1,800 international investors were questioned about their outlook for the future of the hotel investment markets across the globe…
1,800 international investors were questioned about their outlook for the future of the hotel investment markets across the globe. The results have been published recently in Jones Lang LaSalle Hotels` Hotel Investor Sentiment Survey (HISS).
For the Americas region, while some markets are in the early upturn phase, investors continue to rank the majority of markets in a trough of the cycle. As a result of this bottoming a strong buy sentiment exists – the strongest in over two years.
We expect a proliferation of asset sales in 2003, said Arthur Adler, Managing Director and CEO-Americas of Jones Lang LaSalle Hotels. And the HISS results certainly support that belief. Additionally, investors believe that a number of American hotel markets will experience capitalization rates below 10 percent, the first such trend recorded in the HISS survey`s six-edition history. These lower capitalization rates indicate that investors recognize that hotel cash flows have bottomed-out, the results being that buyers will be coming a bit closer to sellers` value expectations.
The majority of investors believe that some hotel markets have broken through the clouds and commenced a performance recovery. Although many still remain in negative territory in the short term, an increasing number of investors are confident in the medium term outlook.
TRADING PERFORMANCE
With regard to trading performance expectations, Washington, D.C. is without a doubt the darling of the Americas hotel market, said Adler, recording a strong positive result in the short term and an almost unanimous positive vote in the medium term. This is the most robust result ever recorded in the HISS to date.
Other key markets recording an improvement in sentiment over the short term include Boston, San Francisco and Miami. The issue, though, with markets such as San Francisco is that sellers will not be willing to part with assets at the prices that investors would like to pay.
In the medium term, there is a boost in investor confidence for a positive occupancy and rate environment during the next two years, noted Melinda McKay, Senior Vice President-Research, for Jones Lang LaSalle Hotels.
Canada is another break-out market enjoying an improvement in sentiment over the short and medium terms stimulated by an economy that will grow faster than the United States in both 2002 and 2003. Vancouver is the only neutral market in the short term reflective of its weaker local economy and heavily supplied hotel markets.
INVESTMENT YIELDS
Yields have continued to compress across all of the major markets. According the Adler, several factors are driving this trend. Shrinking interest rates, investors pricing an upside in the market, hot competition for assets due to a plethora of debt and equity capital and few quality assets being brought to market all attribute to this trend. Yields are also compressing following an unrealistic acceleration post 9/11, he added.
This is the first time there has been a widespread ranking of capitalization rates below 10 percent in the Americas. New York and Toronto warrant special note with their capitalization rate requirements falling by 120 bps and 160 bps respectively over the last 12 months.
IRRs have fallen at an even faster rate recording a compression of 230 bps since the last survey. Again, the Canadian market is a stand-out experiencing the highest compression, which indicates investors` long-term faith in hotel fundamentals and superior economic performance. Also compelling is that two of the markets, Toronto and Vancouver, recorded lower IRR expectations than New York, which has traditionally led the market. IRR expectations have also fallen notably in Hawaii and Los Angeles.
GEARING RATIOS
Gearing ratios continue to be focused in the 51-70 percent bracket. Refinancing has comprised the majority of lending activity, and asset owners who have impending maturities would do well to refinance in the existing advantageous environment.
While lending practices to hotels remain relatively conservative, there is a significant weight of debt capital in the system, noted McKay. Certain lenders are competing aggressively for new business given the limited transaction activity and an almost non existent development market. As a result, borrowers can secure favorable deals.
MARKET CYCLE
The majority of the Americas hotel markets are in the vicinity of a cyclical trough, according to investors. Three leading U.S. markets – Los Angeles, New York and Washington, D.C. – are already positioned in the early upturn phase signaling investor confidence that the worst is over. Not surprisingly, Latin American markets remain in a downturn or trough phase.
Those surveyed expect further downside risk for Atlanta, Boston, Chicago and San Francisco, yet analysis of hotel performance data suggests these cities are already experiencing an upturn, included Adler.
INVESTMENT INTENTIONS
Investors recorded their strongest buy rating for hotels in the Americas in over two years. The 42.9 percent preference to buy is an increase of 650 bps over the last HISS report and represents a significant vote of confidence in the outlook for the hotel sector.
The strongest five buy ratings include:
* New York (62.8%)
* Los Angeles (62.2%)
* Caribbean (60.0%)
* Washington, D.C. (56.1%)
* Boston (55.6%)
Investors feel confident that these markets will show continued growth in performance indicators and are seeking to enter at a cyclical low. Notable sell ratings in the United States include Phoenix and Dallas.
Interestingly, over the last two years a notable proportion of investors have indicated a build sentiment in Orlando, said Adler. While the market is improving, excess supply will plague its ability to post a solid recovery.
Theodore is the Co-Founder and Managing Editor of TravelDailyNews Media Network; his responsibilities include business development and planning for TravelDailyNews long-term opportunities.
