European Hotel Transactions 2002
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HVS INTERNATIONAL EUROPEAN HOTEL TRANSACTIONS 2002 This edition has been published by the London Office of HVS International 2002 Edition Philippa Bock and Bernard Forster 76% respectively, with approximately Over the past three years liquidity Introduction €1.1 billion of single asset sales within the European hotel market has uropean hotel investment activity transactions recorded and €2.1 billion improved, with the total value of came to a near standstill in the of portfolio transactions. single asset hotel transactions rising months immediately following phenomenally; in 2001 there was a E € the sudden and unprecedented terrorist record high of over 3.2 billion. This atrocities in the USA. Nevertheless, European Single represented a 44% increase upon the the strength of the European hotel total value of transactions in 2000 and investment market in 2001 prior to Asset Transaction an astounding 108% increase since 1998. these events was phenomenal, resulting It is also interesting to note that, in in record levels of investment activity Activity addition to the increased volume of in both single asset and portfolio uring 2001 we recorded a total of transactions, the average price sales transactions. In 2001 the total 80 single asset hotel transactions achieved per room increased by 35% investment volume of single asset Dwhich met the criteria for between 1999 and 2001. This trend has transactions over €7.5 million achieved inclusion within our survey. These not yet been repeated in 2002; however, a new all-time record of over represented an 11% increase compared several quality single assets are €3.2 billion, an increase of over 44% with the previous year’s 72 qualifying currently being marketed (or are on the previous year. Meanwhile, transactions, and a 13% increase upon rumoured to be), including Starwood’s portfolio and corporate activity 1999 levels, when a total of 71 single Ciga portfolio, the Ritz in Paris, the recorded approximately €9.2 billion, asset hotel transactions were recorded. Nikko in Düsseldorf, the Four Seasons an astounding 81% increase on the In 2002 we have recorded 34 qualifying in Milan, the Hotel des Bergues in previous year. transactions to-date in our survey. Geneva and the Sheraton Pulitzer and The cautious and uncertain outlook HVS International is pleased to the Sheraton Schiphol Airport in that ensued during the last quarter of have been involved with providing Amsterdam. 2001 resulted in a sudden change in the valuation and due diligence support to The surge in transactional activity investment market. As a result of a significant proportion of the single began in 1999. This can be attributed uncertainty over future profit margins, asset and portfolio sales recorded to various factors, such as EMU and as evidence of a difference between within this report. convergence, benefiting the investment the bid and the asking price unfolded, a number of deals close to completion were put on hold. Meanwhile, fewer Figure 1 European Hotel Single Asset Transactions 1995–02 assets came onto the market as hotel owners, able to service debt through 90 3,500 falling interest rates and reduced gearing, chose instead to ride out the 80 3,000 stormy conditions. In contrast to the previous year, which benefited from 70 2,500 deals already well progressed following 60 buoyant trading conditions in 2000, a reduced level of investment activity in ransactions 50 2,000 Millions the first half of 2002 was apparent. It is € only in the second half of 2002 that the 40 1,500 hotel investment market is showing 30 distinct signs of recovery. Despite Number of T 1,000 Approx possible further military action against 20 Iraq and other countries perceived as a 500 10 threat to international security, there are signs of a renewed optimism as an 0 0 increasing number of deals are 1995 1996 1997 1998 1999 2000 2001 2002 completing, in terms of both single asset and portfolio transactions. As at No. of Transactions € Millions September 2002 year-to-date, single asset and portfolio sales transactions were down by approximately 46% and Source: HVS International Research HVS International European Hotel Transactions 2002 1 climate; the removal of currency risk, allowing increased cross-border Figure 2 Portfolio Investment Activity by Buyer Category 2000–02 activity; lower interest rates, improved market transparency and improved Private 0% profitability as a result of strong trading Equity 62% conditions in many of the European 30% Joint 1% markets, thus ensuring greater funds Venture 4% were made available for acquisitions. Hotel Transactional activity has been further Investment 20% boosted by the availability of sources of Company 5% finance, such as securitisation and