abc Real value in a changing world Hotel Investor Sentiment Survey Issue 21, November 2010 Global sentiment for short term trading records another marked improvement. Trading sentiment remains heavily weighted in favour of the major global gateways, whereas the Americas recorded the most marked turnaround. Global investment yield requirements recorded their third consecutive contraction. Expectations for leveraged IRRs and cap rates are both at their lowest level since June 2008.
Contributors Arthur de Haast Global CEO Arthur Adler CEO, Americas Mark Wynne-Smith CEO, EMEA Scott Hetherington Managing Director, Asia Craig Collins Managing Director, Australasia Karen Wales Senior Vice President Research, Asia Pacific karen.wales@ap.jll.com Katleen van den Brande Vice President Research, EMEA katleen.vandenbrande@eu.jll.com Lauro Ferroni Research Associate, Americas lauro.ferroni@am.jll.com Jones Lang LaSalle Hotels, the first and leading global hotel investment services firm, is uniquely positioned to provide the depth and breadth of advice required by hotel investor and operator clients, through a robust and integrated local network. In 2009, Jones Lang LaSalle Hotels provided sale, purchase and financing advice on over $1.6 billion worth of transactions globally. In addition, advisory and valuation services were provided on nearly 800 assignments. The global team comprises over 200 hotel specialists, operating from 36 offices in 19 countries. The firm s advice is supported by a dedicated global research team, which produced 80 publications in 2009 in addition to client research. Jones Lang LaSalle Hotels services span the hospitality spectrum; from luxury single assets and large portfolios to select service and budget hotels, resorts and pubs. Services include investment sales, mergers and acquisitions, capital raising, valuation and appraisal, asset management, strategic planning, operator selection, management contract negotiation, consulting, industry research and project development services. Jones Lang LaSalle Hotels clients have access to the resources of its parent company, Jones Lang LaSalle (NYSE: JLL). www.joneslanglasallehotels.com.
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 1 Global overview Highlights Global sentiment for short term trading recorded another marked improvement (+10.8 points to 11.7%), whereas confidence in the medium term outlook has softened (-2.7 points to 32.7%). Short and medium term trading sentiment remains heavily weighted in favour of the major global gateways at 41.4% and 58.7% respectively. The Americas recorded the most marked turnaround in short and medium term trading sentiment. Global investment yield requirements recorded their third consecutive contraction. Expectations for leveraged IRRs (17.0%) and cap rates (8.3%) are both at their lowest level since June 2008. Sentiment for short term trading is highest for the major gateways (+41.1%) and Asia Pacific (21.9%). While representing strong growth for the major gateways compared to April 2010 (up 16.6 points), sentiment for Asia Pacific has flattened with many markets having experienced a strong recovery through 2010 and conditions are now expected to stabilise. Short term trading sentiment for the Americas recorded the most significant turnaround compared to April 2010, surging into positive territory with an increase of 26.4 points to 19.4%. Operating fundamentals have turned the corner across the U.S. with RevPAR growth evident in most markets. Sentiment for EMEA continues to lag the global market and at 2.6% has just etched its way into positive territory. Expectations for short term trading are most positive across Western Europe, while remaining negative for Eastern Europe and MENA. Global buy sentiment has reduced (-4.1 points to 37.1%). Buy and hold are now the most favoured investment strategies. The ratio of buyers to sellers has also reduced with an increase in sell sentiment. This could result in more assets being sold at a discount if banks initiate structured sales. The mantle for global growth passes to the Americas Building on the momentum highlighted in our April 2010 survey, sentiment for global short term trading has increased for the third consecutive time, up 10.8 points to 11.7%. Medium term sentiment, on the other hand, recorded a slight contraction, decreasing by 2.7 points to 32.7%. On the whole, it appears that investors believe the bottom of the market has now passed. Sentiment for short term trading is positive for 66 of the 97 (68.0%) markets we track, whereas medium term sentiment is positive for 92 markets (94.8%). Global trading performance expectations 2000 to 2010^ Net Balance 60% 40% 0% - Global trading performance expectations^ Global Major Gateways Americas EMEA Asia Pacific -60% -40% - 0% 40% 60% Net Balance Short Term Medium Term Major gateways include Barcelona, Chicago, Hong Kong, London, Los Angeles, Milan, Mumbai, Munich, Moscow, New York, Paris, Rio de Janeiro, Rome, San Francisco, Shanghai, Sydney, Tokyo, Washington D.C. and Vancouver Medium term sentiment remains weighted heavily in favour of the major gateways at 58.7%. This is followed by the Americas (41.9%), Asia Pacific (41.4%) and EMEA (22.9%). This is the first time since October 2005 that sentiment for medium term trading for the Americas has been the highest of all three regions and highlights the current level of optimism for future growth in most U.S. markets. Both Asia Pacific (-4.2 points) and EMEA (-3.1 points) recorded a slight softening in medium term sentiment in our most recent survey, whereas sentiment for the Americas increased (+3.1 points). -40% -60% Sep-00 Jun-01 Jun-02 Jun-08 Oct-08 Apr-09 Apr-10 Oct-10 Short Term Medium Term
