Global hotel transactions are on course to exceed $60bn this year, reckons Jones Lang LaSalle Hotels, a third up on 2005 levels. At $41bn in just the first six months of this year, it is clear that the $45bn achieved last year will be comfortably exceeded.
Even in the past week, two substantial European assets have changed hands – the Marriott in Grosvenor Square, London, and the Sheraton in Krakow.
JLL states that the jump in transaction activity is being driven by an abundance of capital seeking real estate, relatively inexpensive debt, the emergence of private equity firms as both buyers and sellers, less attractive returns on offer from other real estate asset classes and continuing uncertainty in the equity markets.
The weight of cash chasing deals – JLL says its research shows that there are three buyers for every one seller – has pushed both initial yields and IRR expectations down.
Strategic Hotel Capital is the buyer of the 236-room Marriott, adjacent to the American embassy in London. The £103m deal is expected to close in the third quarter of this year.
The EBITDA contribution in the first 12 months of ownership is estimated at between $13m and $15m giving a multiple of between close to 13 times and close to 15 times.
Strategic has also bought the 65% in the InterContinental in Prague that it did not already own for $68.8m plus the assumption of $56.5m in debt.
Here, Strategic estimate EBITDA will come in at between $14.5m and $16.5m for the first 12 months of ownership. This gives a multiple on the 100% price of $193m of between just under 12 times and just over 13 times.
These are all chunky numbers. The other deal, which is understood to have been struck on similar multiples, was the purchase of Sheraton in Krakow by the Quinn Group. The seller was a consortium comprising Belgian construction group BESIX, the largest and oldest bank in Poland PKO Bank Polski, Polish developer NDI and Starwood Hotels. The agent in the deal for the vendor was Molinaro Koger.
Quinn paid Eu45m for the 232-room hotel which it will add to its existing properties in the Czech Republic, Bulgaria, Ireland and the UK.
Laurence Geller, head of Strategic, said of his deals: “Europe remains an under asset-managed marketplace, presenting extraordinary opportunities to apply our unique skills.”
It is not easy to see, however, where Strategic is going to add huge amounts of value to the Grosvenor Marriott given that Blackstone was its previous owner, an opportunity fund not exactly renowned for sleeping on the job.
There are plenty of assets in Europe that could benefit from Strategic’s undoubted skills but few of them are for sale or likely to come up for sale in the near term. Instead, as JLL hints, we have situation of sophisticated financial buyers selling to other sophisticated financial buyers. Not much room for a substantial uplift from shrewd asset management.
Where JLL hits the nail on the head is the abundance of capital and the relative unattractiveness of alternative investments.
Eric Kudlak of Molinaro Koger shares JLL’s view that this year is set to set a bumper deal flow. He believes that the market will continue to be competitive for between six and nine months.
After this point, however, he fears that the good times may come to an end. The scenario is one where rising energy prices contribute to inflationary pressure that forces central banks to raise interest rates.
The already tightening interest rate environment in the world’s major economies certainly lends support to this thesis. With many recent deals being struck with 80% plus leverage, casualties look increasingly likely.
Buried in Strategic’s results were details of its European properties, currently Marriotts in Hamburg and Paris and the InterContinental in Prague. While the Marriott Champs Elysees delivered an 11.4% increase in property EBITDA for the first half, the Hamburg hotel saw EBITDA rise just 0.2% and the InterContinental in Prague suffered a fall of 3.5%. The net result of this was for the three units to see the average EBITDA margin drop by 2.1 percentage points to 38.5%.
These are not soaraway numbers despite an increase in average total revpar of 8.1% across the three hotels. The figures demonstrate that current top line growth is struggling to find its way to the bottom line.
Factor in a few more rises in interest rates that will both apply pressure on financing and choke demand, and it begins to look like a difficult period is beckoning.