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While investment levels on existing hotels in the Europe, Middle East and Africa (EMEA) will remain strong in 2015, the figure masks a large disparity across countries. EMEA will continue its stride with more than $24 billion (Dh88 billion) in hotel trades.
However, the bulk of the volume will be driven by large single-asset transactions, led by London and Paris, while portfolio deals are anticipated in the UK and Germany.
The Middle East is expected to remain a source of outbound capital.
In 2014, global hotel transactions volume reached $60 billion, a 10 per cent increase over the year before. This year, the strong flow of cross-border capital into hotel real estate assets is expected to further galvanise increased deal momentum.
The forecast is that global hotel real estate transaction volumes will reach $68 billion, a 15 per cent increase on 2014 levels and the third-highest annual total on record. Private equity investors are fully loaded and under pressure to invest funds. Asian money, driven by outbound Chinese capital, is growing rapidly due in part to increased activity from insurance companies.
The year is likely to represent the highest transaction volume in eight years as investors are ready to chase after top hotel deals. As in previous years, the Americas are expected to continue driving global transaction volume with a projection of $34.5 billion in transactions. In the US, investors are disposing of assets purchased at the onset of the recovery cycle and taking capital gains.
Momentum is further fuelled by the weight of private equity pursuing portfolio deals. Asia-Pacific is expected to bring a steady increase of 15 per cent more transactions, lifting deal volumes to $8.5 billion. Japan will be the standout, led by increased debt and investor confidence in hotel performance growth.
Australia is expected to remain an active market as well: its stable government and rise in tourism and investment interest from China make it a continued safe haven for moderate growth.
There are obviously a large number of factors that could impact our hotel transaction volume projections, among which we can mention a potentially strong return in the European commercial mortgage-backed securities (CMBS) market. Although much smaller than that of the US, this segment would increase demand for acquisitions in EMEA and stretch equity further.
Also, more push from capital exporters in China and the Middle East would put an upward pressure on deal flow as well. On the downside, the potential risks are much larger: from the deterioration or widening of current conflicts to other shocks that could directly or indirectly impact tourism and travel.
The general sentiment is, however, positive as investors’ short-term sentiment for trading globally has increased. Fundamentals remind strong as access to capital continues to improve and investors move ahead.
Global cap rate expectations are at around 7.2 per cent, with the minimum for major gateways in the range of 6.5 per cent. Simultaneously, there is a perception of a potential cap rate contraction in the short term, especially in relation with the US market.
In terms of leveraged internal rate of return (IRR), investors’ expectations are in the range of 16.5 per cent globally with leveraged IRRs for the US in the range of 18 per cent.
Financing resorts and pure leisure tourism hotels remain challenging and largely a domestic or regional play. This said, this hotel investment compartment could present lucrative opportunities for investors with the right strategic focus.
Source: Chiheb Ben-Mahmoud, Special To Gulf News
The writer is Head of Hospitality at JLL Mena.