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European Hotel Transactions 2007 Weathering the Storm ...

This report is produced by the office of HVS March 2008

Cristina Balekjian, Elke Geieregger and Karen Smith

Introduction Figure 1 Total Hotel Investment Volumes 2000-07 (€ millions) After a record year in 2006 in terms of the volume of hotel investment, activity in the European hotel market fell back to just under €19 billion in A2007. This decline, albeit that it was only slight, equates to a drop of approximately €1.5 billion, or 7%.

Until the subprime crisis in the USA began in the third quarter of the year, a crisis which in Europe became known colloquially as the ‘credit crunch’, the market was continuing to power ahead. There were several major portfolio deals, such as the disposal by Single Asset Transactions Portfolio Activity Hilton of the Scandic portfolio, two sale and Source: HVS London Office leaseback deals by , the sale of Alliance Hospitality and, of course, the deal by The stemming from the strength of the euro. the second half of the year. The average Blackstone Group to acquire Hilton Europewide occupancy also remained stable. transaction price of €234,000 a room Corporation, which was agreed in the Although the region’s sporting and cultural remained in line with 2006, showing a slight summer. events calendar was not as full in 2007, decrease. In 2006, the growth in the number Europe remained strong in terms of RevPAR of trophy assets transacted greatly increased Despite the credit crunch, deals continued to performance. A number of key cities, the sales price per room, with hotels such as be made in the fourth quarter of the year, including London and Paris, were able to the Four Seasons Hotel Milan and Hotel Arts including a third sale and leaseback capitalise on stronger economic conditions Barcelona selling for €1.7 million and transaction by Accor and the sale of and high-profile events such as le grand €863,000 a room, respectively. Meanwhile, Morethanhotels to JER Partners. It would be départ of the Tour de France from London, the trend in single asset activity in 2007 was fair to say, though, that many of these deals the Paris Air Show and the Rugby World for fewer trophy asset investments with sales were already fairly advanced and under Cup in France. prices of more than €800,000 a room. negotiation or in due diligence before the credit crunch really began to bite. The Eurozone is estimated to have achieved We note that 17% of all of the qualifying GDP growth of 2.7%, compared to 3.0% in single assets transacted in 2007 had no In European Hotel Transactions 2006, 2006; thus, the Eurozone has remained publicly disclosed sales price. The total price published 12 months ago, HVS was already economically stable. In the first half of the of these transactions has been estimated by seeing warning signs indicating that the year, a favourable economic environment HVS to be slightly less than €1 billion. market was overheating, and we questioned allowed levels of hotel investment seen in whether the good times might soon be 2006 to be maintained, and these were The UK remains the leader in the coming to an end. Although trading further supported by strong hotel transactions table with roughly 32% of the performance for most European hotels performance in the region. The second half of single asset transactions by value ( €1.5 continues to improve, albeit at a slower pace, the year, on the other hand, despite showing billion), having in 2005 taken over from it seems that the observations made by HVS continuous growth in hotel performance, Spain as the leader. We recorded 35 that the market, in terms of investment, saw hotel investment slow. The slowdown transactions in the UK provinces, compared might turn in 2007 were well founded. can be attributed to the effects of the ‘credit to only six in London. Unlike the previous crunch’, which in August started to show year, in 2007 investment in the UK provinces signs of taking hold. was greater than it was in London, European Single accounting as it did for 71% of all monies In 2007, HVS recorded a total of 117 spent (approximately €1.1 billion) compared Asset Transaction transactions involving single hotel assets, to 29% for hotels in London ( €445 million). Activity each of more than €7.5 million, the minimum Average prices varied from €504,000 a room amount that we have set for a transaction to in London to €269,000 a room in the otels in Europe saw RevPAR grow qualify for inclusion in our survey. In provinces. HVS puts the value of the by more than 6% in 2007 compared general, there was a decrease of -13% in the undisclosed hotel transactions in the UK at to the previous year. In general, the number of transactions in 2007. (The number around €356 million. market was kept afloat by strong economic of transactions in 2006 was 134.) This Hconditions that helped drive both corporate decrease was due mostly to the shift in In 2007, Spain remained an active hotel and leisure business. This helped investment from single assets to portfolios. market with a total of 23 properties (4,099 counterbalance any fall-off in demand There was too a slowdown in investment in rooms) transacted for a total of

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approximately €613 million. Spain continues to account for 20% of the total single asset Figure 2 European Single Asset Hotel Transactions 1997-07 investment volume. The value of undisclosed transactions in Spain amounts to an estimated €235 million.

Berlin proved to be the transaction hot spot in Germany in 2006, whereas in 2007 transaction activity was spread across the country. Germany continued to prove a strong contender for investment, with an increase in transaction volumes. Fifteen German properties (3,116 rooms), accounting for 13% of transaction sales ( €471 million), were sold compared to nine (2,063 rooms) in 2006. HVS estimates a total of €120 million for undisclosed transactions.

