So far, 2010 has been positive for the global hotel real estate market. Hotel operating fundamentals have posted generally favourable results since the start of the year*, with hotel demand increasing and average daily rates showing signs of stabilisatiing in most gateway cities. Having completed extensive cost containment measures, major hotel owners and operators are now also sounding progressively more optimistic about continued recovery.

This increased visibility with respect to improving operating fundamentals has set the tone for more positive investor sentiment for hotel real estate. At the same time, there is also a noticeable increase in stock being offered to market, which we believe in part is being spurred by greater sale activity from banks and other lenders who have taken control of more assets over the last year and/or are trying to reduce their hotel loan portfolios. Combined with the substantial weight of capital in the market looking for acquisition opportunities, transactional activity has accelerated significantly since the start of 2010. For the first five months of the year, total transactions volumes amounted to $4.2bn (€3.3bn) - a significant 36% increase over the same period in 2009.

Recovery in transactional activity was greatest in the Americas, where hotel sales increased 96% year on year to total $1.9bn for year-to-date May 2010. This marks the first time since 4Q 2007 that transaction volumes in the Americas have surpassed those of Europe, Middle East and Africa (EMEA). Spurred by the overall recovery in capital markets, US-based REITs have been among the most prolific investors in the region and are expected to dominate buying activity for the rest of 2010. In the first five months of 2010, REITs accounted for 40% of all hotel sales in the region. We are expecting investor interest to remain keen for hotel acquisition opportunities in the Americas through the remainder of 2010 from not only domestic buyers but also international groups - within the first five months of the year a number of high-profile acquisitions have already been undertaken by foreign buyers.

Transactional volume grew more modestly in EMEA, increasing 4% to $1.3bn over the same period in 2009. Leased assets dominated sale activity, accounting for almost $500m of hotel sales in the region. Compared with 2009 when buying activity was dominated by institutional investors, private equity/investment funds such as Invesco Real Estate have also been very acquisitive this year. As of year-to-date May these groups have been the largest net buyers in the region, acquiring approximately $330m worth of hotels in this period.

Transaction activity continues to be robust in Asia Pacific. Hotel sales totalled $973m in the first five months of the year, a 19% increase over the same period in 2009. Australia and Japan feature very strongly in investor interest within the region - both countries recorded more than $450m worth of hotels sold and together account for more than 95% of hotels sold in the region. Asia-based conglomerates and property companies continue to dominate the regional investment landscape, recording more than $920m of hotel acquisitions in the period.

While there are lingering concerns about the continued pace of recovery in the global economy, particularly in Europe due to the impact of the current debt crisis, going forward the outlook for the hotel real estate market continues to be buoyant. In the latest April 2010 edition of Jones Lang LaSalle Hotels' Hotel Investor Sentiment Survey, expectations for global short term trading recorded its most marked increase since the survey's inception (up 31.8%). Positive short-term trading is now expected in just under half of the 93 markets tracked. Medium-term trading sentiment is even more upbeat - positive medium-term trading is expected for over 90% of the markets tracked, and sentiment is highest for key gateway markets including New York, Washington, DC, Paris, Singapore, Mumbai and Sydney.

Yield requirements have firmed up over the past six months, with capitalisation rates (initial yield) falling 100 bps to 8.7% and leveraged IRRs falling 120 bps to 18.1%. Investors are expecting global cap rates to remain largely neutral over the next six months although firmer yields are anticipated in markets where recovery is gaining pace - Sydney, London, Rome, Paris, Milan, New York, Los Angeles, Boston, San Francisco and Miami - as well as markets where recovery is delayed, such as Bangkok and Dublin.

Market optimism is also reflected in changes in global investment intentions with a notable increase in buy sentiment (+5.6% to 41.2%) and a decrease in hold sentiment
(-6.1% to 35.8%). Buying is now the most favoured short-term investment strategy in both the Americas (50.2%) and Asia Pacific (37.1%). North American markets dominate the top 10 global markets for buying, occupying nine of the top 10 positions - the exception is Paris (60.5%) - making it evident that the majority of global hotel investors expect that the greatest value will be found in the US.

Arthur de Haast is global CEO of Jones Lang LaSalle Hotels
Sue-Lin Heng is vice-president of Global Hotel Capital Group

* Note: trading performance in April 2010 was negatively affected for a number of European cities due largely to the disruptions resulting from the eruption of the Eyjafjallajökull volcano