European Hotel Transactions 2004 This issue has been published by the London Office of HVS International 2005 Edition Philippa Bock and Bernard Forster good covenants, together with the availability of a buyer and the offer Introduction exceptional level of private equity and matching the vendor’s expectations. institutional capital becoming available. During 2004, HVS recorded a total of he European hotel industry staged 137 single asset hotel transactions of a good recovery in 2004, having more than €7.5 million, the minimum experienced significant instability T amount set for a transaction to qualify in recent times as a result of numerous European Single for inclusion in our survey. The total unprecedented events worldwide. The volume of single asset transactions was resilience of the hotel market, as proven Asset Transaction particularly impressive, resulting in a over the last three years, has resulted in Activity record level of investment; this hotel real estate now being considered a investment, at approximately €4 billion, mainstream asset class. Moreover, the ith no unprecedented events was 21% higher than it was the previous upside of hotels in a recovering market occurring in Europe during year. Single asset transactions accounted is very appealing, with the positive 2004 to send the industry into W for approximately 45% of the total leverage resulting from improved turmoil, the signs in late 2003 that many investment activity, less than the profitability creating a very attractive European markets were at the bottom of previous year; however, this was environment for investors. their cycles proved correct, with a understandable considering the strong In 2004, the European hotel number of European markets enjoying increase in portfolio activity following investment market shifted into top gear RevPAR growth in 2004. Although the subdued level of activity in 2003. with a tremendous increase in activity, in continental Europe experienced only Nevertheless, this volume of investment terms of both single asset and portfolio marginal growth, an exceptionally underpins the high level of buyer transactions. HVS recorded a 31% strong amount of investment in single demand, with strong upside sentiment increase in total investment activity in assets was made, with owners who had keeping prices high. 2004 compared with the previous year, endured the turbulence of the past few In 2004, Spain succeeded in being the to approximately €8.9 billion. Hotel years choosing to dispose of their assets. most active market for hotel investment activity was fuelled by a The criteria for deciding whether or not transactions, continuing the trend set the significant number of private investors to dispose of assets include the future previous year. Spain recorded a total of seeking opportunistic acquisitions and capital expenditure requirements 40 qualifying transactions representing by private equity investors that were following a period of deferred over 8,100 rooms and totalling over €1 stimulated by the growth in popularity maintenance as owners seek to billion, some 25% of the total single asset of innovative financial structures that maximise cash flow; the strategic fit of transaction activity in terms of give a combination of upside and the property within the portfolio as a investment volume. The UK also security. This outstanding level of whole; the opportunity of deploying enjoyed very strong liquidity, but had to investment confirms the weight of capital in a more efficient arena or the settle for second place behind Spain with money targeted at hotel real estate, in ability to earn superior returns; the 33 qualifying transactions totalling particular demand exists for assets with current local market conditions; the approximately €980 million. Germany, meanwhile, enjoyed a buoyant hotel Figure 1 Total Hotel Investment Volumes 1998–04 (€ millions) investment market, totalling around €370 million, and accounting for some 9% of the total transaction activity. Of the other main European countries, France, Italy, Ireland and the Netherlands all recorded a sizeable increase in single asset transaction activity by rooms sold in 2004. Meanwhile, following the expansion of the EU, with ten new members joining, investment activity in eastern European markets was prevalent as opportunistic investors looked to purchase real estate in strategic locations with repositioning potential. A total of 11 qualifying transactions took place in central and eastern Europe, representing 7% of total European investment volume. Elsewhere, Turkey and Cyprus were all Source: HVS International Research investment hot spots during 2004, a HVS International European Hotel Transactions 2004 1 approximately 29% lower than the Figure 2 European Single Asset Hotel Transactions 1995–04 European average value per room recorded in the HVI of approximately €222,000 per room. The reason for this is 150 4,500 that within the HVI survey the sample of 140 4,000 hotels is limited to four-star and five-star 130 branded hotels located in primary cities, 120 3,500 whereas the HVS European Hotel 110 Transactions review includes all publicly 100 3,000 quoted hotel sales above €7.5 million 90 and encompasses assets positioned in 2,500 80 the budget, mid-market and luxury 70 2,000 hotel sectors. 