Behind Germany, in fourth place, France maintained its investment activity with the sale of important luxury assets such as Parisian hotels Hotel Le Parc Trocadero and the Radisson SAS Hotel Champs Elysees. €Millions Number of Transactions

HVS has recorded a total investment of €322 Source: HVS London Office million in nine hotel assets (1,449 rooms) in the country, indicating a share of 8% of the Monte Carlo : Bank of Scotland Corporate, the Four Seasons Hotel London for €103 total single asset activity. Fairmont Hotels and Prince Alwaleed. million, or €472,000 a room. The luxury Luxury hotel group Fairmont has been hotel in Mayfair was acquired by a Bahraini In 2007, a total of nine qualifying transactions managing the Monte Carlo Grand Hotel investor. Elsewhere, a consortium of were made in central and eastern Europe, since March 2005. The hotel is set to undergo investors including InterContinental Hotels down from 11 transactions in 2006. This refurbishment to the tune of €45 million Group and two Middle Eastern investors decrease is understandable as, particularly including the addition of a new spa; divested itself of the Hotel outside capital cities, the focus in these London City for €123 million, or €606,200 a markets remains very much on the • One of the highest values per room in 2007 room. The buyer, Gruppo Statuto, is an development of new hotel assets. A large was achieved by Amberley Castle in Italian real estate company that acquired the proportion of assets are already owned by Arundel, in the English county of West 118-room Four Seasons Hotel Milan in 2006 investors who are not the hotel’s operator, Sussex. Von Essen Hotels acquired the for the record sum of €1.7 million a room. and thus there is limited opportunity for sale fourteenth-century fortress for €17.7 million, Famous luxury hotel Blakes , in London, was and leaseback (or sale and manageback) or €934,000 a room, with a view to including sold by Sir Mark Weinberg and his wife deals. it in its 25-strong chain of boutique hotels. Anouska Hempel for €49 million, or Earlier in the year, von Essen acquired the 25- We note the following significant single €999,000 a room, making it the highest sales room country mansion Hunstrete House for asset transactions in 2007. value per room achieved in our survey. They €8.8 million to turn it into a 70-room had acquired it from Atlan Holdings only a • High barriers to entry make Paris a classic boutique hotel; year previously, for €33.3 million. Purchaser transaction hot spot. Strategic Hotels & GuestInvest is to add the 49-room property • Scotland appeared with increasing Resorts acquired the distinguished Hotel Le to its condo hotel scheme, with rooms costing frequency on the transaction radar in 2007. Parc Trocadero from Accor for €66.5 million, from €1.4 million; The 251-room, five-star Caledonian Hilton , or €573,000 for each of the hotel’s 116 rooms. on Edinburgh’s famous Princes Street, was • The Blackstone Group parted from its first- Located in the 16th arrondissement, the sold for €76.4 million, or €305,000 a room. ever hotel investment in Germany, the Nikko hotel, with its extensive private garden, will Vendor and operator Hilton invested a Düsseldorf , when it sold the 301-room hotel be operated by . The renovation budget of close to €10 million in to Benson Elliot for €114 million, or €378,700 46-room Radisson SAS Champs Elysees , 2 2005. Nevertheless, new owner The a room. The property is part of the 12,000 m boasting a Haussmannian fac5ade on Paris’ Caledonian Operating Company Ltd UK mixed-use Deutsch-Japanische Center. most famous boulevard, was sold to Luxury plans to invest a further €18 million in the Hotel Group for €21 million, or €456,500 a Grade II listed property. Hilton acquired the room; property from Queens Moat Houses in 2000 Portfolio Transaction • Located on Sardinia’s southern coast, the for more than €72 million. The Radisson Activity 758-room Forte Village Resort was sold to SAS Hotel Glasgow earned its previous FIMIT, an Italian private real estate fund, owners WG Mitchell (a Northern Irish ortfolio transactions were the for €312 million, or €411,600 a room. The property company) €103.3 million (or strongest driver of total investment volume in Europe in 2007, as they had vendor, Lehman Brothers, had acquired the €418,200 a room) when it sold the 247-room been in 2006. Yet again, the Hilton portfolio property in 2003. The resort consists of seven property to Strategic Investment featured prominently in the total volume of luxury and upscale hotels, 30 food and Management Ltd barely a year after P investment with the purchase in June of beverage outlets and extensive leisure acquiring it from Marylebone Warwick Hilton Hotels Corporation’s portfolio by facilities; Balfour for €76.6 million; private equity company The Blackstone • London & Regional Properties paid a • London saw three major transactions in Group for a total of roughly €19 billion. This reported €311 million ( € 502,000 a room) to 2007. Kingdom Holding Company, chaired transaction involved Hilton’s worldwide the co-owners of the 619-room Fairmont by Prince Alwaleed, announced the sale of portfolio. After apportioning an appropriate

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Table 1 Portfolio Transactions 2007

