Following five years of consecutive growth, hotel transaction volumes across the EMEA region fell by 60% to 7.8 billion in 2008, a clear example of the impact that challenging economic conditions and illiquid debt markets have had throughout the year. Despite this steep decline, the EMEA region fared slightly better than the global hotel investment market which saw volumes drop by 80% over 2007 levels. Moreover, EMEA contributed just below 50% of the global hotel transaction volume.
The first three quarters of 2008 still saw a number of transactions close, reaching a total volume of 7.2 billion. In the face of economic uncertainty, and with the collapse of Lehman Brothers in September, the debt markets became increasingly more cautious and expensive. Mark Wynne-Smith, CEO, Jones Lang LaSalle Hotels, Europe, Middle-East and Africa said: "The year end 2008 was the quietest I have ever known in my career. However, there are signs of structural change in our industry that will cause more deals to be done towards the 2009 year end. We are also seeing some decisions being taken as a result of announcements on the various Government stimulus packages which we expect to feed through into to more activity in the 2nd half."
2008 saw a change in recent trends as 2008 hotel investment volume was made up mainly of single asset transactions, reaching 4.3 billion, whilst portfolio transactions - which were mostly 2007 carry overs - achieved 3.5 billion. The majority of portfolio transactions recorded in 2008 were made up of two or three properties and we did not see many large corporate transactions which were prevalent in recent years. The exceptions to this trend were the sale of the Northern European Properties portfolio in Finland for 835 million to a real estate fund managed by Capman, and the sale of a 50% stake in Quinlan's Jurys Inn portfolio to the Oman Investment Fund for 585 million. These deals were the last in a long line of great real estate exits but I think the model is going to change to reflect current conditions.
What we expect to see through 2009 is more consensus on pricing as both buyers and sellers accept that we saw truly exceptional conditions in the last two years and we have to look back to the mid 1990's pricing metrics for where the market will settle certainly in the short term. Investors' focus has to be on making capex funds stretch further and effectively managing your operator and employees as you can't rely on the market to carry you forward.
We see the major lenders moving forward through 2009 with the selection of a variety of strategies to recover value in the medium term. This will mean some changes of ownership and control, including mergers, which will cause the transactional activity to increase. We also predict that M&A among some of the larger operators will increase as the development pipeline is reducing so quickly and the synergies between merged operators will become increasingly attractive as market demand falls off.
We also have to reset our expectations for a normal year representing perhaps 50% of the peak transaction volume. For EMEA deals above 10 million, that still means around 10 billion of total liquidity. It will mean that private equity groups will have to write bigger equity cheques to stay at the same levels of activity. And while hotel operators were net sellers in 2007, market conditions made them net buyers in 2008 and we are likely to see a lot more of this type of activity in the short term simply because, apart from a small number of specialist hotel investors, the operators are the only groups who really need the properties in order for their business models to thrive.
Looking at the source of investment in 2008, domestic capital became once again the dominant source, representing 34% of the total volume in 2008. But the market also saw an incredible uplift in Middle Eastern capital, from 5.6% in 2007 to 26.7% in 2008, as several countries have set up sovereign wealth funds for investment, driven by a desire to diversify from their natural resource based wealth.
Mark concludes: “As difficulties in the financial markets continue and investor sentiment takes more time to stabilise, it is expected that 2009 will be another challenging year. We expect activity to be improving in the third and fourth quarters driven more by restructuring activity than by a return to the market by lenders.”
In 2009, hotel investors will generally favour lease opportunities given their more reliable income streams, and either trophy assets in prime cities such as Paris and London, or hotels in the economy sector, which trade well in down cycles.
Source: Jones Lang LaSalle