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March 21, 2016

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Growth in hotel investments pushes forward

2016 is expected to be another strong year for hotel investment with transaction volumes around the globe projected to hit US$70 billion, according to latest forecasts by JLL’s Hotels & Hospitality Group.

The forecast follows a robust 2015, which marked the second-highest year on record for hotel transactions. With global transactions topping US$85 billion, 2015 saw a number of records: The volume of single-asset transactions, at US$47 billion, was the highest ever. Cities such as New York and Hong Kong saw their highest annual transaction volume level. Blackstone’s purchase of Strategic Hotels & Resorts in late 2015 marked the largest portfolio transaction in eight years. And the proportion of cross-border purchases reached a new high, signifying the ever-growing dynamism and globalization of the sector.

• Volumes across the Americas to
notch US$37 billion

The Americas region is forecast to see transactions totalling US$37 billion. As in recent years, the US is expected to be the single most liquid country in terms of transaction volume. Activity across the board is slated to soften by 20 percent in 2016.

In the US, investors are re-trading assets purchased earlier in the recovery cycle and momentum is further fuelled by the weight of private equity raising funds and pursuing large single assets and portfolios. With historically low cap rates in primary markets, robust activity is expected to be seen in secondary regions, such as the Midwest. Given their lower share prices, real estate investment trusts (REITs) are expected to be net sellers, with dispositions often accretive in that they can buy back shares at discounted prices. Additional privatizations of REITs are also expected to be seen, given that in many cases the entity as a whole is trading for less than the individual asset values.

With REITs less active buyers, offshore investors stand to become the second-largest buyer type after private equity. The ownership composition of hotels remains fragmented and there is opportunity for fewer larger owners to own more stock.

The industry will likely head into a cycle where hotels will transact more like office buildings, with investors trading in and out on a consistent basis. Given the healthy macro-economic environment in the US, capital will continue to flow in a normalized asset trading environment.

• Single-asset transactions in Europe’s secondary markets

Europe, the Middle East and Africa (EMEA) will continue their stride with a projected US$25 billion in hotel trades in 2016, a decrease of 15 percent from 2015.

Sales will be driven by single-asset transactions, with an increasing share in secondary markets. Given the culling of portfolios and prime single-asset properties coming to market this year, single-asset transactions are expected to rise 35 percent. The relative weakness of the euro against the US dollar will help inbound tourism, notwithstanding some reticence among travelers given recent terrorist acts.

To find yield, investors will look beyond the mainstay markets, with provincial UK, secondary German cities, major cities and resort markets in Spain, Italy and Portugal receiving more attention.

On the buy-side, private equity and sovereign wealth funds will be active, and Chinese mainland investors will continue to purchase hotels. Sellers will include investment funds and private equity investors who made early-cycle buys. Europe is expected to remain the largest destination for offshore capital in 2016, as it is the recipient of inflows from US-based private equity funds, Middle Eastern investors and capital from Asia.

• Japan and Australia to be the standout in Asia Pacific

On the back of the strongest years for the Asia Pacific, the region is slated to see transaction volume of US$8.5 billion, a decline of between 5 and 10 percent from 2015. Japan, which saw its second-highest amount of transactions ever last year, will continue to see a strong bench of domestic investors in addition to interest from US private equity funds. Moreover, there are also early trends of Chinese investors evaluating purchases in secondary Japanese locations.

Australia will remain active as well, in particular with regard to portfolios. Given the large number of prime single assets having traded to long-term holders of late, the amount of product on the market will be lower. Chinese mainland has started to see in excess of US$1 billion in hotel trades annually, and this level is set to continue if not increase in 2016.

The tightly-held hotel stock in Singapore leads to deals being few and far between. Investors will take more of a wait-and-see approach in Hong Kong, which saw its highest year for deals ever in 2015, with hotel performance largely having peaked. Pockets of liquidity will also be seen across Southeast Asia and the Indian Ocean.

India’s hotel landscape is changing — from being development-driven to becoming more transaction-based. Improved hotel operating performance is providing the impetus for acquisition and consolidation in some markets.

• More M&A and consolidation
to be expected

Hotel companies made headlines in 2015 announcing purchases of competitors. Many of these large deals, such as Marriott International’s merger with Starwood Hotels & Resorts, are expected to be completed in 2016 and more consolidation is on deck.

Even with the mergers and acquisitions announced in 2015, the lodging industry remains considerably more fragmented than other large consumer industries in terms of the market share controlled by the top brands. More consolidation among operators and real estate owners alike is expected this year, whether it be portfolio optimizations or public-to-private trades.




 

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