Comparison of the UK and Italian Hotel Investment Market March 2005 March 2005 0
Historic liquidity of the European Hotel Investment Market The UK is the most liquid market of the European hotel investment markets when comparing investment volumes in different European countries between 1995 and 2004. During this period, the UK investment volume accounted on average of 39% of the total European single asset transaction volume. The proportion of UK investment volume peaked in 1995 with 75% ( 611m), boosted by the sale of the Ritz in London. The second highest proportion was in 1999 with 50% ( 1,003m), when a number of high profile assets changed hands, including the Hilton International Regent s Park and the Westbury Hotel in London. During the same period, hotel investment volume for single asset transactions in Italy represented 6% (on average) of the European total. The proportion of investment volume peaked in those years when trophy assets changed hands: Between 1995 and 1998, the proportion of Italian transaction volume averaged 7%, boosted by the sale of the Sheraton Hotel & Conference Centre Eur in Rome in 1995. In the following year, the sale of the Four Seasons in Milan to an Asian high net worth individual. Two years later, in 1998, the hotel was sold again to Walton Street capital. Italy s share of European hotel transactions was highest in 2002 with 15% ( 259m) following the sale of the Four Seasons to its current Irish owners as well as several other medium size transactions. In 2003, a European record year in itself, Italy s share of the European transaction volume remained high. Italy s proportion of the European investment volume was boosted by the sale of the Principe di Savoia in Milan for a record price of 275m, resulting in a 13% share of the European Investment volume, totalling 403m. With no trophy asset sale in 2004, Italy s hotel investment totalled 133m, representing only 4% of the total European single asset volume transacted in 2004, being much closer to the average market share since 1999. European Hotel Investment (over 10m) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 95 96 97 98 99 00 01 02 03 04 UK Other Europe Italy March 2005 1
Buyer Universe: Investor Origin The buyer universe in the UK is very diverse due to the liquidity of the UK hotel investment market. Although domestic buyers represent nearly 70% of transactions, boosted by UK regional transactions that tend to be of smaller lot sizes and dominated by domestic investors, the proportion of non-european investors is much higher than in Italy. Middle Eastern buyers represent 12% on average between 1998 and 2004, boosted by high profile acquisitions in the late 1990 s, including the sale of the Portman Radisson SAS Hotel in Portman Square (London) in 1999 and the InterContinental Churchill (London) in 1998. UK: Buyer Origin of Single Asset The Italian hotel investment market has been led by domestic buyers, representing 100% in 1999, 2000 and 2004. Domestic buyers dominated those years, in which the lot size of transactions varied between 27m to 33m and was not inflated by high profile transactions. Trophy sales, such as the sale of the Four Seasons in Milan as well the sale of the Principe di Savoia, inflated average deal size in 2002 and 2003 and boosted the proportion of European and US investors. Without these transactions, the proportion of domestic buyers would be over 90%. Italy: Buyer Origin of Single Asset Asia 4% Middle East 12% USA 6% Other 1% USA 8% Europe 9% Domestic 68% Europe 46% Domestic 46% March 2005 2
Buyer Universe: Investor Type In terms of investor types, the UK has been historically dominated by private and public hotel operators. Since 1998, this investor group have represented together 39% of total single asset investment volume. While investment by public hotel operators peaked in 2000 with 63% of investment volume, private hotel operators dominated in 2003, representing 53% of total investment. High net-worth individuals (HNWI) have also played an important role over the past seven years, representing 20% of single asset investment volume. UK: Buyer Type of Single Asset As in the UK, hotel operators have been most active in the Italian market. However, domestic hotel operators in Italy are mostly private. In 1999 and 2000 private hotel investors represented 100% of the Italian singe asset investment volume. HNWIs are the second most active buyer group, representing 23% of single asset investment volume since 1998 and represent 53 in 2004, boosted by the sale of the Hotel Cicerone in Rome. Institutional investors have represented 16% of total investment volume since 1998. Although interest by institutional investors has been dominated by domestic funds, Deka, a German openended fund, was the first international institutional investor that entered the market in 2003 with the purchase of the Golden Tulip Grand Hotel Verdi in Milan as part of a portfolio acquisition, which included mainly offices. UK: Buyer Type of Single Asset Institutional Investor Property 10% Company 11% Private Company 8% Public Hotel 15% Prop erty Co mpany 3% Institutional Investor 16% Public Hotel 3% HNWI 20 % Sp ecialist Ho tel Investor 2% Private Equity 10% Private Hotel 24% HNWI 2 3% Private Equity 8% Private Hotel 47% March 2005 3
Profile of Transactions Vacant possession transactions have been the most common type of deals both in the UK and Italy. Sales subject to management contract and as an investment (sale subject to lease contract) are other preferred types of transactions. In Italy, the proportion of hotels sold subject to management contract was dominated by two trophy asset deals, while the transactions in the UK are more evenly spread between the two. In the UK, sale & leaseback deals have represented 5% of transactions since 1998, peaking in 2003 with 13%. This type of transaction has been less favourable in Italy, representing only 1%. In the current environment, expansion through debt finance is less costly than future funding through sale and leaseback structures, as interest rates remain at historically low levels. UK: Profile of Singe Asset Italy: Profile of Single Asset MC 14% S & L 5% MC 24% S & L 4% Franchise 3% Investment 13% VP 66% Investment 13% VP 56% Outlook We anticipate that the investor universe in the Italian market will grow in the medium term. Although the market has been perceived as opaque, the recent sale of trophy assets, including the sale of four upscale hotels in Sardinia (Costa Smeralda) in 2003, is likely to increase interest by foreign investors. Nevertheless, the expansion of the investor universe will depend on the product that will be put on the market. Hotels in Italy tend to be smaller in terms of size (30 rooms on average), compared to other European countries. March 2005 4
However, international operators have notably increased their presence in Italy over the past decade and those who have not yet entered the market are keen to find suitable assets. Consequently, the internationalisation of hotel operators in the market is also likely to bring increased investors interest and international operating standards. This will be in line with an active European hotel investment market during 2005. This expectation is driven by the large number of portfolios currently in the market, which will have a particularly strong impact on the liquidity in the UK, as well as restructuring plans by a number of hotel companies divesting non core or non strategic assets. Overall, we expect improved liquidity in the Italian hotel investment market, boosted by the sale of high-profile assets. Biographies Roberto Galano Senior Vice President, Milan Roberto has recently moved to Milan to head the Jones Lang LaSalle Hotels office, after having been a member of the corporate advisory team in London since 1996, which offers a wide range of services to international hotel investors and owners. Special areas of expertise include complex financial and project analysis, market feasibility studies, negotiating management agreements, establishment of hotel funds (working jointly with Corporate Finance) and investment sales. Sabine Balzer Associate, London Sabine is responsible for providing market intelligence and research support for the European team, as well as external clients. She produces one of the leading research publications in the European market, the Digest Europe: a report on 23 of Europe s hotel markets. More recently she has been involved in advisory work. March 2005 5
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