2 Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 Further yield compression but some bumps in the road ahead Global investment yield requirements recorded their third consecutive contraction. Expectations for leveraged IRRs average 17.0% and 8.3% for cap rates (initial yields). Both are at their lowest level since June 2008. The change in requirements for leveraged IRRs was most pronounced, recording a 110 basis point reduction compared to April 2010, whereas initial yield (cap rates) expectations declined by a more marginal 40 basis points. Higher yields are required where there is a perceived risk of maintaining income levels. As trading sentiment has improved, yields have compressed. Investment yield requirements Leveraged IRR Cap Rate (Initial Short Term Cap for New Yield) for New Rate Trend Acquisition (%) Acquisition % Americas 18.8% 8.1% Neutral EMEA 15.1% 7.7% Higher Asia Pacific 17.2% 9.3% Lower Global 17.0% 8.3% Neutral Note: Regional averages are weighted by the number of responses Source: Jones Lang LaSalle Hotels Hotel Investor Sentiment Survey The rate of decline in cap rate expectations reflects a much sharper downward trend than has been evident over the past ten years, similarly for leveraged IRRs. While in part reflecting the severity of the global recession, investment yield requirements appear to be fast-approaching the market peak. Cap rate requirements for the Americas are now 40 basis points higher than the market peak. This compares to 70 basis points in EMEA and 120 basis points in Asia Pacific. Leveraged IRR expectations are equally keen. Expectations for the Americas are now only 150 basis points higher, whereas the gap in Asia Pacific and EMEA is even narrower at 120 basis points and 110 basis points respectively. On the whole, investors expect cap rates to remain neutral over the next six months. Sentiment is skewed in favour of further compression in Asia Pacific, a neutral stance in the Americas, but softening in EMEA. Concern persists as banks increasingly start to initiate structured sales, stock on the market will increase and this may result in some assets being sold at a discount, impacting pricing overall. The primary concern is for poor quality assets or those in secondary locations. Expectations for initial yields are lowest for EMEA at 7.7%, followed by the Americas at 8.1% and Asia Pacific at 9.3%. Buyers are placing greater emphasis on price per key and IRRs to determine the intrinsic asset value. Assets are being bought on the basis of forward incomes, but determining at what point income might stabilise remains difficult. Global cap rate (initial yield) trend over next six months^ Global Asia Pacific Global investment yield expectations 2000 to 2010^ EMEA 25% 15% Americas - -5% 0% 5% Net Balance (Positive/Higher and Negative/Lower) 5% Jun-01 Jun-02 Jun-08 Oct-08 Apr-09 Apr-10 Oct-10 Leveraged IRR % Cap Rate (Initial Yield) % Buyer to seller ratio has reduced The better than anticipated trading recovery has not translated into an increase in global buy sentiment with the proportion of investors intending to buy decreasing in our most recent survey by 4.1 points to 37.1%. Buy and hold are now the most favoured investment strategies at 37.1% and 37.0% respectively.
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 3 The decrease in buy sentiment (-4.1 points to 37.1%) was offset by an increase in all other intentions - hold (+1.2 points to 37.0%), sell (+0.9 points to 13.0%) and build sentiment (+2.1 points to 12.9%). This highlights that lower capital reserves are likely to be spread more thinly over an expanding market. Global short term investment intentions 2000 to 2010^ 60% 50% 40% 30% 0% Sep-00 Jun-01 Jun-02 Jun-08 Oct-08 Apr-09 Apr-10 Oct-10 Buy Build Hold Sell Reflecting this, the ratio of buyers to sellers contracted in our most recent survey to average 2.8:1. This is the lowest level since October 2008, while appearing contrary to recent transaction trends. The ratio is highest in the Americas at 5.5:1 and lowest for EMEA at 1.9:1 as buyers look to capitalise on displaced markets. The U.S. and Canada dominate all of the top ten markets for buying. Top ten global markets - short term investment intentions Buy Build Hold Sell 1 Vancouver Sao Paulo Dubai Guangzhou 2 Boston Rio de Janeiro Budapest Spanish Resorts 3 New York Lima Fiji Bangalore 4 Miami Bogota Warsaw Dublin 5 Denver Cairo Brisbane Toronto 6 Washington D.C. Mexico City Dallas Birmingham 7 San Francisco Marrakech Stockholm Manila 8 Los Angeles Cancun/ Abu Dhabi Hangzhou Riviera Maya 9 San Diego Mumbai Birmingham Chendgu 10 Toronto Bali Copenhagen Fiji Source: Jones Lang LaSalle Hotels Hotel Investor Sentiment Survey Globally, potential acquirers of hotel real estate over the next six months identified in our most recent survey include private equity / real estate funds (32.3%), owner operators (27.0%), private investors (20.4%) and institutions (9.4%). While on the whole this represents little change compared to six months, the proportion of private equity / real estate funds targeting hotel real estate has increased (previously 26.5%) whereas interest from institutions has waned (previously 14.6%). Global investor profile - short term investment intentions^ 50% 40% 30% 0% Buy Build Hold Sell Developer Institution Listed REIT Owner operator Private Private equity / RE Fund Other The increase in sell sentiment means that the proportion of investors looking to divest is now above the long term average and at the highest level since October 2007, prior to the global downturn. Sell sentiment edged upwards in Asia Pacific and the Americas, while remaining neutral in EMEA indicating that a more pronounced rise in product on the market is likely. Distressed sales have been limited thus far, but are expected to increase during 2011 as more investors are forced to act.
4 Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 Global short term investment intentions^ Global preferred asset type^ Global Global Americas Americas EMEA EMEA Asia Pacific 0% 40% 60% 80% 100% Buy Build Hold Sell Asia Pacific 0% 40% 60% 80% 100% All Grades Luxury Upscale Midscale Budget Serviced Apts Our latest survey highlights an increased appetite for all grades of accommodation in the short-term with sentiment having increased 5.3 points to 21.0% compared to April 2010. Sentiment for luxury hotels and serviced apartments also increased, but at a more moderate rate. Upscale assets continue to be rated most highly in the Americas and EMEA, whereas investors in Asia Pacific have a renewed penchant for luxury hotels.
