According to Jones Lang LaSalle Hotels` recently released Digest Europe, single asset investment activity in Europe fell from a peak of £1.4 billion in 2000 to £1.2 billion in 2001, as the markets were dominated by portfolio activity.
In 2001 European money led the market, facilitated by increased European convergence. Domestic investors concluded the largest number of transactions at 58%, according to the Digest Europe. Regional European capital was also active as the German funds looked increasingly outside their domestic markets and European operators sought to increase their exposure across the Continent. US capital, a significant force in recent years, was less active in 2001 as US managed private equity funds struggled to find deals.
“September 11 did not bring the European investment markets to a standstill as in the US” stated Nick Marsh, Executive Vice President at Jones Lang LaSalle Hotels. A number of deals were already well progressed when the terrorist attacks took place and despite a drop in confidence, many of these deals continued to completion. “In fact 38% of all single-asset investment activity recorded in 2001 took place in the final quarter” added Mr Marsh.
The largest deal in 2001 was the sale of the Hotel Arts Barcelona for approximately £178 million (£390,788 per room). This was followed by the Cumberland Hotel, London (£150 million and part of the Granada disposal), the Maritime Pro Arte in Berlin and the Nikko Paris, all being over £60 million in value.
“A positive sign for the European market is the increasing level of self sufficiency in the investment markets, following EMU convergence as well as the diversification of investor types active in the market” stated Mr Marsh. Private equity was the largest source of capital in 2001 at 41% and includes funds such as Colony Capital, Tweed Investments and Nomura. Hotel operators were second at 26%, although down from 40.1% in 2000. Institutional investors continue to increase their presence and in 2001 accounted for 13% of capital invested into European hotels.
London saw transaction volumes fall 13.4% to £219.5 million in 2001, as the market was dominated by the sale of the Granada portfolio for £2.9 billion. Many owners in London were reluctant to bring properties to the market against a backdrop of softening trading in the final quarter of the year and in fact several assets were removed from the market, with the Berners Hotel (£51 million) the only asset to sell following September 11. “However owners are in no danger of facing pressure to sell, given that the falls in 2001 are set against a very strong 2000 and the importance of maintaining representation in the strategic London market has deterred many owners from exiting the market. Interest will return to the London market in 2002 and there is continuing appetite for overall product” stated Mr Marsh.
Looking to 2002, Arthur de Haast, Managing Director, Europe at Jones Lang LaSalle Hotels expects operating markets to stabilise over the first half of 2002, which should bring renewed investor interest, as the prospects for Europe appearing to be strengthening rather than weakening. “The likely buyers include the German open and closed-ended funds who have significant liquidity with more than £6 billion earmarked for European real estate. Private equity funds are also likely buyers in 2002, particularly given the reduced level of quality commercial property being offered to the market in 2002” stated Mr de Haast.
A number of owner-operators with cash reserves will be on the acquisition trail in 2002. Operators will continue to consider the popular sale and leaseback structure in 2002, with Hilton and Jarvis announcing plans. “There were a proliferation of innovative sale and leaseback deal structures in 2001 and momentum seems to be gathering behind the theory of splitting the bricks and the brains` added Mr Marsh.
In the current economic climate, property appears to be a surer bet to many investors, particularly high net-worth individuals. The under performance of the equity market over the past 6-12 months has shifted a level of investor interest to property, with hotels seen as a portfolio diversifier.
“Investors looking for income growth should target markets that have been hardest hit since September 11, such as London, Paris or Amsterdam” stated Mr Marsh. He added that both the UK and French economies have an above-average economic outlook and thus have domestic drivers in 2002-03, and when the US market recovers, these gateway cities will also benefit. “Coupled with the potential for a strong rebound is the limited new supply proposed for these key cities” said Mr Marsh. He also pointed to Southern Europe as being a potential investment hotspot, with its relative insulation from cross-continental events, and despite the planned supply increases (which will mainly effect, smaller, domestically operated hotels), “opportunity lies in internationally branded, upper-scale hotel assets with good conference and leisure facilities”.
Examining the hotel trading markets, 2001 saw all European city markets record either a significant slowing in growth levels or negative growth following the peak in 2000. Cardiff was the unlikely performer in 2001, although according to the Digest Europe, this is largely due to the slump in 2000 due to oversupply. “The two strongest markets in 2001 were Munich and Frankfurt, enjoying increases in RevPar of 6.6% and 5.2% respectively, due to strong increases recorded in the first eight months of the year which could compensate for a weak fourth quarter” said Mr de Haast. The only other market to record increases in room yield of any significance was Manchester at 3.9%, whilst Rome, Barcelona, Berlin and Vienna were able to record minimal positive increases.
London was the worst performer in 2001 with an 18% decline in room yield due to its status as a major financial and cultural centre, the negative publicity surrounding the impacts of the foot and mouth disease and of course the impact of September 11. Other markets that suffered pronounced falls in room yield were Warsaw, Prague, Budapest, Amsterdam and Düsseldorf at -15.7%, -9.6%, -8.0%, -7.4% and -7.4% respectively.