2003 was not an easy year for the global tourism industry. In the midst of recovering from the fallout from September 11, the industry was faced with new setbacks such as the Iraq war, the outbreak of SARS and continued economic uncertainty.

Despite these challenges, Jones Lang LaSalle Hotels had its most successful year thus far, executing 68 hotel transactions comprising 13,263 rooms worth US$2.6 billion. Landmark deals spanned the globe and included the InterContinental Mayfair, London; Marriott Champs Elysées, Paris; The Ritz Madrid; Principe di Savoia, Milan; Hilton Prague, Park Hyatt Sydney; JAIC Hilton, Colombo and in the United States, Cheeca Lodge Resort & Spa, Florida, Grand Traverse Resort, Michigan and the FelCor Portfolio in Arizona, Ohio and New York.

Of particular note were six arms length transactions in Asia - a notoriously difficult market for agents given its illiquidity and preference for direct deals. Deals were done in Japan, Thailand, Singapore and Sri Lanka.

“International capital flows are an important feature of the hotel market,” said Mr Arthur de Haast, Global CEO, Jones Lang LaSalle Hotels. “And we find our international network is critical,” he continued. Over the last two years, inter-regional investors have been active in Europe, Americas and Asia Pacific. “For instance, during 2003 we sold two hotels in Germany - Marriott Hotel Munich and Nikko Hotel Dusseldorf - to US investors for two different Japanese clients,” said Mr de Haast. “In addition, we sold the Marriott Champs Elysées to a German fund on behalf of US based Strategic Hotel Capital,” he continued.
“We have identified China, Japan, Mexico, Russia and Italy as markets that represent strong growth potential over the coming year and we have made sure we have people ready to assist our clients in these market,” said Mr de Haast. “That brings our network to 101 people across 17 offices in 10 countries.”

Any company can claim to be the largest, but Jones Lang LaSalle Hotels has proven to deliver meaningful results for our clients through advising on these transactions. But leading the world in high value single asset transactional advice is just the beginning. “We also provided valuation and consulting advice to clients on 119,814 rooms across 281 cities and 37 countries worth US$18.8 billion during 2003,” said Mr de Haast.

Following is a region by region snapshot of the hotel investment market for 2003 and outlook for 2004.

Europe - Investment Frenzy

Despite the challenging environment, the European hotel investment market was extremely active during 2003. Single asset transactions exceeded US$3.5 billion and portfolio transactions recorded US$5.2 billion, 82% and 29% respectively above the levels of 2002. The year was also eventful for Jones Lang LaSalle Hotels, who were responsible for 50% of the total number of European transactions, which totalled €3.1billion.

“Investors believe the ongoing decline in hotel trading performance in Europe will soon abate and are confident that quality assets will start to show significant uplift in trading and therefore values in coming years,” said Mr Nick Marsh, CEO Europe, Jones Lang LaSalle Hotels.
“In addition, capital remains relatively cheap and liquid due to low interest rates in Europe and the US,” Mr Marsh said. “And, due to the volatility and poor returns of the equity markets, investors who were traditionally active in these markets are seeking alternative investment opportunities. Diversification has encouraged investors to look at property and, while this had led to price inflation in traditional commercial sectors, previously overlooked property classes such as hotels have shown up on the radar of a broader selection of investors.”

During 2003, a number of trophy assets changed hands including the Principe di Savoia in Milan (US$320.9 million), the Marriott Champs Elysées in Paris (US$183.1 million), the Mayfair InterContinental in London (US$191.1 million) and the Ritz Madrid (US$136.1 million).

Private equity continues to play a significant role in the European hotel sector. Private equity funds such as Blackstone and Whitehall tend to focus on portfolio acquisitions where there are fewer competitors or where their experience in dealing with complex property issues enables them to be more aggressive.

German open-ended funds persist in dominating institutional hotel investment, with Deka, DIFA, CGI and SEB all active during the year. “The long term nature of their investment strategy enables them to be competitive in situations where other investors would be deterred by the challenging short term outlook,” said Mr Marsh. “During 2003, German funds demanded more aggressive lease structures but we believe these will soften as their familiarity with the sector increases,” he said.

Hotel operators showed a resurgence of activity across various markets, particularly UK, Ireland and Spain, where domestic operators acquired a number of single assets or small portfolios often at mid market level. “We have also seen a number of operator to operator transactions at the upper tier of the market such as Mayfair InterContinental and Ritz Madrid,” said Mr Marsh, “illustrating that hotel operators are willing to invest their own equity for strategic assets.”

Outlook for 2004

Given the expected trading improvement and continued attractiveness of financial markets, we expect interest in hotel investment across Europe to remain strong. “We expect new hotel investors to remain involved despite the recovery in the equity markets. We also expect to see owner operators and existing investors take advantage of improving values to reshape their portfolios and realise profits that disappeared over what were two very challenging years. Particularly noteworthy opportunities include further asset sales from the Savoy portfolio and a solution to the ongoing financial problems of Le Meridien,” concluded Mr Marsh.