Source: HVS London Office

sum to the European portfolio, HVS estimates Trillium has agreed to upgrade the hotels firm JER Partners completed its acquisition the total volume of investment in European hotel with a budget of roughly €47 million; of 11 Express by assets owned portfolios to have been approximately €14 and managed by Morethanhotels. billion. This total is only marginally below the • Irish private equity group Quinlan acquired Conversely, JER Partners is understood to be record volume of €14.5 billion recorded in 2006. the Group (a portfolio of budget selling its stake in the Great Eastern Hotel in hotels in the UK and Ireland) for €1.16 billion, the City of London to , its partner in the In 2007, HVS recorded 52 portfolio or €241,000 a room, from JDH Acquisitions, the property. Hyatt has recently rebranded the transactions, compared to 32 transactions the company which took Jurys Doyle Hotel Group hotel under its boutique Andaz brand; previous year. A summary of the portfolio private in 2007. Quinlan is expected to continue transactions is shown in Table 1. the plans Jurys Inn had for expansion into • In the first half of the year, Accor sold 72 continental Europe; properties in Germany and 19 in the As it had done for the previous two years, Netherlands to Moor Park Real Estate the UK continued to lead portfolio • Moorfield Real Estate Fund (MREF) acquired (MPRE) for €863 million. MPRE will lease transactions activity, with a 20% share of the 24 hotels from Macdonald Hotels Ltd for €608 back the properties, which are operated total portfolio investment. This share is half million, or €242,000 a room. The portfolio under the , , and Etap last year’s figure, when the UK accounted for comprised 2,511 rooms of a three-star or four-star brands, on 84-year leases to Accor. The 40% of total portfolio activity. However, standard in hotels located in provincial UK cities. average price paid was €72,000 a room; transaction activity remained at similar levels, with a total of 13 deals recorded over Another trend that has become more evident is • With a business strategy geared towards the year. Noteworthy UK portfolio that investors have recently started to turn to the acquisition of underperforming hotels, transactions include the following. alternative hotel investments, focusing on other Dynamique Hôtels, a hotel investment hotel segments as luxury assets become scarcer company established in 2006, acquired 19 • Land Securities Trillium paid €711 million and the availability of such properties becomes budget hotels (a total of 1,000 rooms) that (€142,200 a room) for 30 Accor hotels in more limited. The number of transactions operate under the brands Bonsaï Escale, various locations in the UK. This portfolio involving the budget and mid-market segments Bonsaï Etape and Bonsaï Relais. Earlier in the comprised roughly 5,000 rooms in hotels grew in 2007. The following are examples. year, Dynamique Hôtels bought ten Akena branded as either Ibis or Novotel. Vendor Hotels in France. Dynamique Hôtels now Accor secured 84-year leases with 12-year • As part of its strategy of growing in the owns a portfolio of 78 multibranded hotels. breaks on variable rents. Land Securities UK budget hotel segment, private equity

