• Morgan Stanley becomes a force in European hotels

InterContinental Hotels Group has concluded the sale of its seven upscale hotels in mainland Europe, achieving a 15 times multiple on 2005 EBITDA.

While the move brings to an end IHG's disposal process it marks the arrival of Morgan Stanley Real Estate Funds in European hotels in a major fashion.

MSREF paid a chunky Eu634m for the seven InterContinentals, about Eu80m above the net book value of Eu550m. In addition, MSREF is to invest a further Eu60m on upgrades at the properties.

The seven hotels generated revenues of Eu185m and EBITDA of Eu42m in 2005, before management fees. These latter are expected to be around Eu10m a year going forward.

IHG has secured 30-year management contracts with two 10-year renewals, effectively giving it contracts of 50 years on the 2,537 rooms across the portfolio.

Morgan Stanley is better known in Europe as an advisor: it was involved in the Kingdom and Morgans Hotel Group IPOs and it advised on the sale of Hospitality Europe, the Whitbread Marriott portfolio and both tranches of Accor hotels bought by Fonciere des Murs..

Struan Robertson, managing director, head of Morgan Stanley Real Estate Europe and Middle East, said: \With this transaction MSREF is extending its hotel investment business into Europe.\

He added: \At the same time we are establishing a specialised asset management platform to ensure the highest quality interaction with our hotel operating partners across the region.\

Last September, MSREF established a hotel management company in Japan called Panorama Hospitality. And the European operations are likely to follow in a similar fashion.

Panorama was launched to asset manage, operate and be the owner's representative for a portfolio of 13 hotels with more than 2,800 rooms.

The properties had been bought up by MSREF over the preceding years for around $1bn and, unlike with the latest IHG deal, MSREF directly manages most of them.

At the time of the formation of the new management company in Asia, MSREF said it was looking to quadruple its investment in hotels, ploughing another $3bn into them in the region. The initial $1bn investment was part of a broader $10bn investment in real estate.

In Europe, MSREF has also agreed with IHG to put its flag on properties comprising 1,000 rooms, although these are expected to be mostly franchised rather than directly managed by IHG.

And while IHG and MSREF are to work together going forward, neither is wedded to the other regarding future transactions.

Hotels are an increasingly important part of MSREF's activities, with the appeal being both the cyclical and asset management opportunities.

When it announced it had raised $4.2bn in March for MSREF V International, its general real estate fund of which hotels are a part, it said it had already committed about half the amount to investments in Japan, China and Western Europe.

This latest transaction pits Morgan Stanley head-to-head in Europe with its rival US bulge bracket investment banks, notably Lehman Brothers, which was a co-investor in the UK IHG portfolio, and Goldman Sachs' Whitehall Street which in March bought four properties in continental Europe from Marriott and took out Queens Moat Houses in 2004.

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