• Investors pile in as hotels look increasingly attractive

Transaction levels in the UK hotel market could breach GBP2bn this year, as investors grow in confidence and start to compete for assets in the regions. While 2013 transactions were up 138% year on year, agents Savills reckon the market has further to grow.

And looking further afield, agents Jones Lang LaSalle are predicting a boom year globally for the hotel industry, with a 5-10% increase in transaction volumes to USD50bn. Their Hotel Investment Outlook suggests a five year high in activity, driven by easing debt markets and the appreciation of the sector’s steady operating performance.

While asset-light activities will lead to more disposals of branded property in Europe, strategic investment by the brands will focus on growing new brands. And Accor, which has recently signalled a change of strategy on property, will be one to watch. “Characteristic of the more mature recovery phase, corporate and M&A deals will trend in 2014,” suggest JLL. “Well capitalised firms are acquiring platforms and intellectual property, as well as brand databases to speed up growth, as opposed to merely growing organically.” Middle Eastern and Asian investors, who are keenest on overseas plays, will continue at a similar level in the market to 2013.

It will be liquidity that puts the Americas at more than half of global activity, with an expected USD28bn of deals this year. “Further increasing operating fundamentals in most markets across the Americas, an abundance of equity capital and a strong and growing debt market will create an attractive environment for acquisitions and financings in 2014,” predict JLL. While hotel development will start to pick up, it will still lag one percentage point below long term average. “On the whole, investors can expect tepid supply increases,” summarise JLL.

Across Europe, transaction volumes were up 17% in 2013, led by the UK which provided for more than one third of the activity. “The UK regional hotel investment market had a tremendous year in 2013, reporting the highest level of liquidity since 2007,” said Martin Rogers, head of regional hotels at Savills. “We expect that we will continue to see strong volumes in 2014, however we believe that single asset transactions will dominate as opposed to the large portfolio sales we saw last year.”

“The familiarity and maturity of the UK will provide good opportunities for investors in 2014 and will drive more value,” predicted Jonathan Hubbard, northern Europe CEO of JLL Hotels. “As a result of this, we will see competition heating up and investors that miss out on the prime core market opportunities will start to focus on the secondary markets in those countries where they will tap broader opportunities and better returns. It’s a very positive picture for the EMEA region and particularly for London and the UK.”

“As a share of total UK volumes, the regional hotel market accounted for 43% in 2013 which is an improvement over the past few years although still significantly down from the 82% it accounted for before the downturn,” added Rogers. “The increased interest we are seeing demonstrates investors confidence and more realistic pricing by vendors and this will help to boost the percentage in 2014.”

Outside the core markets of the UK, France and Germany, JLL sees Spain and Ireland offering opportunities “and investors will be eager to move on well-positioned assets in these markets”. There will be more opportunities, but also greater competition leading ultimately to some investors being frustrated. “We expect those who miss out on core opportunities to focus on secondary assets in those key countries.” With bond returns low, JLL believes more institutional investors will head for the hotels sector, while private equity investors will be both selling out of profitable positions, as well as looking for new opportunities.

In Asia, a lack of stock that dragged transaction volumes down in 2013 is expected to continue, as investors hold onto hotels in what they see as a rising market. Asian investors are often driven by sentiment, rather than the rationality of returns, point out JLL. They expect Australia, Japan, Thailand and the Indian Ocean to attract most investor interest during the year, with the more adventurous looking at Myanmar and Sri Lanka. “Deals will be opportunistic, but not priced as an absolute steal, as banks have shown little willingness to write down debt.”

 

HA Perspective: [by Katherine Doggrell] Hotels are back in favour as an investment class, but there is a caution now which was not present when Liverpool saw its building boom.

The enthusiasm looks well-placed. The IPD UK Monthly Property index for December shows that UK commercial property produced a return of 10.9% in 2013, which is the strongest annual performance since 2010 and well ahead of the consensus forecast of 8.6%.

Phil Tily, executive director and head of UK and Ireland at IPD, said: “Critically, this has increased confidence in higher yielding and heavily discounted regional assets, that has allowed growth finally to spread out of the capital as investors look for improved income returns and value add opportunities.”

Asset-backed investing is once again in vogue, but just when you thought it was safe to crack out the champagne, those pesky banks have started raining on everyone’s parades again. Barclays has reportedly putting the kaibosh on staff travel, with a reduction in international travel for everything other than ‘essential’ meetings and a ban for all employee travel for internal meetings.

The move is part of wider cost-cutting, with branch closures and job losses also expected and is likely to be cause for pause for those calling an across-the-board resurgence in business travel. For the UK regions, it is hoped that this will not give a stutter to recent signs of recovery.

 

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