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 5 Americas overview Highlights from the survey After protracted dislocation and losses, the hotel real estate sector is regaining vigour across the Americas. Investors signalled a considerably more assured outlook in this survey and responses indicate that hotel transaction activity is bound to increase further in 2011. Investors short term performance outlook for the Americas is positive for the first time in more than two and a half years. Respondents medium term sentiment rose to the highest level since 2005, with investors most upbeat on international gateway cities. Investors leveraged IRR requirements decreased by over 200 basis points from the last survey as risk perception continues to moderate. Expected cap rates (initial yields) softened by 115 basis points. The largest change in respondents investment intentions was marked by the decline in hold intentions, now at a three year low. Concurrently, investors buy sentiment increased to its highest level since 2005 evidencing respondents strong interest in pursuing acquisitions at the bottom of the cycle. Hotel investor sentiment picks up Building on the sentiment from the previous survey, the outlook for hotel investors across the Americas has gained further positive momentum. Survey respondents indicated improved sentiment both for the short term (six months) and medium term (two years). Operating fundamentals have turned the corner and revenue per available room (RevPAR) has recorded positive year-on-year growth in most markets. Across the Americas, the net balance of investors short term hotel performance expectations marked another sharp increase, reaching 19.3%, its highest level over the past two and a half years. Medium term performance sentiment increased for the fourth survey in a row, increasing to 41.9%, on par with investors medium-term outlook recorded in late 2005, underlining that investor sentiment is rising across the board. Investor sentiment is highest for major gateway markets. New York, Washington, D.C., Boston and San Francisco exhibit the most positive short term sentiment in the U.S. at 86.2%, 72.4%, 68.4% and 60.3%, respectively. Hawaii showed the greatest improvement in investors short term performance outlook compared to the previous survey. For the medium term, investors outlook is most positive for New York, Boston, Washington, D.C., Los Angeles, San Francisco and Hawaii. Markets posting the most significant lift in medium term performance expectations include Denver, Philadelphia and Phoenix. Of the markets surveyed in Canada, Montreal, Toronto and Vancouver all marked an improvement in both short term and medium term sentiment. Investors expect the recovery to be strongest in Toronto due to its international gateway status. Americas trading performance expectations 2000 to 2010^ Net Balance 80% 60% 40% 0% - -40% -60% Sep-00 Jun-01 Jun-02 Jun-08 Apr-09 Apr-10 Oct-10 Short Term Medium Term Having increased significantly in the previous survey, positive investor sentiment for the markets tracked in Mexico hit a roadblock and softened again. Overall, however, long term fundamentals are reasonably strong and the hotel market is evolving toward increased domestic consumption, though key issues such as concerns over security remain. Investors expressed negative short and medium term performance sentiment for the Caribbean as demand remains below peak levels and owners continue to face rate pressure. Nevertheless, over the longer term, the Caribbean market will enjoy a surge in pent-up demand for leisure and group incentives travel. Investors have a positive short term outlook for South America, reporting the highest sentiment for São Paulo and Rio de Janeiro, at 18.8% and 12.5%, respectively. Brazil is undergoing an exceptionally strong economic recovery, driven by booming domestic demand which is leading to significant hotel investment opportunities. The country is also preparing to host the 2014 FIFA Soccer World Cup and the 2016 Summer Olympic Games, further boosting investor appeal.
6 Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 Investors still have a relatively cautious outlook for Buenos Aires, with short term sentiment at -5.9%, but respondents medium term outlook is relatively positive due to rebounding local economic fundamentals. For Lima and Bogotá, included for the first time in this survey, investors net balance of medium term performance expectations is 6.7% and -7.1%, respectively. Americas trading performance expectations Atlanta Boston Chicago Dallas Denver Hawaii Houston Los Angeles Miami New York Orlando Pacific Northwest Philadelphia Phoenix San Diego San Francisco Tampa Washington D.C. Montreal Toronto Vancouver Bogota Buenos Aires Caribbean Lima Rio de Janeiro Sao Paulo Santiago Cancun/Riviera Maya Los Cabos Mexico City -100% -80% -60% -40% - 0% 40% 60% 80% -100% Net Balance Short Term Medium Term Yield requirements contract Due to an improving economic outlook and strengthening investor confidence, respondents leveraged IRR requirements tightened by over 210 basis points in the Americas region, narrowing to 18.8%. This represents the second consecutive contraction since the bottom of the market, marking the slowly decreasing risk perception in the sector. Liquidity both for acquisitions and re-financings is slowly increasing and exceptionally low interest rates have created an attractive lending environment, as lenders are setting interest rate floors resulting in highly profitable spreads relative to base interest rates. Americas investment yield expectations 2000 to 2010^ 30% 25% 15% 5% Jun-01 Jun-02 Jun-08 Oct-08 Apr-09 Apr-10 Oct-10 U.S./Canada Leveraged IRR U.S./Canada Cap Rate (Initial Yield) Mexico/Caribbean/South America Leveraged IRR Mexico/Caribbean/South America Cap Rate (Initial Yield) Expected going-in cap rates (initial yields) compressed by 115 basis points to 8.1% in the Americas. This represents the third consecutive survey where respondents target cap rates contracted. A significant number of recent hotel transactions across major markets in the U.S. traded well below the target cap rates reported in this survey. Due to depressed cash flows, going-in cap rates are often immaterial and hotel buyers are placing greater emphasis on price per key, longer term IRRs and stabilised year yields based on cash flow projections to determine the intrinsic asset value. Across markets surveyed in the U.S. and Canada, the lowest leveraged IRR requirements were reported for New York (16.3%) and Washington, D.C. (16.7%), representing an average decrease of 350 basis points from one year ago. Among U.S. cities with the highest IRR expectations are Phoenix, Orlando, Dallas and Atlanta. Leveraged IRR expectations averaged 18.9% for the three cities surveyed in Canada, with Vancouver lowest at 18.4%. Investors target cap rates marked a decrease in every market surveyed across the U.S. and Canada, with a 100 basis point decline reported on average. Respondents indicated the lowest cap rate expectations for New York (6.5%), Washington, D.C. (7.3%) and Boston (7.4%), data points that are in line with actual market transactions recorded in these markets over the past eight months. Current cap rates reported in the survey are 230 basis points below the levels recorded at the trough of the market in the first half of 2009.