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In 2007, hotel operators continued to divest Hotels Corporation decided to sell the billion in 2007, compared to just over €5 their assets in order to become more asset- Scandic hotel chain. EQT, a private equity billion the previous year. We note that the light, and thus undertook sale and leaseback group, paid €833 million (Ä36,000 room) for total investment value of the Hilton Hotels or sale and manageback transactions. The the 132 hotels in nine European countries. Corporation portfolio relates to traded following are examples. The majority of these 23,000 rooms are European assets only. leased, with a few under management or • Continuing its strategy of asset disposal, franchise contracts. Hilton is planning to • Hotel investment companies finished in Accor announced the sale of 57 hotels (8,200 introduce its successful US mid-market second place with 18% of the total rooms) in France and Switzerland for €518 brands and Hilton transaction value, a total investment of €3.3 million. The purchaser was a real estate billion. The contribution to investment Garden Inn in the near future; consortium that included the institutional showed a significant increase in absolute investor Caisse des Dépôts et Consignations • Ireland-based Prem Group can look back terms (it was €2.8 billion in 2006); and two funds managed by AXA Real Estate. on a very active investment year in 2007; The vendor will lease the hotels under its following to single-asset deals in Liege and • Hotel operators showed the largest Novotel, Mercure, Ibis, All Seasons and Etap Antwerp, it acquired the 9-property strong decrease in investment. In 2006 they brands on 12-year variable leases; ‘Global Hotel Group’ portfolio in France and accounted for 34% of the total transactions Belgium for €65 million or €75,000 per activity. As hotel operators continue to • In September the privately owned Spanish detach themselves from asset ownership, a room. hospitality group Barceló signed a long-term downward trend in this category’s agreement to lease and manage 20 In 2008, we consider that the abundance of investment activity is likely to continue in the Paramount Hotels in the UK that had been portfolio transactions will experience a future. Consequently, hotel operators acquired by Dawnay Shore Hotels. The slowdown, given the nature of the current accounted for 11% of the total transaction hotels are to be rebranded and they will be a global economy. Large-scale investments of volume, equating to a value of €2.0 billion; significant step into the UK market for the scale of the Blackstone/Hilton deal are Barceló; likely to be postponed as banks become more • Institutional investors followed closely cautious about debt in the short term. For behind with a share of 11% of the total • In an attempt to change its structure in the small-scale and medium-scale deals, transaction activity, a noteworthy increase in UK, disposed of 17 of its assets in however, there is a certain flexibility for long- hotel investment on a share of 6% in 2006. a sale and leaseback deal with Prestbury term investments. In general, the first half of Absolute investment values also Hotels Ltd. The agreement will see the the year looks to be more difficult for demonstrated a significant increase, properties leased back for periods of between investors, and it is predicted that towards the representing 60% growth on the previous 25 and 35 years. About €150 million of the end of the year the market should begin to year to a total value of €1.8 billion ( €1.3 money raised will be used to reduce recover. billion in 2006); Travelodge’s debt and the balance will be invested in further expansion; • Investment made by real estate investors Profile of Investors amounted to €1.5 billion, or 10% of the total • Property investor and fund aAIM made transactions made in 2007. Over the past two n 2007, investor profiles were different one of its largest purchases in January, years, overall investment made by such again; private equity companies acquiring six four-star properties from buyers has decreased as other types of appeared at the top of the list with a share Permira. aAIM invested €410 million in a investor have arisen. Notable transactions of 44% of the total transaction activity (see portfolio of 1,310 rooms, which have already made by real estate investors included the Figure 3). However, it should be noted that seen a €70 million investment in I purchase of 30 Accor properties in the UK by The Blackstone Group transaction accounted refurbishment; aAIM is willing to invest a Land Securities Trillium; the purchase of the for 5% of the total portfolio activity and a further €28 million in improvements and Crowne Plaza Hotel London City by Italian notable 4% of the total investment volume in additional facilities. The transaction is part of investor Gruppo Statuto; and the purchase of Europe in 2007. As The Blackstone Group is a a 25-year sale and leaseback deal with the Fairmont Monte Carlo by London & private equity company, such activity Principal Hotels. Regional Properties; resulted in the increased presence of private Other noteworthy portfolio transactions equity companies as an investor type. Private • High-net-worth individuals accounted for include the following. equity groups acquired assets worth €9 a total share of 7% of the total transaction

• Aside from selling the Nikko Düsseldorf, The Blackstone Group was active elsewhere Figure 3 Single Asset and Portfolio Investment Activity by Buyer Category in Germany. The private equity group 2007 ( € millions) invested €757 million in the 4,500-strong Deutsche InterHotels portfolio in cities across the country that included Berlin. The vendors included Aareal Bank and Deutsche Bank. The 14 hotels included in the deal are branded by Accor, and Rezidor;

• The second major company taken private last year was Four Seasons. Bill Gates, through his Cascade Investment vehicle, and Prince Alwaleed, via Kingdom Hotels International, offered US$82 ( €120) for each share in Four Seasons, valuing the chain at almost €3 billion. We have apportioned an estimated 20% of the transaction value to Four Seasons’ 13 hotels in Europe;

• Following the Hilton merger, Hilton Source: HVS London Office

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acquisition of the Radisson SAS Hotel Figure 4 Single Asset Investment Activity by Buyer Category 2003-07 ( € millions) Champs Elysees in Paris by Luxury Hotel Group, Amberley Castle by von Essen Hotels, and numerous transactions in the UK and Spain;

• Real estate investors were not as active in 2007 as they had been in the previous two years. Real estate investors’ share of the total single asset transactions value decreased from 28% in 2006 to 14% in 2007. The total monies invested by this category amounted to €746 million;

