• Values bounce back

Property is bouncing back from the downturn with remarkable strength. According to Investment Property Databank, UK commercial property showed its fastest capital growth since it began its index 23 years ago.

And surely hotels, which are outside of this index, will be showing similar resilience. But the fear is that the bounce will prove temporary and that there will be further capital falls to come.

According to Christie & Co, hotels have dropped in value by 34% since the peak in the third quarter of 2007. This compares to a drop of 44.2% in the IPD index of offices, industrial and retail property.

The property consultants said at the launch of their Business Outlook 2010 publication this month that they expect transaction levels to have reached bottom. So far in this recession, the drop in levels of transactions has mirrored that of previous recessions in the 1980s and 1990s and, if the pattern is repeated this time around, a gradual recovery is in prospect.

The swing in the IPD index is wilder than that exhibited by Christie & Co's hotel index partly due to the nature of the deals and valuations tracked. IPD is focused on large investment deals but the Christie index picks up smaller owner operator transactions as well as the larger portfolio deals.

The dearth of supply has helped drive up the IPD index. And while supply constraints are helping to support hotel values as well, the crash and rebound has not been quite as dramatic. Even so, hotels in the Christie index did suffer a 19.5% drop in 2009 alone.

Good quality hotels are maintaining robust values. The sale and leaseback deal struck by Whitbread at the end of December shows this.

M&G Investments is paying £36.5m in cash for five Premier Inns and adjacent restaurants. The price is a net initial yield of 5.5% on the 25 year leases. The hotels are being held in a Guernsey Unit Trust set up by the M&G Secured Property Income Fund, according to law firm Lawrence Graham who advised Whitbread on the deal.

Globally, other deals demonstrate the robustness of hotel values. Orient Express sold the Lilianfels Blue Mountains in December for A$21m (US$19.3m) which represents 17 times 2007 EBITDA and 23 times 2008 EBITDA.

HA Perspective: King Sturge, in its property predictions event held at the start of this year, warned of the danger of a false dawn for the property investment market. It said that although this year may produce the best returns for four years, there may be a collapse in values again in 2012.

The prevailing theme about the period ahead is of a two-tier market, with prime property maintaining value and anything outside of this suffering.

So far, it is not entirely clear that the gap is that wide. Prime is usually applied in loose terms and seems to be applicable whenever something fetches a strong multiple. Some clearly less prime properties have seen values dive dramatically but often these are situations where they had seen their values chased up unrealistically given the quality of the business underpinning the asset.

Going forward, the sustainability of the current rebound in capital values will, partly, depend on the strength of the recovery. And there are as many views on the macroeconomic outlook as there are economists.

But it is not just about the economy. One thing that this recession has shown so far is that a massive economic problem does not automatically translate into a massive problem for the hotel industry.

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