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 7 Americas cap rate (initial yield) trend over next six months^ Americas average^ Atlanta Boston Chicago Dallas Denver Hawaii Houston Los Angeles Miami New York Orlando Pacific Northwest Philadelphia Phoenix San Diego San Francisco Tampa Washington D.C. Montreal Toronto Vancouver Bogota Buenos Aires Caribbean Lima Rio de Janeiro Sao Paulo Santiago Cancun/Riviera Maya Los Cabos Mexico City -40% - 0% 40% Net Balance (Positive/Higher and Negative/Lower) Yield requirements are considerably higher in Mexico and South America than in the U.S. and Canada. But in the longer term, especially for Brazil, there will be a greater move toward convergence. In general, yields are tightening in Brazil, while they remain wider in Mexico due to greater economic and political uncertainty. For the three markets surveyed in Mexico, investors leveraged IRR requirements are on average 4.3 percentage points higher than in the U.S. According to the survey, expected leveraged IRRs average 24.5% for Mexico City, 22.2% for Cancun/Riviera Maya and 21.3% for Los Cabos. Leveraged IRR requirements have tightened at a faster pace in Brazil as the country s commercial real estate market becomes more developed and transparent. According to the most recent survey, IRRs average 23.0% for Rio de Janeiro and 22.0% for São Paulo. The recent sale of the JW Marriott Rio de Janeiro, arranged by Jones Lang LaSalle Hotels, represents a threshold transaction for the country and will be instrumental in defining parameters for future trades. Americas average cap rate (initial yield) for new acquisition Cap Rate (Initial Yield) % 13% 11% 9% 7% 5% Mexico/Caribbean/South America average U.S./Canada average New York Washington D.C. Boston San Francisco Hawaii Los Angeles Vancouver Pacific Northwest Chicago San Diego Montreal Miami Denver Toronto Philadelphia Tampa Houston Orlando Dallas Atlanta Phoenix Sao Paulo Rio de Janeiro Cancun/Riviera Maya Santiago Buenos Aires Los Cabos Lima Caribbean Bogota Mexico City Americas average leveraged IRR for new acquisition Leveraged IRR % 30% 25% 15% Mexico/Caribbean/South America average U.S./Canada average New York Washington D.C. Boston San Francisco Pacific Northwest Los Angeles San Diego Hawaii Vancouver Chicago Philadelphia Denver Tampa Houston Toronto Montreal Miami Atlanta Dallas Orlando Phoenix Los Cabos Sao Paulo Cancun/Riviera Maya Rio de Janerio Mexico City Santiago Lima Bogota Buenos Aires Caribbean The stage is set for robust transaction activity The largest change in respondents investment intentions was marked by the decrease in investors hold sentiment to 32.5%, now at a three-year low. Concurrently, investors buy sentiment increased to its highest level since 2005, and sell sentiment declined to 9.6%. Combined, these shifts are consistent with the dramatic increase in transaction activity seen in 2010 and set the stage for a further boost to transaction velocity across the Americas in 2011. Momentum for acquisitions has already built over the past six months and continues to rise further. The proportion of respondents signalling buy as their dominant intention increased to 52.3%, representing a five year high. Now that operating fundamentals have clearly turned the corner, buyers are becoming increasingly aggressive as they seek to establish a foothold at historically low purchase prices. Debt markets are still restricted, but improving and the abundance of equity capital in the marketplace will continue to drive transactions.
