Interest rates for hotel development and acquisition purposes remain at historically low levels, therefore the dividend yield from a hotel investment looks very attractive given the risk.
ATLANTA, GA, – Rising profits, limited supply growth and improved access to capital make 2013 and 2014 an excellent time to invest in the U.S. lodging industry. This is the sentiment expressed by participants in the recently released 2013 edition of PKF Consulting USA, LLC’s (PKFC) Hospitality Investment Survey.
“It has been a while since we have seen such a convergence of positive operating fundamentals and a favorable, yet practical, financing environment,” said Scott Smith, MAI, vice president in the Atlanta office of PKFC. “While opinions may vary among industry professionals regarding the cause for all the optimism, at PKFC we believe that several factors support our positive outlook for hotel real estate.”
- Due to limited supply growth, revenue per available room (RevPAR) is forecast to grow between 6.0 to 7.0 percent in most major U.S. lodging markets.
- Given the strong outlook for revenue growth, net operating income (NOI) is forecast to increase in excess of 10 percent through 2015.
Interest rates for hotel development and acquisition purposes remain at historically low levels, therefore the dividend yield from a hotel investment looks very attractive given the risk.
- As special servicers and banks work-out their troubled lodging assets, fewer distressed properties remain to have their loans modified or sold.
- Few quality hotels are available for sale causing interested parties to bid aggressively.
Conducted in the spring of 2013, the current edition of the Hospitality Investment Survey tracks changes in investment and financing criteria over the prior 12 months.
Investment Criteria
“One metric that continues to improve is capitalization rates. Lower interest rates, higher dividend expectations and investor confidence are driving capitalization rates lower,” Smith added. “With more equity and debt coming into the market, cash buyers with a pocket full of money are finding fewer deals to execute, thus pushing yields lower.” In 2013, the overall capitalization rate (OAR) decreased to 8.38 percent, a 35 basis point decline compared to the 2012 survey results and the lowest OAR recorded since the inception of the Hospitality Investment Survey.
This year’s survey also indicated that discount rates, or un-leveraged IRR’s, for hotels decreased 37 basis points to 11.05 percent. “This further demonstrates that a majority of investor sentiment is positive, and the hotel sector is not viewed as risky as it was just a few years ago. Investors now are willing to accept a lower return just to get in on the action,” Smith noted.
Despite the positive outlook for industry performance, many survey participants are anticipating a shorter holding period. These respondents fear increases in supply and potential upward pressure on interest rates.
Financing Criteria
In general, the sentiment of the survey indicates that financing, though not abundant, is becoming more available and affordable. “Many survey respondents, particularly investors active in the limited-service segment, indicated that new-construction financing is becoming more available in second-tier and tertiary markets,” Smith responded.
Interest rates fell in 2013 to 5.54 percent, a comparative year-over-year drop of 104 basis points. “This is by far the lowest interest rate PKFC has recorded since the mid 1990s. Several lenders stated that good sponsors with solid balance sheets are able to secure rates between 400 and 600 basis points above the one-month LIBOR rate,” Smith noted.
Debt service coverage ratios increased slightly, though they remain near 2007/2008 levels. Loan-to-value ratios (LTV) experienced minimal change compared to 2012. At 64.63 percent, LTVs are below the historical Hospitality Investment Survey long-run average of 66.0 percent.
Summary
While most investment and financing criteria remained relatively unchanged over the past 12 months, two of the most important criteria continue to improve: access to capital and interest rates.
Investors and lenders surveyed continue to be bullish regarding the next few years, and due to the lack of high-quality assets being marketed for sale, PKFC expects the transaction activity of well-branded assets in second-tier and tertiary markets to increase over the next 12 to 18 months.
“As real estate cycles go, the positive RevPAR and NOI expectations for the lodging sector during the near term will allow property values to continue to grow. For industry participants that believe increasing NOI, limited supply growth and improved access to capital is a reason to invest in hotels, then now is their time,” Smith concluded.
Tatiana is the news coordinator for TravelDailyNews Media Network (traveldailynews.gr, traveldailynews.com and traveldailynews.asia). Her role includes monitoring the hundreds of news sources of TravelDailyNews Media Network and skimming the most important according to our strategy.
She holds a Bachelor's degree in Communication & Mass Media from Panteion University of Political & Social Studies of Athens and she has been editor and editor-in-chief in various economic magazines and newspapers.