• High-net-worth individuals increased their share of single asset transaction activity from just above the 10% seen in 2006 to 17%. The acquisition by Bahraini investors of the Four Seasons Hotel London and the purchase Hotel Operator Institutional Investor of Dublin’s landmark hotel The Burlington Hotel are examples of investments made by Hotel Investment Company Private Equity high-net-worth individuals in 2007: Real Estate Investor High-Net-Worth Individual investments that totalled €827 million; Source: HVS London Office • Although institutional investors and activity in 2007. It should be noted that high- hospitality investment to increase in the private equity firms were not particularly net-worth individuals were more active in future. We expect to see too the emergence of prominent in acquiring single assets in 2006, transactions activity in 2007. Buyers in this high-net-worth individuals as prominent increased activity by both categories, category demonstrated a slight increase in investors, as such buyers are less dependent especially private equity companies, was their total share compared to the previous on debt. seen in 2007. Institutional investors and year (3%), and they contributed greatly in private equity firms together accounted for • In regard to single asset transactions, hotel terms of absolute values with a 78% increase around 21% of the total single asset activity, investment companies led the investors’ table on the previous year: a total investment of with private equity alone accounting for 16%. for the first time after showing a sharp just over €1 billion ( €585 million in 2006). In terms of value invested, there was a 59% increase on the previous year (see Figure 4). This has been the greatest amount of increase, amounting to a total single asset With a share of 22%of all single asset investment by such investors since 2004. transaction value of just over €1 billion ( €617 transaction activity in 2006, their relative In contrast to 2006, 2007 saw an increase in share increased to 31% and a total investment million in 2006). large-scale investment made by private of €1.9 billion. Major investments When we consider portfolio transactions, the equity funds, as hotel operators moved away undertaken by hotel investment companies dominance of private equity companies as from asset ownership and disposed of their include the acquisition of the Hilton Hotel the main investor type is evident; they properties by management or sale and Liverpool and the Cambridge Garden House accounted for most of the value of portfolios leaseback contracts. As a result of such by the Ability Group; traded in 2007 (see Figure 5). This is less of a agreements, hotel operators gain a surprise, however, given the purchase of • Investment activity by hotel operators considerable sum of capital that can be put Hilton Hotels Corporation by The Blackstone accounted for 16% of all single asset towards refurbishment or be used to fund Group. This deal had a great impact on total transactions ( €819 million), which is lower acquisition and development activity in new portfolio transaction activity. markets or brands. We expect the presence of than the 27% share the previous year. private equity and institutional investors in Significant transactions included the • Private equity companies’ share of total portfolio activity soared from 32% to 54%, on Figure 5 Portfolio Investment Activity by Buyer Category 2003-07 ( € millions) account of the acquisition of Hilton Hotels Corporation (HHC), as explained previously. Other activity included the acquisition of Four Seasons Hotels & Resorts by Cascade Investments; the purchase by EQT of from Hilton Hotels Corporation; and the sale of 28 Thistle Hotels in the UK to CIT. Private equity companies’ investment in portfolios totalled €8.7 billion. Although total investment by private equity has been slightly influenced by the HHC transaction, we note that by factoring out this prominent deal, private equity investment remains significant, with a 52% share of total portfolio activity and total value of €7.6 billion, compared to €4.6 billion in 2006;

Hotel Operator Institutional Investor • Institutional investors accounted for a 13% Hotel Investment Company Private Equity share of the total portfolio activity. This is a slight increase on the 8% of 2006, thus Real Estate Investor High-Net-Worth Individual Source: HVS London Office proving such investors will be active buyers

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Figure 6 Single Asset and Portfolio Transactions 2002-07 ( € millions) Credit Crunch - Investor Scare? ntil the end of summer 2007, the year performed well, keeping up the investment levels of the previous year and proving to be another record year Ufor hotel transactions. As hotel operators downsized their ownership portfolios by divesting assets, new investors, such as private equity companies and institutional investors, became solid partners, demonstrating a continued strong appetite for hotels. With buyers outnumbering sellers and RevPAR growing, hotel values increased strongly. This, in turn, resulted in significant general yield compression, with yields being Home Abroad paid for mainstream hotels that several years ago were only in evidence for true trophy Source: HVS London Office assets.