8 Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 In absolute terms, investors buy intentions are highest for international gateway markets such as Vancouver (77.8%), Boston (71.9%), New York (71.7%), Miami (69.0%) and Washington, D.C. (61.1%) as they have generally experienced the most robust rebound in visitation levels. Respondents also indicated significantly increased intent to acquire assets in Tampa, Denver, Philadelphia, Orlando and Phoenix. Outside of the U.S. and Canada, investors buy sentiment is highest in Los Cabos (42.9%), Cancun/Riviera Maya (33.3%) and the Caribbean (25.0%), where investors are evaluating opportunities to acquire resorts at a discount to replacement cost. In South America, the buy sentiment is outweighed by development interest because most major markets still have a relatively limited number of internationally branded hotels. Across the Americas, the proportion of respondents who indicated sell as their dominant investment strategy inched up to 9.6%, a two year high. Survey responses signify that sellers such as special servicers, banks and receivers are becoming increasingly motivated, though at a slower pace than that with which buyers have perked up. Sellers bringing quality assets to market will receive a significant amount of attention since the high quantity of equity in the market has led to pent-up buyer demand. The number of sellers will gradually increase as investors review the divesture of non-core assets to create liquidity. Investors hold sentiment has declined to a three year low across the Americas. With the buy sentiment picking up steam, investors now exhibit an overlying hold strategy for just one out of three markets. Cities where the hold sentiment marked the greatest decline include Toronto, Chicago, Boston, Miami, Denver and Los Angeles. Markets where the hold sentiment still dominates include the Caribbean, Santiago, Buenos Aires, Montreal and Houston. Respondents inclination to build hotel assets (5.6% of investors) remained virtually flat in the U.S. and Canada and remains at one of the lowest levels since the survey s inception. Outside of mature lodging markets, however, the build sentiment is considerably higher. The build sentiment is the dominant investment intention for Lima, Bogotá, São Paulo and Rio de Janeiro, where branded hotel product is underserved in a number of sectors. Additionally, since there are very limited opportunities to acquire existing assets in these cities, investors must enter the market by investing in development projects. Americas short term investment intentions Atlanta Boston Chicago Dallas Denver Hawaii Houston Los Angeles Miami New York Orlando Pacific Northwest Philadelphia Phoenix San Diego San Francisco Tampa Washington D.C. Montreal Toronto Vancouver Bogota Buenos Aires Caribbean Lima Rio de Janeiro Sao Paulo Santiago Cancun/Riviera Maya Los Cabos Mexico City 0% 40% 60% 80% 100% Buy Build Hold Sell Americas short term investment intentions 2000 to 2010^ 80% 60% 40% 0% Seo-00 Jun-01 Jun-02 Jun-08 Oct-08 Apr-09 Apr-10 Oct-10 Buy Build Hold Sell
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 9 Americas preferred asset type Atlanta Boston Chicago Dallas Denver Hawaii Houston Los Angeles Miami New York Orlando Pacific Northwest Philadelphia Phoenix San Diego San Francisco Tampa Washington D.C. Montreal Toronto Vancouver Bogota Buenos Aires Caribbean Lima Rio de Janeiro Sao Paulo Santiago Cancun/Riviera Maya Los Cabos Mexico City 0% 40% 60% 80% 100% All Grades Luxury Upscale Midscale Budget Serviced Apts Across the Americas, 42.9% of survey respondents indicated they are targeting upscale properties for investment. Upscale assets are most sought after in U.S. markets where investors flush with cash vie for opportunities to purchase high-quality assets in prime urban locations to benefit from attractive acquisition prices relative to replacement cost. Over 25% of respondents indicated they are primarily targeting luxury assets for investment, seeking to acquire luxury assets in high barriers to entry markets at pricing well below historical norms. In the U.S., demand for luxury assets is highest in New York, Boston and Hawaii. Due to the limited stock of luxury assets available for sale, bidding will be competitive which will likely escalate pricing for prime assets. The acquisition of mid-scale assets remains on the radar of investors in primary markets across the U.S. and Canada in particular, with 10.5% of respondents targeting this asset class. The number of select service hotel portfolios on the market is increasing rapidly as institutional owners and special servicers work to clear distress off their books which is leading to positive momentum in the select service hotel transactions market.
10 Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 EMEA overview Highlights from the survey Confidence in the EMEA hotel operating market continued to increase in our recent survey as short term expectations moved above zero for the first time since June 2008. Short term expectations were positive for 21 cities compared and proved to be most positive for cities in Western Europe. In the medium term, investors reported a slight decline in performance expectations. Nevertheless, trading performance expectations remained at a healthy level above, indicating that investors see good prospects for growth over the next two years. Investors positive attitude was also portrayed in terms of initial yield requirements which strengthened to 7.7% in our recent survey. Investor yield requirements have experienced a steady decline since October 2009. Yield requirements were lowest in Western Europe with cities such as London and Paris proving most appealing to investors. IRR requirements, on the other hand, were raised by 50 basis points to 15.1%. Part of this increase was, however, driven by the addition of two cities in the Middle East with IRR requirements above. Initial yield requirements are not expected to continue the trend upward over the next six months as more stock is likely to appear in the market which might adversely impact pricing. Investors continued to favour hold intentions, while intentions to buy assets weakened in the most recent survey. The buy sentiment was mainly strong in Western European countries, in particular in Germany where