Asia Pacific - Continued liquidity in Australia, Cultural change in Asia

In the relatively liquid market of Australia, in total, 22 major hotels comprising 4,529 rooms were sold for A$797.9 million.

“Australian investors have recognised the opportunity to purchase hotels in the downturn of the market cycle and as a consequence, the level of domestic investment at A$663.2 million, was the second highest ever,” said Mr David Gibson, CEO Asia Pacific, Jones Lang LaSalle Hotels.
Investors varied greatly both in terms of their objectives and their characteristics. High net worth individuals, institutions, developers and owner / operators have all been active investors.

“Jones Lang LaSalle Hotels has benefited from a gradual culture change in Asia, completing six open market and transparent transactions in locations as varied as Colombo, Bangkok, Pattaya, Phuket, Singapore and Osaka,” said Mr Scott Hetherington, Managing Director, Asia, Jones Lang LaSalle Hotels.

“We are seeing an increasing number of arms length transactions, led by investors who are motivated by financial returns rather than a cultural attachment to their investments,” said Mr Hetherington. “To cater for the increase in activity, we have recently appointed an additional two advisers in China, three in Singapore and two in Japan,” he said.

Investors have included US opportunity funds, local family related companies and owner-operators.

Outlook for 2004

“Looking to next year across the region, investors looking for income returns should seek assets expected to benefit from improved trading conditions in markets such as Shanghai, Beijing, Hong Kong, Phuket, Sydney and Brisbane. Counter cyclical investors are likely to examine opportunities in Bali and Singapore, which are currently positioned on the trough of the cycle,” said Mr Gibson.

“China is the market on everyone’s radar at present and during 2004, we expect major development opportunities to be offered for sale in Shanghai and Beijing,” said Mr Hetherington. “In addition, India represents strong potential in terms of economic growth and an increasing presence of international hotel operators,” he said.

In Australia more foreign hotel owners are likely to sell their Australian assets in order to take advantage of the favourable exchange rate. Furthermore, they may be more comfortable selling their hotels in the early upturn of the cycle, believing the trading upturn will result in a higher price. Given the trading recovery and the slowing residential market, Australia has seen the end of residential conversions for hotels.

According to Jones Lang LaSalle Hotel’s recent global Hotel Investor Sentiment Survey, investors’ intentions to purchase hotel assets across Asia Pacific have increased significantly over the past two years, in light of trading expectations as hotel markets continue to recover from recent demand shocks.

The experience of Jones Lang LaSalle Hotels agrees. In total, Jones Lang LaSalle Hotels sold US$465.9 million worth of tourism property comprising 3,718 rooms across five countries in Asia Pacific. This is US$102.5 million above the transaction level of the previous year.

Americas - Transaction Level Doubles

Unspectacular fundamentals did not deter the deluge of capital that inundated the hotel sector in 2003. Despite the poor performance and uncertain outlook for the industry, volume of U.S. transactions over US$10 million doubled in 2003 to reach US$6.7 billion.
“A record amount of capital in the system and pent-up demand for quality assets with a strong repositioning story are driving this upsurge in transaction volume,” said Mr Art Adler, CEO, Jones Lang LaSalle Hotels, Americas. “Low interest rates also mean that deals are making sense on low capitalisation rates,” he continued.

As expected, hotels located in primary urban areas dominated the sales during 2003, but at US$1.9 billion, assets in secondary and tertiary markets also represented a significant proportion of the sales. “This reflects the disposal of non strategic hotels by large public companies,” said Mr Adler.

A particularly active location was New York where seven single asset deals closed during 2003 and three more large deals are pending. “The activity is driven by recovering profits and the strength of the residential market and potential for hotels to be converted,” said Mr Adler.

Private REIT CNL Hospitality was the standout investor during 2003, purchasing almost US$2 billion or 32% of the total volume of transactions above US$10 million, including four of the largest ten transactions. Private equity funds/opportunity funds accounted for 36% of 2003 transactions, followed by public REITS (24%) and owner/operators (7%).

Outlook for 2004

Jones Lang LaSalle Hotels executed win-win transactions for 14 properties comprising 4,491 rooms in the Americas worth US$233.9 million during 2003. And we expect this to increase during 2004.
We expect an increase in product being brought to market this year. This is due to a further increase in the weight of capital, a drawn-out performance recovery, maturing debt and a potential increase in interest rates. In fact, we have already seen 21 hotels trade in the first 19 days of 2004 - MeriStar sold four hotels, 12 Candlewoods were bought by HPT, while Highland purchased two properties and Columbia Sussex three properties.

Buyer groups for 2004 include:
- REITs - The existing REITs have much stronger balance sheets and are in a favourable position to make accretive acquisitions.
- Private equity funds - Low interest rates, a lack of competitive returns in other asset classes, counter-cyclical opportunities and an inability to place capital into the sector in 2003, should result in a flood of opportunistic capital to hotels in 2004.
- Pension funds - Notable interest from these funds as they are unable to generate the required returns from other real estate sectors.
- Offshore investors - Could become more active as they recognise the counter-cyclical opportunities in the US.
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