and future contenders in the hotel transparency and increased the pool of As their enthusiasm for hotel investment investment market. Total investments made potential lenders and investors seeking to increased, investors were more prepared to by institutional investors amounted to €1.8 invest in European markets. pay out large sums of cash for hotel assets. So billion. Major deals include the sale of ten much so that, in the first half of 2007, the Hilton hotels to Morgan Stanley Real Estate In 2007, 42% of all acquisitions, a total of €7.9 strength of the hotel market resulted in a Fund, and the acquisition of 57 Accor hotels billion, were made by buyers in their home number of major transactions taking place. by AXA REIM and CDC; countries. Acquisitions made abroad totalled Private equity companies and institutional €10.9 billion, or 58% of the total transaction investors became increasingly more active • Investments made by hotel investment value. Among single asset transactions, the and demonstrated their influence on the companies totalled approximately €1.8 proportions shift towards a higher domestic hotel investment market by securing a billion, or 13% of the total portfolio activity. share (60%) whereas portfolios tend to be number of portfolio deals for high prices. Highlights were deals such as the acquisition acquired by foreign buyers predominately This strong trading environment is further of 20 Paramount Hotels in the UK by (64%). This is illustrated in Figure 6. exemplified by transactions such as the Dawnay Shore Hotels; the acquisition by Hilton/Blackstone deal, the Four Seasons Prem Group of nine of InterContinental The investment trend has thus practically Hotels portfolio deal, as well as Hilton’s Hotels Group’s properties; and the reversed in recent years, with 69% of total disposal of Scandic Hotels. acquisition by MBI International, an investment volume undertaken abroad in investment company from the Middle East, 2006, and 2007 proving to be another The credit crunch started to show signs of of the five UK properties in The Eton important year for acquisitions abroad, with taking hold at the end of the first half of 2007; Collection; a share of 58%. However, there are some this in turn had an impact on investment markets, such as Italy and Spain, where activity for the remainder of the year, as lenders • Hotel operators invested a total of €1.2 domestic transactions in both the single asset became more cautious over hotel investment billion. Their relative share of 9% of the total and the portfolio sector remain dominant, credit. As a consequence, fewer deals were portfolio transaction value was a decline on with the exception of trophy assets that concluded in the second half of 2007, with many the previous year to levels similar to those attract a lot of interest from foreign buyers. investors adopting a ‘wait and see’ attitude, by seen in 2005. More than half of this amount which deals were postponed or withdrawn was spent on deals in the UK; Asset ownership in Europe has primarily from the market. Such was the case in the sale been dominated by European hotel of the and portfolios, • High-net-worth individuals continued to companies. As capital becomes more readily which had the remarkable asking price of €1 make little impact on portfolio activity in available in locations such as the Middle billion. Potential buyers, including Robert terms of value, with an estimated total of East, including Israel, this trend is likely to Tchenguiz and Derek Quinlan, decided to €319 million and a 2% share of portfolio continue changing and we expect to see even withdraw their bids as credit availability activity. We note, however, that there was an more Middle Eastern investors (such as MBI decreased. RBS also suffered from the impact of increase in activity by this group of investors, International, the buyers of The Eton the ‘crunch’ when it decided to sell 15 of its with four transactions recorded over the Collection in the UK) and Israeli investors hotels, of which 12 were Hilton properties, to course of the year, the price of only one of (such as Jelmoli Holding, which acquired the the bank’s former head of principal finance for which was disclosed. portfolio of Seiler Hotels) trading hotel assets approximately €1.6 billion. The deal was in Europe. The emergence of eastern withdrawn on account of debt market European investors is another trend likely to turbulence. aAim is another investor that felt become commonplace in the future as the impact of lenders’ resistance. Its €870 Cross-Border interest in the sector rises and investment in million deal on 18 Queens Moat Houses and the region increases. Examples of Activity Kew Green had to be postponed on account of transactions made by such investors include uropean hotel assets continue to the difficulty it had in raising debt through its the acquisition by Russian real estate and attract investors from all over the financier. construction company Mirax Group for €250 world. In the first half of the year, million of the Sungate Port Royal Hotel in cross-border deals continued to be facilitated We have seen too a sharp fall in loan to value Eby the euro, as it allowed greater Turkey. (LTV) ratios. The crazy days of LTVs of up to

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90% (and higher) are gone and whereas a few Thus, readers of HVS’s sister publication the conclude in the absence of a healthy debt months ago an LTV of 70% or 75% for an European Hotel Valuation Index (‘HVI’) will financing market.” Rudy Reudelhuber, also established hotel in a mature market seemed note that the decline in hotels values due to of HVS Hodges Ward Elliott, observed: “the perfectly reasonable, today 70% seems to be the collapse of the debt markets has been majority of vendors remain in an excellent the absolute maximum, even for the surest of counterbalanced in many instances by position, with few needing to sell. This is bets. At the same time, the cost of debt improved trading performance over the causing an imbalance in market pricing as finance has increased and financial markets preceding 12 months. Indeed, in some vendors donít need to accept price seek increased margins on base rates, with markets the end result has been an increase reductions whilst purchasers expect to 130 to 140 basis points seeming to be the in value, albeit that the increase in most cases achieve discounted prices on account of starting point of the range on offer. The cost has been marginal. Although there is no higher financing costs and uncertain future of equity has remained fairly constant on doubt that had we published an edition of trading potential. This imbalance is thus account of the availability of cash-rich the HVI in mid 2007 the values reported causing a stalemate with deals less likely to private individuals and private equity firms would in all likelihood have been higher happen until the two sides move closer in that have entered the hotel investment arena. than they were by the year end, the results of their expectations.” Furthermore, we have witnessed a our annual survey are, nonetheless, narrowing of the yield gap between leased encouraging. As we ponder our expectations for 2008 it is and managed hotels. Hotels on heavy lease difficult to conclude at this point in time agreements have typically sold for The biggest ‘unknown’ as this article goes to whether the markets really can weather the significantly lower values than managed print is how long the trading performance of storm for now and bounce back in late 2008 hotels have. European hotels can hold out against or early 2009, or whether they are simply declining economic prospects. Can the adrift in the fog with little visibility as to the Despite tougher recent market conditions, slashing of interest rates in the USA way ahead. In our opinion, there are deals to hotels continue to attract investors’ interest, invigorate the markets and investors across be done but the smart investors will be those as the overall European hotel market the Atlantic and pull the USA quickly out of who carefully analyse the trading maintains its levels of performance. recession, or are the widely reported performance of the hotels and markets they Although it is undeniable that as a result of structural problems in the US economy too are considering and who in seeking debt the subprime crisis there is less debt grave to be saved by interest rate cuts alone financing are realistic in their expectations, available for investors, it should be noted and is a major correction on the horizon? We paying close attention to debt coverage and that opportunities in the market remain. The must question to what extent Europe can serviceability of the loan, while not expecting luxury segment is expected to feel less of an weather the economic storm and ask can to achieve unrealistic exit strategy positions. impact from the current situation, as Europe avoid being dragged down too and billionaire Middle Eastern investors, with thus avoid a recession of its own? In general, we expect that the first half of increasingly liquid prosperity, continue to 2008 will see a slowdown in the number of give preference to trophy assets and are As we move through 2008, we may find deals being completed, as many are currently ready to put their money into such when we look back at the year in 12 months’ postponed and investors have become investments. These buyers may well be time that the debt financing markets, having cautious about the current environment. joined by new-found billionaires in emerging changed so dramatically, are unlikely to However, it is expected that the market will countries such as India, Russia, and China bounce back quickly enough to have a lasting start to make its recovery in mid 2008. who will be keen on European investments. impact on the hotel investment market. Solutions to the credit crunch may be found We expect to see further opportunities in Many banks have closed their doors so that once again we may be able to see a central and eastern European markets as completely to new debt financing and the stabilisation of interest rates and an increase these countries still show considerable securitisation players are well and truly in hotel property values and in the volume of upside potential. closed for business for the time being. hotel transactions.

