Investors Find Comfort in Hotel Market
The European hotel industry may be sensitive to economic fluctuations, but hotel values, which suffered less during the 2008-2009 financial crisis than those of shops or offices, have recovered and investors now appreciate the sector’s resilience and cash generation, industry experts say.
As the euro has slipped in value against other major currencies amid the economic woes, the euro area has become attractive as a holiday destination for Asians and Americans, boosting occupancy rates and the market for hotel real estate.
Hotel property transactions in Europe, the Middle East and Africa reached €8.94 billion ($11.24 billion) in 2011, up 14% from the previous year, according to property-services company Jones Lang LaSalle. That is well below the €21.37 billion in 2007 but up from €3.3 billion in 2009.
And 2012 is likely to be even stronger, Jones Lang LaSalle said. Four-star hotels accounted for 45% of the €2.5 billion in transactions in the first quarter of this year, compared with 27% a year earlier.
There is some skepticism about how long the trend will continue. Some market-watchers expect distressed sales to cause the market to soften again.
Many assets will need to be refinanced this year or next, but financing is still hard to come by and virtually unobtainable in the secondary market, defined as lower-quality properties in good locations. The number of buildings for sale is likely to increase, while closing those sales will become more difficult, industry experts say.
But despite the debt crisis, economic contraction in many European Union countries and instability in the European banking system, experts at Jones Lang LaSalle say confidence in the hotel real-estate sector has risen since October 2011.
"The growing desire for diversification has led to a large upsurge in interest in the European hotel sector," says Gaël Le Lay, head of hotel investment at insurer AXA Real Estate Investment Managers, which has €42 billion in assets under management. Both private and institutional investors are keen to buy into hotel real estate, he says.
"The budget hotel industry is very stable and demand holds up in a crisis," says Olivier Petreschi, director at the Carlyle Group. "People trade down in a crisis and choose the three- to four-star hotels, as opposed to the five-star, and budget hotels as opposed to three- to four-star hotels, so budget and quality hotels will always have customers."
That sentiment is echoed by Jochen Schäfer-Suren, head of hotels and leisure at €2.1 billion property fund Internos. "Quality three- to four-star business hotels provide the perfect combination of real-estate investment—as they usually are in good locations—and operating business," he says.
"Competing with international buyers in the luxury bracket is virtually impossible and not financially viable," says Mr. Schäfer-Suren. "Buyers from Russia or the Middle East, whose priority is capital preservation and not profit, often snatch trophy assets."
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