Hotel Investment Outlook Pushing Forward

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1 Hotel Investment Outlook 218 Pushing Forward

2 Hotel Investment Outlook Healthy global economy re-energises growth cycle With improving economic indicators in the U.S. and Western Europe, alongside a better than expected response to geopolitical issues, the global hotel transaction market is expected to remain healthy in 218. Global GDP growth, together with strong travel and tourism trends, pave the way for an extended cycle of positive hotel operating performance and investment prospects. In fact, investor sentiment notched a notable increase in late 217 and early 218, which will underpin a more optimistic environment than we have seen in a number of quarters. A range of investors, including private equity, insurance companies, and pension funds, are attracted to the higher yields offered by hotel real estate compared to other fixed-income products in a low-interest rate environment. This is evident by their increased allocation to real estate in general, a trend which will continue in 218. Nevertheless, the global economy faces some macroeconomic and social political headwinds such as inflation, potential further interest rate hikes and ongoing political uncertainty. These will keep a lid on any meaningful growth in transaction volumes. Hotel investment market liquidity in 218 is expected to hold largely steady on 217 levels. Europe is slated to see some growth in transactions activity, while Asia will likely see a softening due to a reduction in singular portfolio transactions seen in 217. Global Hotel Transaction Volumes Volumes (US$Bn) F Var % America % Asia Pacific % EMEA % Global % At a glance An abundance of debt and equity capital is targeting hotel investments. The level of fundraising activities is at its highest seen in any cycle; we expect to see significant growth in 218. Private equity investors are likely to sell properties that are reaching the end of their intended hold period, providing a robust flow of inventory for sale. Hotel owner/ operators with highquality assets are likely to extend their hold period and look for asset management or refinancing opportunities throughout 218. With outbound capital from Mainland China slowing, Asian investors are expected to account for the largest proportion of cross-border acquisitions in 218. Source: JLL

3 Hotel Investment Outlook Regional Insights In North America, we expect factors driving hotel investment to be largely unchanged from those seen throughout 217. Transaction volumes across the Americas are forecast to hold steady at US$28 Bn. Despite the market being in the 9th consecutive year of growth, investor sentiment turned more positive as 217 progressed, underpinned further by government tax reform. Late 217 saw an acceleration in hotel performance growth in many U.S. markets, and the number of rooms entering the supply pipeline has waned for several consecutive months. Bright spots in Asia Pacific include Japan. Here, the hotel industry is booming, with the number of international visitors reaching a new high. The government has doubled its inbound tourism target to reach 4 million by 22, when the Summer Olympic Games take place in Tokyo. Singapore is increasingly on investors lists as well, with improving hotel operating performance and a waning supply pipeline. India is forecast to receive a jump in investment levels and a number of larger portfolios are expected to transact in 218. In Europe, France is expected to see an increase in transactions, with market conditions rebounding from the effects of terrorism. A number of key transactions are expected to close in 218. Investor interest in the UK remains high, although volumes are expected to be slightly down from last year as a number of large portfolios were traded in 217. Germany and Spain continue to attract investors due to sound economic fundamentals and promising hotel markets. Asia Pacific is forecast to see a decline in deal volumes, largely due to non-repeat of R&F Properties acquisition from Dalian Wanda Group in 217. If this transaction is excluded from the 217 activity, Asia Pacific transactions volume in 218 is slated to be within 1% of levels seen last year. Source: Limewood Hotel, UK