60 50 1,500 40 Millions (Approximate) Portfolio € Number of Transactions Number of 1,000 30 Transaction 20 500 10 Activity 0 0 ollowing two years of subdued 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 investment activity in terms of Fportfolio transactions, 2004 Number of Transactions € Millions witnessed a significant rebound. The increase was driven by various factors such as companies disposing of non- Source: HVS International Research core, underperforming assets following a strategic review; an increasing trend to trend that is expected to continue in 2005 company based in Hong Kong, for separate the property asset from the € and beyond. approximately 108 million hotel business; and a wealth of capital € In 2004, the largest single asset to ( 571,000 per room). The deal is invested in the sector by venture transact was in Monaco, where the 619- understood to represent a yield of capitalists and private equity players room Monte Carlo Grand Hotel sold for less than 6%; seeking a portfolio with significant € ∑ more than a reported 200 million. The The 140-unit Grosvenor House potential for growth. landmark property was acquired by Serviced Apartments in London HVS International recorded 22 Cedar Capital Partners on behalf of FHR were sold by the Royal Bank of portfolio transactions in 2004, compared European Ventures, an equity fund Scotland to the property group with 13 the previous year. In 2004, backed by the Bank of Scotland, Bourne Capital in a deal estimated to portfolio activity amounted to € Fairmont Hotels and Kingdom Hotels be worth approximately 145 approximately €4.9 billion, an € International. The Monte Carlo Grand million ( 1,042,000 per apartment). impressive 39% increase on the previous Hotel has been rebranded as a Fairmont It is understood that a number of the € year. Nevertheless, portfolio transaction Hotel and will undergo a 40 million apartments will be sold for activity still remained some 45% below renovation. residential use, but with the option of the record level of activity in 2001 of The following were among other the inventory being placed into a €8.8 billion. notable single asset transactions in 2004. rental pool, thereby providing an In 2004, portfolio transactions were income stream to the owner when plentiful, reversing the trend of the ∑ The 98-room Le Richemond Hotel in they are not in use. previous two years. One significant Geneva, sold to Rocco Forte Hotels change witnessed was the increased € € for 64 million ( 660,000 per room); One significant difference in trend for partnerships between high-net- ∑ Two boutique hotels in Paris, the 70- transactional activity compared to the worth individuals formed through room Hotel Balzac and the 37-room previous year was the near lack of syndicates. As high-net-worth individuals Hotel de Vigny, sold to JJW Hotels & trophy assets transacting; as a often have lower equity return € € Resorts for 53.5 million ( 500,000 consequence, the average price per room thresholds, and benefit from tax-efficient per room); declined. In 2004, investment activity deal structuring, pricing levels can be ∑ The 73-room Sofitel Demeure centred to a greater extent on the mid- achieved that property funds and Marignan in Paris, sold to a high-net- market sector and on a greater number institutions cannot necessarily compete worth private investor for of hotels transacting in secondary with. The following are examples of this € approximately 27.5 million markets. Furthermore, the increased trend. (€377,000 per room); transaction activity in eastern Europe, ∑ The La Manga Resort in Murcia, sold together with hotel assets in Cyprus and ∑ Quinlan Private’s (the investment to the Spanish investment company Turkey, which typically command lower vehicle for the former Irish tax Med Group for €146 million; sale prices, had a negative impact on the inspector Derek Quinlan) acquisition ∑ The 168-room Radisson SAS Carlton total sales price per room. As a result of of the Savoy Group in a €1.1 billion Hotel in Bratislava, together with an all these factors, our survey shows a 9% deal from the Blackstone Group and office and retail complex, was decline in the average price per room, to Colony Capital. The price paid for acquired by a consortium of approximately €158,000. However, we the collection of four London hotels, investors including Patron Capital would stress that this contradicts the comprising 772 rooms, averages €1.5 Partners, Truthheim Invest and trend shown by hotel asset values in million per room, the highest price Nautical 1 for approximately €60 2004; values have increased by ever paid per room for a UK hotel asset. million; approximately 3%, as illustrated in the In January 2005, Quinlan Private ∑ The leasehold interest in the 189- HVS publication European Hotel proceeded to dispose of the 263-room room Howard Hotel in London was Valuation Index 2005 (HVI).