buy intentions proved dominant. Build intentions intensified in the last six months and reached an average weighting of 16%, the highest since June 2008. Based on our current survey, the buyer to seller ratio fell to 1.9 buyers to one seller from 2.2 to one in April 2010. On the path for growth again According to our most recent survey, investor confidence in trading fundamentals continued to strengthen in the last six months. A notable improvement was reported for short term performance expectations, which turned positive for the first time since June 2008. Short term expectations were positive for 21 cities compared to only nine cities in the previous survey, indicating that according to investors the bottom of the cycle has passed. The optimistic short term view has likely been driven by positive results already achieved in terms of occupancy across the majority of EMEA markets. Although average room rates in some cities have remained under pressure so far in 2010 leading to a further decline in room yield, investors expect trading fundamentals across EMEA to stabilise or even show slight growth in the next six months. Overall trading performance expectations were strongest for key gateway cities such as London and Paris as well as Munich and Hamburg. In the medium term, notable growth is also anticipated for Amsterdam and Istanbul. Short term performance expectations were most positive across Western Europe, while those for Eastern Europe and MENA remained negative at -10.1% and -3.9% respectively. In particular cities in Scandinavia and Germany are expected to show a substantial improvement in the short term. Cities such as Munich and Frankfurt showed growth of more than in room yield at year to date September. Performance expectations in the medium term narrowed slightly compared to the survey in April 2010, but remained at a healthy level above, indicating that confidence in future trading remains. Only a handful of cities are anticipated to continue to weaken in the coming two years. These mainly include the Spanish resorts and Dublin; two markets which have been impacted to a greater extent by the economic crisis due to strong growth in supply in recent years and the reduction in demand. Although occupancy levels in these markets began to improve during 2010, both markets are set to remain very competitive, which will keep average room rates at low levels. EMEA trading performance expectations 2000 to 2010^ Net Balance 80% 60% 40% 0% - -40% -60% -80% Sep-00 Jun-01 Jun-02 Jun-08 Apr-09 Apr-10 Oct-10 Short Term Medium Term
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 11 Some caution remained apparent with regard to cities in MENA, although the majority of concern is concentrated on Dubai and Abu Dhabi. Development activity skyrocketed in both cities in recent years, driving a double negative impact on trading performance during the downturn. While tourism levels in these locations have started to return, the recent hikes in supply will need to be absorbed before any growth can be achieved in the market. Investors did report confidence in the longer term prospects of both cities, in particular for Abu Dhabi where trading performance expectations for the medium term moved above. Medium term performance expectations in MENA were strongest for Cairo and Jeddah. Some notable differences were apparent amongst cities in Eastern Europe. While a positive view was provided for Istanbul, Warsaw and Moscow, investors remained more uncertain about capitals such as Budapest and Prague. The latter two established themselves as desirable city break locations in recent years, but they were severely hit by the economic downturn due to their dependence on foreign visitation and investments. Cities such as Istanbul, Warsaw and Moscow only started to develop as an international tourist destination when the downturn hit and hence did not yet endure a boom in hotel development. EMEA trading performance expectations Abu Dhabi Amsterdam Barcelona Berlin Birmingham Brussels Budapest Cairo Casablanca Copenhagen Doha Dubai Dublin Dusseldorf Edinburgh Frankfurt French Riviera Hanburg Istanbul Jeddah Lisbon London Madrid Manchester Marrakech Milan Moscow Munich Paris Prague Riyadh Rome Spanish Resorts Stockholm Vienna Warsaw Zagreb -100% -80% -60% -40% - 0% 40% 60% 80% 100% Net Balance Short Term Medium Term Market evidence supported by further reduction in yield requirements The recovery from the economic recession and rising business confidence have supported the return of hotel investment activity in EMEA. As banks increasingly acted on hotel assets or portfolios under their control, investment activity picked up substantially during the first three quarters of 2010. In line with the upturn in the investment market, average yield requirements strengthened in the latest survey. Yield requirements hardened to 7.7%% from 8.0% in April 2010. EMEA investment yield expectations 2000 to 2010^ 25% 15% 5% Jun-01 Jun-02 Jun-08 Oct-08 Apr-09 Apr-10 Oct-10 Cap Rate (Initial Yield) % Leveraged IRR % EMEA Source: Jones Investment Lang LaSalle Hotels' Yield Hotel expectations Investor Sentiment Survey 2000 to 2010 IRR requirements increased by 50 basis points to 15.1%. Part of this increase was, however, driven by the addition of two cities in the Middle East with IRR requirements above. When taking out the new additions, IRR requirements moved up by 20 basis points to 14.8%. IRR requirements ranged from 11.9% in Paris to 22.3% in Riyadh and were mainly low in Western Europe with cities such as Paris, Amsterdam and Vienna taking the lead. Highest IRR requirements were reported for cities in the Middle East Yield requirements were also lowest in Western Europe with London and Paris proving most appealing to investors. London, however, was the only city in the UK with yield requirements below 7.0%. The provincial UK hotel market is largely dependent on domestic travel and hence has suffered substantially during the country s economic recession and cut in spending. This is not likely to improve in the short term as the country works on controlling its debt levels and implements the recent announcement of further cuts in government spending. Nevertheless, yield requirements for UK provincial cities did remain below or equal to the EMEA average and ranged from 7.1% to 7.7%.