4 Hotel Investment Outlook Macroeconomic context improves For the first time in recent memory, the U.S. and Western Europe are concurrently posting solid GDP growth. The IMF has recently raised its forecast for global GDP growth in 218 to 3.7%, supported by strengthening business and consumer confidence. The U.S. is forecast to achieve growth of 2.3% in 218, driven by recent tax reform creating a more favourable operating environment for hotels. Meanwhile, the Eurozone economy saw robust economic growth in 217, despite political challenges including multiple elections and Brexit talks. In 218, the Eurozone is expected to deliver a 2% uplift in GDP. The travel market continues to be buoyant. International travel has proven resilient despite the political and economic uncertainties of 217. According to UNWTO, international tourist arrivals worldwide will reach 1.8 billion by 23, an average growth of 3.3% per year between 21 and 23. $7, 2,5 $6, 2, $5, 1,5 $4, $3, 1, $2, 5 $1, 215 Leisure Spending (US$Bn) International Tourist Arrivals Source: WTTC Business Spending (US$Bn) 227F International Tourist Arrivals (Millions) (US$Bn) Global Travel Forecast

5 Hotel Investment Outlook This optimism directly benefits the hotel industry, with strong RevPAR forecast for the U.S., as well as major European and Asian markets. According to STR, the U.S. is expected to see 2.7% uplift in RevPAR, mainly driven by growth in average rates. In Asia Pacific, key markets such as Beijing, Hong Kong, Singapore, Sydney, and Tokyo will see a RevPAR increase of 3 to 4%. Europe s sought-after markets will include Munich, Berlin, and Budapest, while Dublin, London, Barcelona, Milan, Madrid, Prague, Rome, Vienna, Athens, Moscow, Zurich will also see steady growth. Paris and Brussels, impacted by terrorist acts in 216, are poised for a meaningful return to growth in 218. The positive outlook is shared by global investors. According to findings from JLL s Hotel Investor Sentiment Survey, compiled in January 218, investors expressed a more bullish view on hotel performance than last year, both for the next six months and two-year period. Investors Global Hotel Operating Performance Sentiment Net Balance of Responses Decrease / No Chnage / Increase 8% 6% 4% 2% % -2% -4% -6% Short Term (six months) Medium Term (two years) Source: JLL

6 Hotel Investment Outlook Supply slowdown in most regions In Asia Pacific, outside of Mainland China, rooms under construction as a proportion of existing supply, are slowing slightly. This is due to delivered projects and emerging regions seeing a slowdown in new development. Hotel construction is a good indication of where demand is growing, and this year the hotel pipeline momentum continues to shift. The number of hotels commencing construction in North America is slowing, as much of the current remaining pipeline will deliver in 218. On the other hand, Mainland China, the Middle East, and Africa are seeing an accelerated pipeline. All these regions are experiencing notable economic growth, and the rise of the middle class has led to an increased demand for travel. Nevertheless, demand is expected to absorb the additional supply in the medium term. Rooms Under Construction 217 vs. 216 as % of Existing Rooms, Percentage Point Variance Supply Pipeline Momentum.8%.7%.6%.5%.4%.3%.2%.1%.% -.1% -.2% -.3% Source: JLL Mainland China Middle East & Africa Global Average Europe Latin America North America Rest of Asia Pacific

7 Hotel Investment Outlook Source: Limewood Hotel, UK

8 Hotel Hotel Investment Investment Outlook Outlook Who s buying? The past several years have marked an increase in buying activity from private equity and institutional investors. This reflects a growing trend of hotels being purchased by investors with portfolios involving multiple asset classes, as opposed to specialist hotel investors. In 217, over 7% of hotel transactions worth US$45Bn were purchased by these generalist investors, compared with 62% back in 214. The hotel transaction market has matured, and generalist investors are getting more knowledgeable and experienced with hotels, as an asset class. In addition, hotel real estate offers a more attractive yield compared to other asset classes. Moving forward, we expect the share of generalist investors to grow further. Private equity flexes its muscle Private equity firms will be the driving force behind hotel deals in 218, having raised a substantial amount of capital ready to be deployed to the real estate market. This large inflow of private capital comes from investors like high-net-worth individuals and family offices moving money from hedge funds to private equity, in search of a higher return. In 218, they will continue to grow as a key buyer group, driven by two key factors: A need for income diversification. Increasing familiarity and comfort with hotel real estate. Public REITs will remain a key buyer in the U.S. hotel market, underpinned by a positive performance in share price. Institutional Investor Share of Acquisition 16% 12% 8% 4% Institutional investment s continued rise Over the past few years, institutional investors have been increasingly active in acquiring hotel properties, more than doubling market share since F Note: Excludes transactions over US$1.5Bn Source: JLL

