of supply of more established commercial property segments has driven traditional investors into the arms of hotel property vendors. On top of all this was cheap debt at high leverage.

Thanks to major disposals by InterContinental, Whitbread, Accor and Societe du Louvre portfolio deals in Europe topped Eu11.1bn. The focus was on the UK and France, accounting for 49% and 30% of deal volume by value respectively.

Single assets (those over Eu10m in value) have also seen a big surge in activity. The volume reached Eu5.0bn in 2005, 51% higher than the previous peak for single asset deals reached in 2004.

The single biggest source of investment funds has been private equity, accounting for 40% of the deals. The next biggest source was high net worth individuals, representing 16% of total deal volume. And publicly quoted hotel companies were the third biggest buyers at 10%.

Much of the cash being pumped into hotel investment is from private equity and much of the private equity investment is from US sources. Domestic players remain the biggest source of funds but US-based investors are the biggest non-domestic source.

JLL predicts that the trends of 2005 are set to continue into 2006. But will the current boom end as all previous such parties in the hotel sector have, with a hangover?

While some form of correction, be it a slowdown or even fall, is inevitable, there are reasons to be more optimistic about the future post this boom compared to previous peaks.

Liquidity in the European hotel market should be helped both by the current flood of private equity investors, who are traders rather than holders, and by the likelihood of REITs in both the UK and Germany.

Such structural change in the asset market might just encourage investors to stick around through the leaner times.

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