12 Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 Similar to results from April 2010, the German cities attracted strong investor interest, as yield requirements averaged 6.8%, well below the regional average. Yield requirements fell by an average 40 basis points across all German cities tracked, with Frankfurt showing the largest decline of 70 basis points. Germany was able to come out of the economic recession strongly with little distress apparent across the country. Hotel assets in Germany have historically offered a secure income stream to investors as most are operated under lease contracts. Investor confidence in Eastern European cities strengthened substantially in our current survey and reached and average of 8.2% or 100 basis points down on the survey in April 2010. Yield requirements narrowed most for Budapest and Zagreb, however, remained lowest for Prague. Highest yield requirements were reported for Moscow and Istanbul. Both cities are positioned at the start of the market cycle, though continue to show great potential as a tourist destination. Investors reported increasingly cautious results for cities in MENA, with yield requirements reaching an average of 12.8%. Despite supply related difficulties, Dubai registered lowest yield requirements across all MENA cities at 8.5%. Investors do not expect the hardening of yield requirements to continue in the coming six months. This is most likely driven by the potential of a greater number of assets being placed on the market as banks increasingly act on their asset portfolios. This, in turn, could negatively impact investor pricing, in particular for assets outside of core city locations. EMEA average IRR leveraged for new acquisition^ Leveraged IRR% 25% 15% 5% 0% EMEA Average^ Paris Amsterdam Vienna Brussels Barcelona London Rome Munich Milan French Riviera Prague Berlin Frankfurt Hamburg Dusseldorf Dublin Stockholm Warsaw Madrid Copenhagen Lisbon Edinburgh Zagreb Budapest Birmingham Moscow Manchester Spanish Resorts Istanbul Dubai Abu Dhabi Marrakech Casablanca Cairo Doha Riyadh Jeddah EMEA average cap rate (intial yield) for new acquisition^ Cap Rate (Initial Yield) % 14% 12% 8% 6% 4% 2% 0% EMEA Average^ London Paris Munich Vienna Hamburg Frankfurt Berlin Copenhagen Barcelona Amsterdam Milan Dusseldorf Edinburgh Rome Warsaw Manchester Stockholm Madrid Prague Birmingham Brussels Budapest Istanbul Zagreb Dubai Lisbon Casablanca French Riviera Dublin Moscow Marrakech Jeddah Abu Dhabi Riyadh Spanish Resorts Doha Cairo EMEA cap rate (initial yield) trend over next six months^ EMEA Average^ Abu Dhabi Amsterdam Barcelona Berlin Birmingham Brussels Budapest Cairo Casablanca Copenhagen Doha Dubai Dublin Dusseldorf Edinburgh Frankfurt French Riveria Hamburg Istanbul Jeddah Lisbon London Madrid Manchester Marrekech Milan Moscow Munich Paris Prague Riyadh Rome Spanish Resorts Stockholm Vienna Warsaw Zagreb -40% -30% - - 0% 30% 40% Net Balance (Positive/Higher and Negative/Lower)
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 13 Hold strategy proves attractive in recovering market Although investors increasingly show confidence in hotel trading and investment, investor intentions remained dominated by hold sentiments. Hold intentions even strengthened in the last six months and reached a weighting of 40%. Buy intentions remained in second place, albeit experienced somewhat of a decline in importance reaching 28% from 34% compared to the survey in April 2010. Sell and build sentiments continued to take the third and fourth place respectively, although the latter did grow in importance across the region. EMEA short term investment intentions 2000 to 2010^ 60% 40% 0% Sep-00 Jun-01 Jun-02 June-08 Oct-08 Apr-09 Apr-10 Oct-10 Buy Build Hold Sell The hold sentiment was prevalent in all areas within EMEA, although was most prominent in Scandinavia, MENA and Eastern Europe. In particular MENA and Eastern Europe have been plagued by strong growth in supply and continue to be perceived as risky destinations with many investors focusing investment activities on Western Europe. Consequently, many current owners in these markets will prefer to hold their asset until better times return and Eastern European cities are again perceived to offer better investment opportunities. Interest in Scandinavian cities, mainly the capitals, has remained strong in recent years. The area has, however, suffered from a weakening events sector, which has often been the backbone of growth. The latter seems rather counterintuitive as results at year to date September 2010 show the UK again as the clear leader in terms of hotel investment volume within EMEA. The UK market has been increasingly characterised by distressed sales, appealing to investors looking to buy at a discount. Other stock on the market has largely constituted trophy assets which continue to be high in demand. The competitiveness for this type of asset might have deterred investors from looking at other countries in Western Europe in search for appealing opportunities. Moreover, many assets in the UK are held under a management contract, which continues to be perceived as more risky in the current, although improving, market environment. The buy sentiment was strongest in other Western European countries, in particular in Germany where buy intentions proved dominant. Buy intentions across German cities strengthened by 580 basis points with Munich and Hamburg taking the lead. Investors also reported a strong intent to purchase hotel assets in Paris, London and Madrid. Build intentions intensified in the last six months and reached an average weighting of 16%, the highest since June 2008. Although these results are not likely to signify a burst of new hotel developments onto the market in the short to medium term, investors seem increasingly willing to consider hotel development projects in specific locations. Development intentions were largely concentrated in MENA with Cairo, Jeddah and Marrakech taking the lead. These cities continue to suffer from a lack of quality branded hotel supply and could offer outstanding investment opportunities to investors as they establish themselves as popular international tourist destinations. The sell sentiment remained stable compared to the survey in April 2010. Despite having suffered from substantial declines in trading performance and strong supply growth, sell intentions were most prominent in MENA, in particular in Abu Dhabi and Casablanca. Investors also reported high sell intentions for Dublin, the Spanish Resorts and Birmingham. Owners in these markets might be keen to sell their assets with the intention to invest their funds in more attractive investment opportunities. While consistently reporting dominant buy intentions during the boom years of 2006 to 2008, buy sentiments have been pushed to second place since the start of 2009. Although the gap with hold intentions seemingly began to narrow in the survey in April 2010, this did not persist in our current survey. The weighting of buy intentions fell by 540 basis points, largely due to investors reportedly being less willing to invest in Eastern Europe and the UK.
