Bank sales will dominate 2011 hotel investment market

Hotel investment volumes in the EMEA region are expected to grow by 18% to EUR 8.3 bn in 2011, from EUR 7 bn in 2010, according to Jones Lang LaSalle Hotels' latest Hotel Investment Outlook report.

JLL Hotels anticipates that investment activity will be strongest in highly-leveraged markets such as the UK and Ireland, largely as a result of banks' fire sales.

According to the report, 2011 will be characterised by those markets which carry risk but also offer real opportunities. The bulk of investment activity will be driven by the distressed asset workout activity of financial institutions as they look to retrieve capital to achieve regulatory targets. In some markets, it will be difficult for banks to exit assets as they will need to continue to support incoming purchasers given the absence of alternative debt, particularly for large portfolios. Hence, existing lenders will focus on reducing exposure and improving terms and conditions to avoid risk in the short-term.

Mark Wynne-Smith, CEO for JLL Hotels EMEA, said: 'Throughout 2011 more hotels which cannot be refinanced at current loan-to-value ratios are expected to be put on the market. Banks, lenders and special servicers attempting to clean up balance sheets will be the most motivated sellers this year. Not all of the stock expected to enter the market will be prime; a growing number of secondary assets and those requiring capital expenditure are likely to become available and may sell at discounted prices, putting pressure on the wider recovery of asset values.'

While bank sales will dominate in 2011, private equity funds will also begin to emerge as more active sellers as funds reach their liquidation dates. Owners and operators will continue to focus on select disposals of cash-flowing assets which can achieve attractive bids. Where distress or high leverage is not present, activity will be driven by selected disposals by owners, operators and private equity sales - either voluntary or 'encouraged' due to maturing terms. The buyer pool is set to remain largely stable during 2011 with investment and equity funds and property companies in search of attractive investment opportunities at a discount. The more conventional institutional investors will look for a secure income stream.

Wynne-Smith concluded: 'The gap between core and weaker assets will widen during 2011 as more stock in secondary markets becomes available. This could adversely affect cap rates and drive yields into double-digit figures for poorly located, underinvested hotels.'