On the positive side, the impact of the credit Conclusions crunch appears to be most severe in the UK. Its severity seems to lessen the further east and Outlook one moves across Europe. For instance, we Cristina Balekjian ith the benefit of hindsight, it is see a much smaller impact in eastern Europe Market Intelligence Analyst now clear that mid 2007 marked and continued appetite for the development Elke Geieregger the turning point in the European of new hotels in locations such as Croatia, Associate hotel investment market cycle, with the and across provincial Poland and into Karen Smith Russia. Meanwhile, in the Nordic hotel Wprevious 18 months representing the peak in Director the market. However, it ought clearly to be markets the impact seems to have been noted and recognised that two cycles affect negligible so far, as evinced by the sale of a hotels. The first concerns hotel trading portfolio of 39 hotels across Finland and March 2008 performance and the second the investment Sweden by Northern Europe Properties in market and investor appetite. Although there January 2008. is an overlap of and a correlation between these two cycles, unlike in previous Although there were a handful of single asset downturns hotel trading performance is for deals at the start of 2008, such as the sale of the most part continuing to improve, albeit at the Hilton Rhodes Resort in Greece and the much more subdued levels than in recent Montcalm Nikko Hotel in London, Charles years. In contrast, it is the meltdown in the Human, of our sister company HVS Hodges debt financing markets that has caused the Ward Elliott, commented: “the European investment market cycle to go ‘over the top’ transaction market has most definitely and cause a decline in hotel values, rather slowed dramatically, and whilst it hasn’t than a collapse in trading performance completely ground to a halt, deals are precipitating the fall. difficult to negotiate and take longer to

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8 European Hotel Transactions 2007 HVS London Office 6154 European Hotel:Layout 1 22/2/08 09:22 Page 9 d e u n i t n o c - ) € ( 7 0 0 2 s n o i t c a s n a r T l e t o H t e s s A e l g n i S e c n i f a f e O p n o o d r n u o L E S V 3 H : e e c l r b u o a S T

HVS London Office European Hotel Transactions 2007 9 6154 European Hotel:Layout 1 22/2/08 09:22 Page 10 d e u n i t n o c - ) € ( 7 0 0 2 s n o i t c a s n a r T l e t o H t e s s A e l g n i S e c n i f a f e O p n o o d r n u o L E S V 4 H : e e c l r b u o a S T

10 European Hotel Transactions 2007 HVS London Office 6154 European Hotel:Layout 1 22/2/08 09:22 Page 11 d e u n i t n o c - ) € ( 7 0 0 2 s n o i t c a s n a r T l e t o H t e s s A e l g n i S e c n i f a f e O p n o o d r n u o L E S V 5 H : e e c l r b u o a S T