14 Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 EMEA short term investment intentions EMEA preferred asset type Abu Dhabi Amsterdam Barcelona Berlin Birmingham Brussels Budapest Cairo Casablanca Copenhagen Doha Dubai Dublin Dusseldorf Edinburgh Frankfurt French Riviera Hanburg Istanbul Jeddah Lisbon London Madrid Manchester Marrakech Milan Moscow Munich Paris Prague Riyadh Rome Spanish Resorts Stockholm Vienna Warsaw Zagreb 0% 40% 60% 80% 100% Buy Build Hold Sell Abu Dhabi Amsterdam Barcelona Berlin Birmingham Brussels Budapest Cairo Casablanca Copenhagen Doha Dubai Dublin Dusseldorf Edinburgh Frankfurt French Riviera Hanburg Istanbul Jeddah Lisbon London Madrid Manchester Marrakech Milan Moscow Munich Paris Prague Riyadh Rome Spanish Resorts Stockholm Vienna Warsaw Zagreb 0% 40% 60% 80% 100% All Grades Luxury Upscale Midscale Budget Serviced Apts Investors continued to show the strongest interest for upscale hotels, while the attractiveness of midscale and budget hotels weakened compared to the survey in April 2010. Budget hotels proved to be most appealing in the UK and Germany. Only cities in MENA held a strong interest for luxury assets, which is likely to be driven by the current high number of recently constructed luxury assets in cities such as Dubai and Abu Dhabi. Core assets in core locations have attracted interest from cross border investors who have been keen investors during the first three quarters of 2010. This has resulted in strong competition for key quality assets, while assets outside of core city centre locations are often faced with weak investor interest. With more and more stock becoming available, market dynamics have kept buyers in a favourable position. Based on our current survey, the buyer to seller ratio fell to 1.9 buyers to one seller from 2.2 to 1 in April 2010. The highest buyer to seller ratios were reported for Paris (16.0), Munich (15.0) and Hamburg (13.0). The fragile nature of the market, however, remained apparent in the number of cities with a low buyer to seller ratio, with 13 cities comprising a ratio of less than one buyer to one seller.
Hotel Investor Sentiment Survey Buy, build, hold, sell? November 2010 15 Asia Pacific overview Highlights from the survey Positive sentiment for short and medium term trading across Asia Pacific has become entrenched, despite both recording a marginal contraction compared to April 2010. Short term trading sentiment for Asia Pacific remains the highest of all three regions at 21.9%, whereas medium term sentiment is more robust at 41.4%. Investors rank Singapore, Hong Kong, Sydney, Perth and Bali highest for both short and medium term trading. Yield requirements have increased compared to April 2010. Expectations for leveraged IRRs recorded a marginal 10 basis point increase to average 17.2%, whereas initial yields (cap rates) recorded a 60 basis point increase to 9.3%. Investors expect cap rates to contract over the next six months with sentiment skewed in favour of key gateways and major leisure destinations. Markets rated highest for buy sentiment include Tokyo (52.4%), Perth (47.8%), Phuket (47.6%) and Sydney (46.7%). Strong trading outlook becomes entrenched Asia Pacific entered the global crisis on a strong footing and is continuing to lead the recovery. Having trended upwards sharply over the past year, since bottoming in April 2009, investor expectations for short and medium term trading recorded a marginal contraction in our most recent survey to reach 21.9% and 41.4% respectively. Sentiment for short term trading declined by 0.8 points compared to April 2010, whereas medium trading recorded a 4.2 point reduction. Positive sentiment for both, however, remains in line with the long term average and is more deep-rooted than for the Americas and EMEA. Trading recovery across Asia Pacific has gained pace through 2010 with many markets heading back towards peak occupancy levels. Room rates have also started to increase with double digit gains evident in Singapore and Hong Kong and modest gains in Sydney, Brisbane, Hanoi, Manila, Phuket, Seoul, Taipei and Beijing. Investors rate Singapore, Hong Kong, Sydney, Perth and Bali as stand outs for income growth over the next couple of years with all five featuring as the top markets for both short and medium term trading. Investor sentiment for short term trading is strongest for Singapore at 63.4% (increasing to 75.7% over the medium term), whereas investors favour Hong Kong over the medium term at 78.9% (up from 56.4% in the short term). Well-renowned for their responsiveness to changing market conditions, being both the first to fall and rise subsequent to any crisis, these key gateways have led the charge on the trading recovery. The resilience of Singapore s accommodation market is particularly noteworthy, absorbing the addition of almost 6,500 new rooms through 2010, with the staged opening of the two integrated resorts - Resorts World Sentosa and the Marina Bay Sands. Asia Pacific trading performance expectations 2000 to 2010^ Net Balance 80% 60% 40% 0% -20 % -40 % Sep-00 Jun-01 Jun-02 Jun-08 Oct-08 Apr-09 Apr-10 Oct-10 Short Term Medium Term In Australia investors are buoyed by the recent trading upswing in Sydney and Perth, as well as the absence of any significant room additions on the horizon in both markets. Sydney is rated highest for both short and medium term trading at 55.1% and 70.1% respectively. Recovery in corporate demand is being driven by the domestic sector and a long-awaited commitment to the delivery of a series of anchor events is boosting shoulder periods. The year is expected to finish on a high with conferences and concerts, the Ashes test series and the Oprah extravaganza all taking place. Sentiment for Perth has also improved as it has become evident that after a temporary pause the mining boom looks set to continue unabated. Expectations for short and medium term are now at 55.0% and 65.8% respectively. Of the region s leisure markets, Bali is rated most highly with investor sentiment for short and medium term trading at 51.4% and 64.5% respectively. Initially benefiting from the diversion of traffic from Thailand s resort markets, the island continues to go from strength to strength and has broad appeal across all market segments. The strength of the domestic economy and expansion of low cost air services across South East Asia are also proving a boon for this market. Sentiment for short term trading is positive for 24 of the 29 (82.8%) markets surveyed, the exceptions are Fiji (-24.1%), Bangkok (-19.5%), Manila (-20.0%), Auckland (-8.6%) and Gold Coast (-7.7%). All markets except for Fiji (-6.9%) and Manila (0.0%) are expected to experience a significant turnaround with medium term sentiment for ranging from 35.1% in Bangkok to 17.1% in Auckland.