9 Hotel Hotel Investment Investment Outlook Outlook Hotel Acquisition Volume by Investor Type 1% 8% 38% 29% Specialist Generalist 6% 4% 2% 62% 71% Source: Zoku, Amsterdam Source:JLL

10 Hotel Investment Outlook South East Asia steps up to the plate International capital continues to play a key role in the hotel investment landscape. In 217, over 15% of investment activities, worth US$1Bn, were from international investors. But investors from Mainland China have fallen behind the rest of Asia as the largest group of outbound capital, which now accounts for 3% of offshore investments. This trend is likely to continue in 218 with Asian investors, notably from South East Asian countries, dominating the offshore investment landscape. This is all driven by renewed interest in diversification, both in terms of location and product. What s more, Asian REITs targeting hotels are becoming more prolific whilst Singapore has ambitions to be the global headquarters for the REIT industry. Key investment destinations include North America, UK, and Germany, due to these countries solid economic fundamentals and positive hotel trading performance. On the other hand, despite recent Chinese government crackdowns on outbound capital, investors here still have the appetite to invest in mature markets across North America, UK, Western Europe and Australia. However, their investment criteria has changed considerably. While overseas investments under $3M are still permitted, we expect there to be a big decline in the acquisition of high-profile trophy assets and large-scale portfolios. Composition of Cross- Border Capital For Hotel Acquisitions 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% F Asia (Excluding Mainland China) North America Europe Mainland China Middle East Source: JLL

11 Hotel Investment Outlook Middle East investors focus on the U.S. Middle Eastern investors remain active, with a mix of buyer types including sovereign wealth funds, ultra-high-net-worth individuals, and real estate investment trusts. We expect their outbound investments in 218 to remain at 217 levels, due to political issues and low oil prices. The U.S. remains their priority, with key focus on commercial hubs such as New York, San Francisco and Los Angeles. Source: Zoku, Amsterdam Movement of Capital around the Globe in 217 Outflows Asia (excluding Mainland China) North America Mainland China Europe MIddle East South America Australasia Note: Figures are in US$Bn Source: JLL $3. Inflows $.8 $4.4 $2.6 $2.3 $4.5 $1.6 $1.2 $.2 $.8 $.4

12 Hotel Investment Outlook Debt funds gain prevalence 217 saw a large influx of capital coming to the real estate market. The amount of real estate funds raised from private equity rose over 4% since the global financial downturn in 29. However, it was debt funds which registered the highest uplift of over 2%, from US$16Bn to US$49Bn. This trend is expected to continue in 218. The growing popularity of debt funds is largely due to investors need for higher return in a low-interest rate environment. In addition, investing in debt funds provides them with exposure to real estate with reduced risk. Dry Powder - Global Closed-End Private Real Estate Funds, by Primary Strategy US$Bn Value Added Core Plus Core Opportunistic Debt Distressed Source: Preqin Source: Ace Hotel, New Orleans

13 Hotel Investment Outlook Global Closed-End Private Real Estate Fund Distribution 1% 8% 6% Debt Value Added Opportunistic Core Plus Core Distressed 4% 2% Source: Preqin Since the financial downturn, debt funds have emerged as a major lending group in the hospitality financing market, particularly in the U.S. This comes down to a tightening of loan issuances from traditional banks, who are now more risk-averse. Debt funds provide more flexible capital requirement and higher loan-to-value compared to traditional bank lending. In Europe, traditional banks still capture a large share of hotel financing, but we see an expansion in lending by debt funds, with more new lenders entering the market. Brookfield and GreenOak have closed their first European property debt fund, while French fund manager Amundi is slated to launch their first European real estate debt fund in the summer.