sale 0% Individual 1% and leasebacks. Furthermore, private 3% equity investors have become Real 7% 1% increasingly prevalent within the Estate 58% Investor European investment market, a market Fund 6% which was traditionally dominated by 1% hotel owner-operators. Hotel 65% Investment activity in 2001 was Operator 25% 9% particularly impressive (at least during the first three quarters of the year), 0% 10% 20% 30% 40% 50% 60% 70% spurred on by deals which began in 2000 and, in some instances, 2002 2001 2000 opportunistic investors realising the capital gains achieved from entering the market during the early growth financing hotel acquisitions in 2001, commercial property remains positive. stage of the cycle. The global economic with the source of funding widening to DTZ Research anticipates higher slowdown and the resultant effects of include open and closed ended funds, turnover of property assets in 2002, the terrorist atrocities in the USA pension funds and property with net investment expected to be in resulted in a considerable stagnation in companies. While the concept of sale the region of €4.2 billion in the UK. the hotel investment market during the and leaseback transactions is not new Such conditions favour the hotel final quarter of 2001, stagnation that to the European hotel industry, with investment market, as there is an continued into 2002. Transactional Accor having been particularly abundance of institutional capital activity in 2002 has so far been notably aggressive in the market for alternative seeking a more diversified property weaker, but several deals are in the methods of funding during the 1990s, it investment portfolio. As a result, there pipeline and are expected to finalise in wasn’t until 2001 that this method truly is a definite and long-lasting shift in the last quarter of 2002 or in early 2003. became more than a mild flirtation, at attitude towards private equity least within the UK hotel industry. investment in European hotel real In 2001, sale and leasebacks became estate. Company and more than a passing fad: it became clear Who are the winners with respect to that they were to change the future sale and leaseback activity? It appears Portfolio shape of the hotel industry. Hotel that hotel operators who have assets in Transactions operators, by divesting themselves of key locations, strong brands and ownership of hotel assets in return for consistent operating standards will be onsolidation within the leases and management contracts, the most likely to benefit. Sale and European hotel market has been would gain a considerable sum of leasebacks are particularly attractive to Ca key phenomenon over the past capital to be used towards hotel operators for the following three few years as hotel operators and refurbishment and to fund acquisition reasons. investors strive to gain maximum and development activity. Sale and 1. The capital raised through this exposure in markets, and in doing so leaseback, through the release of medium provides financing equal to seek to achieve economies of scale and capital, provides the financial means 100% of market value, unlike debt maximise shareholder value. for greater pan-European financing which typically would only HVS International recorded 14 consolidation, which until now has provide capital of between 60% and corporate or portfolio transactions been starved of appropriate sources of 80% of the value; during 2001 and nine transactions year- funding. An example of this was 2. The removal of debt, which is to-date in 2002. In 2001 the number of Hilton’s sale and leaseback activity, shown as a liability on the balance deals was down 36% on the number of which provided the necessary funds for sheet, will ultimately improve the transactions recorded the previous it to acquire Scandic Hotels. financial and earnings ratios as well as year, but, more importantly, the total Troubled times in the global stock the return on capital employed; value of these transactions was market have resulted in real estate once 3. Operators are in a strong bargaining considerably greater. In 2001 the more becoming a desirable asset in position at the time of arranging the portfolio activity represented an which to invest. Net institutional deal and are likely to receive a good exchange of around €9.2 billion, an investment in UK commercial property rate of return on their investment while 81% increase on 2000. The activity was is estimated to have totalled €3.75 assured of long-term leases and dominated by the disposal and billion in 2001.1 Although this management contracts and the fragmentation of the Compass represented a 50% reduction upon the essential capital to fund expansion and portfolio, which opened the gateway to record levels achieved in 2000, property development. more innovative financing.