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Cristina Balekjian is a Market Europe & Middle East Intelligence Analyst with HVS’s HVS London HVS Chicago HVS Vancouver London office. Originally from Brazil, Russell Kett 205 West Randolph Street Suite 400 - she worked in a number of operational Dominique Bourdais Suite 1650 145 West 17th Street roles in the hospitality industry before Karen Smith Chicago, IL, 60606 North Vancouver, BC, joining HVS in 2007, where she has Hadrien Pujol (312) 587 9900 V7M 3G4 (312) 587 9908 (fax) worked on a number of research-based Marc Finney (604) 988-9743 HVS Shared Ownership (604) 988-4625 (fax) assignments. Cristina holds a BSc HVS Dallas (Hons) in International Hospitality and Services 2601 Sagebrush Drive HVS Washington, D.C. Tourism Management. Philip Bacon Suite 101 HVS Executive Search Flower Mound, TX, 75028 1300 Piccard Drive Chris Mumford Suite 102 Elke Geieregger is an Associate with (972) 899 5400 (972) 899 1057 (fax) Rockville, MD, 20850 HVS’s London office. Having worked 7-10 Chandos Street (240) 683 7123 as a junior consultant and in various Cavendish Square HVS Denver (240) 683 7120 (fax) roles in hospitality accounting, she is London, W1G 9DQ 1777 South Harrison Street now completing assignments in (44) 207 878 7700 Suite 906 Asia numerous European countries. (44) 207 878 7799 (fax) Denver, CO, 80210 HVS Hong Kong Originally from Austria, Elke holds a (303) 512 1222 1-2/F BA (Hons) in tourism management and HVS Hodges Ward Elliott 24 Sai Kung Tai Street 7883 S. Locust Court is a part-qualified member of the Charles Human Sai Kung Centennial, CO, 80112-2426 Chartered Institute of Management Rudy Reudelhuber (852) 2791 5868 Accountants (CIMA). (303) 771 4104 (852) 2791 5699 (fax) Pascal Bichon (303) 290 6533 (fax) Karen Smith is a Director with HVS’s HVS New Delhi 1 Lancaster Place HVS Mexico City London office, specialising in hotel 6th Floor, Tower - C London, WC2E 7ED Bosque de Ciruelos 190 valuation and consultancy. She holds a Building No.8. 44 207 257 2000 Suite A-308 BSc (Hons) in Urban Estate Surveying DLF Cyber City Phase II 44 207 257 2009 (fax) Mexice, DF, 11700 and is a chartered surveyor with more Gurgaon, HR, 122002 (5255) 5245 7590 than 15 years experience in the hotel (91) 124 461 6000 HVS Madrid (5255) 5245 7589 (91) 124 461 6001 (fax) property sector. Karen joined HVS in c/ Velázquez, 80 6to Izq. 2001 and has conducted and directed Madrid, 28001 HVS Miami HVS Shanghai numerous valuations, feasibility (34) 91 781 6666 8925 SW 148th Street 222 Yan An Dong Road, studies and consultancy assignments (34) 91 575 1450 (fax) Suite 216 Level 32 Unit 6C, across Europe, the UK, North Africa Miami, FL, 33176 Golden Bun Financial and Asia. HVS Athens (305) 378 0404 Centre, Huangpu District, 3rd Floor (305) 378 4484 (fax) Shanghai, 200002 10 Panepistimiou Street HVS New York (86) 21 5171 7001 Athens, 10671 (86) 21 5171 7004 (fax) HVS SERVICES (30) 21 0361 2085 372 Willis Avenue • Valuation Services (30) 21 0361 6689 (fax) Mineola, NY, 11501 (516) 248 8828 HVS Singapore (516) 742 3059 (fax) 152 Beach Road • Consulting Services North America #13-02/03 Gateway East HVS Atlanta • HVS Hodges Ward Elliott HVSNewport, RI Singapore, 189721 2386 Clower Street (65) 6293 4415 Suite C101 327 Village Road (65) 6293 5426 (fax) • HVS Shared Ownership Services Snellville, GA, 30078 Tiverton, RI, 02878 (678) 639 3334 (763) 591 7640 South America • Development Services (678) 639 3335 (fax) HVS San Francisco HVS São Paulo • Asset Management & Operational Advisory Services HVS Boston 116 New Montgomery Street Av. Brig. Faria Lima 1912 cj.7F • Executive Search 607 Boylston St. Suite 620 4th Floor San Francisco, CA, 94105 01452-001-São Paulo • Organisational Assessments/ Performance Cultures Boston, MA, 02116 (415) 896 0868 (55) 11 3093 2743 (617) 424 1515 (415) 896 0516 (fax) (55) 11 3093 2783 (fax) • Convention, Sports & Entertainment Facilities HVS Boulder HVS Toronto HVS Buenos Aires Consulting 2229 Broadway 6 Victoria Street San Martin 640 - 4° Piso Boulder, CO, 80302 (1004) - Buenos Aires • Food & Beverage Services Toronto, ON, M5E 1L4 (303) 443-3933 (416) 686-2260 (54) 11 4515 1461 • Restaurant Management & Advisory Services (303) 443-4186 (fax) (416) 686-2264 (fax) (54) 11 4515 1462 (fax) • Gaming Services © 2008 HVS. All rights reserved. • HVS Compass Interior Design Published by: • Marketing Communications HVS - London Office, 7-10 Chandos Street, • Technology Strategies Cavendish Square, London W1G 9DQ Tel:+44 (20) 7878 7700 Fax:+44 (20) 7878 7799 • Hotel Parking Solutions For further information please contact: • Golf Services Karen Smith – [email protected] Elke Geieregger – [email protected] • European Hotel Financing or Cristina Balekjian – [email protected] or visit our website at: www.hvs.com

12 European Hotel Transactions 2007