CHICAGO—A sharp decline in hotel transaction volume might make investors queasy, but the record volume of 2007 was not able to be continued, according to hotel industry executives.
In fact, transactions are at about the same level as 2004, said Arthur de Haast, Global CEO of Jones Lang LaSalle Hotels. “If we look back at the history of volumes of transactions, in 2007 it was an extreme level of activity, so in reality, we’re going back to normalized levels.”
JLLH reported that US$13.9 billion worth of hotels have traded globally in the first half of 2008.
Arthur De Haast
De Haast isn’t concerned about the overall vitality of the hotel industry.
“On the whole it is healthy,” de Haast said. “There is a much broader investor base, there are good things coming out of ’06 and ’07, and the long term and medium term fundamentals are good.”
Charles Human, managing director of Europe for HVS Hodges Ward Elliot, said there are two primary explanations for the current decline in volume.
“The world is going through a credit crunch, and that is the reason activity is down on 2007 levels. Without a doubt, the transaction volume is significantly down on last year, because banks aren’t lending, and buyers’ and sellers’ perception of value is extremely low right now.”
The highest drop in volume was recorded in the Americas at a decrease of 81 percent, but the region is still the “most liquid” with more than US$6 billion worth of transactions in the first half of the year, according to the report. When measured by number of transactions, the Americas saw a decrease of about 40 percent—181 deals closed in the first half of 2007 compared to 108 for the first half of 2008, according to JLLH figures.
And other markets just can’t make up for the declines in the Americas, de Haast said.
Global transactions by region
For instance, the United Kingdom took hits similar to the U.S.
De Haast said historically European volumes are largest from the U.K. not because it has that much bigger supply compared to other European countries, but because the market is more liquid and transparent so there is more activity.
“Like the U.S., it was significantly impacted by the credit crunch. Lots of debt was being securitized, and that has slowed down,” he said. “Whereas in markets such as France, Germany and Italy volumes are down somewhat from last year, it was not nearly as much as the U.K.”
Human added: “In Europe, it does relate to the credit crunch. The economic outlook is weaker and the investor sentiment is generally more cautious for the moment. The perception is that value is declining, so it’s better to wait until tomorrow rather than buy today.
“There is still strong and healthy demand in London and Paris, and I don’t think buyer perception has been affected in the top end of strategic markets,” he said.
The global marketplace is not getting much help from hot markets such as China and India, because they are ripe with new construction, not real estate transactions, de Haast said.
“The reason for that is that China and India have very few hotels in comparison to the Americas,” he said. “Much of the activity in India and China is development. They are still building the stock that will be investments for the future. … Hotels are performing exceptionally well because of the shortage of supply. The returns are exceptionally good, so developers are tending to hang onto [hotels]. As the market matures and settles down, there will be a better supply-demand balance. There will be a greater propensity to sell, and more hotels will open and run, and the whole market will expand.”
And emerging markets are just that—just beginning to show some transaction activity.
“We’re beginning to see it in [Europe/Middle East/Africa] new markets,” De Haast said. “We had our first transaction in Russia. Deals are increasing in Turkey and the Middle East. Dubai developers are now at a stage in development that they are beginning to sell out of a project or will be completing soon and are selling out.”
De Haast mentioned that the Mövenpick Jumeirah Beach Residence complex deal earlier this year was one of first transactions in the last two to three years in Dubai.
Many owners are in a holding pattern, according to Human.
“In theory it would be a good time to buy, but there are no deals out there. Owners are holding onto properties,” he said.
And how long will they be in a holding pattern?
“It’s difficult to say—probably for rest of year,” Human said. “We may see the market loosening up next year, but it’s really in the hands of the banks to get liquidity of the systems.”
But the bottom line is that this too shall pass.
“There is some uncertainty as to when it will happen, but the market will recover. Volume will come back,” Human said.