Economic uncertainty returned in the second half of the year causing momentum to falter, although deals continued, especially in the United States, reaching a forecasted level of $30 billion worldwide, an increase of 13% over 2010.
Despite the continuing economic uncertainty, Jones Lang LaSalle Hotels forecasts that global hotel transaction volume will hold steady in 2012 to again reach upwards of $30 billion in deals, according to initial results from the firm’s Hotel Investment Outlook 2012 report.
“So far, the dislocation in the financial markets has not impacted underlying trading fundamentals. This has reassured investors to a certain degree and has underscored the attractiveness of high quality, income producing hotel real estate as an asset class,” said Arthur de Haast, chairman of Jones Lang LaSalle Hotels.
“Constraint will be driven by illiquid markets and the shrinking balance sheet capacity of international banks to lend significant sources of new money. Still, the market will be flush with equity capital that will come into play,” he explained.
“Private equity players increased investment activity in the second half of 2011, and we expect them to remain ambitious in 2012. With significant buying power and risk tolerance in a volatile environment, they are in position to achieve opportunistic returns. Notwithstanding, deficient debt markets and limited availability of attractive acquisition opportunities will likely hamper higher levels of activity. Still, these players will selectively acquire assets in secondary locations, as well as distressed portfolios and non-performing loans,” he added.
Joining the buyer mix are sovereign wealth funds and private high net worth individuals who will take a long-term view and make strategic acquisitions globally. Public companies, notably REITs, are expected to focus on existing stable acquisitions rather than new ones, consequently diluting the buyer pool.
The biggest sellers in 2012 are likely to be bank-induced, as a result of debt maturities and consequent refinancing challenges. In addition to the influx of assets expected to come to market, a significant amount of note sales are anticipated as well.
Private equity firms and institutional investors are also expected to liquidate some previous acquisitions, either to divest select non-core assets or to return capital to investors as funds reach maturity. In the United Kingdom, the US and Ireland, institutions with significant real estate exposure have started taking action by means of placing stressed assets into the market, although activity has yet to start in Spain and Japan.
Borrowers in Spain have more control over administration processes, as opposed to the UK and Ireland, creating reduced certainty for the banks and stemming greater levels of workout activity. Lenders in Japan are still reluctant to realise losses on hotel loans, which is causing delays in sales transactions.
“We expect that portfolio deals will dominate in several of these markets as banks, whenever they have a large portfolio, prefer to look for a portfolio solution to exit as opposed to selling assets individually,” said de Haast.
Emerging markets remain the global growth engine, greatly driven by rising domestic demand. Fundamentals continue to point to further growth in 2012. Although growth in China and India is slowing both have good momentum, activity is building in Central and Eastern Europe, notably Poland, Russia’s activity jumped up, and South America continues to excite investors, with Brazil as the region’s growth engine.
“Flexibility is a key theme for 2012, and the ability to react to change quickly will feature as a success indicator. Unexpected events, such as political unrest and natural disasters seem to have become “the new normal” and success will be predicated by investors and operators who can calculate risk and adapt the quickest,” de Haast added.