14 Hotel Investment Outlook Home sharing brings induced demand The increasing popularity of the shared accommodation sector and regulatory changes in some markets snatched a lot of headlines in 217. While the growth of home sharing and alternative accommodations listings have slowed down across certain markets, there is no doubt that the sharing economy is here to stay. Nevertheless, disruption from home rental sites and shared accommodation remains relatively small, compared to the global hotel market. According to research conducted by JLL, the shared accommodation sector accounted for only 3% of global hotel room nights, and is expected to increase to just 5% by 225. However, the impact is more significant in global gateway markets like New York, San Francisco, London, Paris and Sydney. Here, it is estimated that alternative accommodations accounted for around 1% of total hotel room nights. Cities with high hotel occupancy tend to have a higher number of home sharing listings. This reflects how home sharing sites have helped induce travel demand in hot markets. It allows travellers to make a journey which was not previously possible due to low hotel room availability and high price. This is borne out by cities like New York, Barcelona, San Francisco, and Berlin. Here, governments have enforced restrictions on the shared accommodation sector, but do not necessarily see a concurrent boost to hotel performance. This further suggests that guests don t view hotels as substitutes, and switch back when home sharing providers face tighter regulations, confirming the notion that a significant portion of home sharing stays represents induced demand. Global Estimates: Hotel vs. Alternative Accommodations Room Nights (Millions) 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, F 219F 22F 222F 223F 224F 225F 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% Alternative Accommodations Market Share of Hotel Room Nights Source: JLL Total Alternative Accommodations Room Nights Hotel Occupied Room Nights Alternative Accommodations Room Nights as % of Hotel Room Nights Share of Alternative Room Nights Deemed Competitive with Hotel Stays 222F

15 Hotel Investment Outlook A bright future for mergers and acquisitions Following the large-scale acquisition of Starwood Hotels & Resorts by Marriott International in 216, there were more mergers and acquisitions announcements during 217. AccorHotels were a particularly active buyer, completing multiple acquisition in 217. Notable announcements included the US$93M purchase of Australia s Mantra Group. Moving forward, we expect to see more hotel M&A activities, due to operators drive for supply growth, operational efficiency and profitability through scale. Through consolidation, companies are able to expand their reach to more customers, acquire more advanced platforms and achieve higher revenue. Other than mergers between the big hotel brands, the shared accommodation industry is another sector where consolidation and acquisitions are expected. Examples include Hyatt Hotels Corporation acquiring a share of Oasis, and Airbnb s purchase of Luxury Retreats. Brand / Parent Company M&A Involving Public and / or Large Global Hotel Companies Number of Transactions and Pending Source: JLL

16 Contacts Mark Wynne Smith Global CEO JLL Hotels & Hospitality Philip Ward EMEA CEO JLL Hotels & Hospitality Scott Hetherington Asia CEO JLL Hotels & Hospitality Craig Collins Australasia CEO JLL Hotels & Hospitality Lauro Ferroni Global Research JLL Hotels & Hospitality Jessica Jahns EMEA Research JLL Hotels & Hospitality Geraldine Guichardo Americas Research JLL Hotels & Hospitality Eva Chan EMEA Research JLL Hotels & Hospitality Cover photo by Source: ACE Hotel, New Orleans To learn more about our hotel investment outlook visit our website: COPYRIGHT JONES LANG LASALLE IP, INC 218 This report has been prepared solely for information purposes and does not necessarily purport to be a complete analysis of the topics discussed, which are inherently unpredictable. It has been based on sources we believe to be reliable, but we have not independently verified those sources and we do not guarantee that the information in the report is accurate or complete. Any views expressed in the report reflect our judgment at this date and are subject to change without notice. Statements that are forwardlooking involve known and unknown risks and uncertainties that may cause future realities to be materially different from those implied by such forward-looking statements. Advice we give to clients in particular situations may differ from the views expressed in this report. No investment or other business decisions should be made based solely on the views expressed in this report.