• A tale of two cycles

We are at a capital markets peak but not a trading recovery peak in Western Europe, so said Mark Wynne Smith, European CEO of Jones Lang LaSalle Hotels.

The odds are stacked in favour of a wobble rather than a crash, he argued even though the effects of the liquidity reduction are likely to be felt in the capital markets for at least six months.

If this analysis is right, it is a strong counterpoint to the last cycle. The purchase of Le Meridien, the high water mark of that period of purchasing activity, occurred just a month before the September 11 attacks and the subsequent sharp downturn in trade.

Despite the high profile of private equity, Wynne Smith’s presentation at the Euromoney Seminars’ 7th Annual European Hotel Finance & Investment Summit last week, showed that in 2001, private equity had a bigger share of all deals with more than half compared to 40% last year and less than 20% in the year-to-date.

The sanguine analysis of the credit crunch was shared by Tim Helliwell, head of hotel finance at Barclays. “The key message is: ‘Relax, we’re all OK.”

Bank of America’s Marco Rosenbaum said that if “you’ve kept your powder dry” then there were opportunities. “Hotels are being recognised as an asset class. This means that if you have people exiting the market then you will have buyers,” he said.

More concerned was Peter Anscomb from Royal Bank of Scotland. “Leverage is through the roof and supply could have implications in a couple of years because of lending on development,” he said.

The hotel sector as a whole will continue to be attractive, reckoned Peter Procopis, finance director at Dawnay Shore. “Where portfolios are of poor quality and overleveraged they have failed in the past and will fail again,” he said.

Procopis urged everybody to hold their nerve about the credit crunch. “We are weeks into this, rather than months. It is not a question of putting pens down and not doing anything.”

Dillip Rajakarier from Minor International gave an Asian perspective. He related that a $600m deal Minor was involved with had collapsed as a result of the credit crunch. But there had been no problems for Minor in raising construction finance.
HA Perspective: How far and how badly the current contagion in the credit markets will spread into the wider economy is still muddied. Much will depend on the intervention of central banks to prevent an economic downturn.

But it is clear that borrowing costs are currently rising as banks charge more for lending money between themselves and are now passing this cost on to customers.

The rising cost of borrowing plus more stringent loan conditions is making things tight for some deals.

Others, however, are being tucked away. Meridia Capital Hospitality has made its first purchase as a fund, spending US$86m on the Ritz-Carlton and the Crowne Plaza in Santiago.

And Ireland’s Prem Group has spent Eu65m buying nine hotels in Belgium and France. This follows the Eu48m acquisition of four hotels in Belium a year ago.

It might just be that the deal market has cooled in sufficient time to allow for a soft landing as the strong trading growth of the last few years tails-off.

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