European Hotels Lure Investors as Properties Hold Their Value
A Taxi Passes The Le Meridien Piccadilly Hotel
Host Hotels & Resorts Inc., the largest U.S. lodging real estate investment trust by market value, in July announced the purchase of the 266-room Le Meridien Piccadilly in London for 64 million pounds ($100 million). Photographer Rupert Hartley/Bloomberg
Host Hotels & Resorts Inc., the largest U.S. lodging real estate investment trust by market value, in July announced the purchase of the 266-room Le Meridien Piccadilly in London for 64 million pounds ($100 million). Photographer Rupert Hartley/Bloomberg
European Hotels Lure Investors
Nigel Dickenson/Bloomberg
DekaBank Deutsche Girozentrale’s property unit on July 1 said it bought the Hotel Renaissance Arc de Triomphe in Paris for 114 million euros ($146 million).
DekaBank Deutsche Girozentrale’s property unit on July 1 said it bought the Hotel Renaissance Arc de Triomphe in Paris for 114 million euros ($146 million). Photographer: Nigel Dickenson/Bloomberg
European Hotels Lure Investors
Nigel Dickenson/Bloomberg
DekaBank Deutsche Girozentrale’s property unit said it bought the Hotel Renaissance Arc de Triomphe in Paris for 114 million euros ($146 million).
DekaBank Deutsche Girozentrale’s property unit said it bought the Hotel Renaissance Arc de Triomphe in Paris for 114 million euros ($146 million). Photographer: Nigel Dickenson/Bloomberg
Real-estate investors will spend more money buying hotels in Europe than the U.S. this year as slower development helps to preserve property values.
Hotel acquisitions in Europe will total about $5.5 billion in 2010, compared with $4.5 billion in the Americas, according to Jones Lang LaSalle Hotels. The U.S. will account for about 90 percent of purchases in the Americas, the London-based hotel investment-services firm said.
Hotel values fell more in the U.S. than in Europe last year as new buildings added to the number of properties on the market, according to Real Capital Analytics Inc. At the same time, occupancy and room rates in Europe increased at a faster pace than in the U.S., propelled by Germany and France.
“In most U.S. cities, if you can’t get the hotel you want, you just have to wait 12 to 18 months and you can buy one that is just being built and is exactly what you wanted,” said David Mongeau, chairman and founder of London-based investment banking firm Avington Financial Ltd.
In Europe, the hotel construction pipeline included 587 properties comprising 100,013 rooms, according to the December 2009 STR Global Construction Pipeline Report. That compares with plans to build 3,829 hotels in the U.S. with 401,090 rooms.
“Properties are more expensive in Europe, but tend to lose value less as it’s much more difficult to find a replacement asset,” Mongeau said.
Prices per room dropped by 24 percent in Europe last year to $223,475, while the U.S. saw a decline of 35 percent to $105,151, Real Capital Analytics said. In 2008, European values increased 29 percent, compared with 20 percent in the U.S.
Better Performance
Transactions will increase at a faster pace in the U.S. than Europe this year because the amount invested in the U.S. was much smaller in 2009. The U.S. total will more than double from $2.1 billion, according to Jones Lang Hotels. Europe’s projected gain will be 25 percent from $4.4 billion.
Occupancy in Europe climbed to 61 percent from 58 percent, while it increased in the U.S. to 56 percent from 54 percent, according to Tennessee-based lodging industry research firm Smith Travel Research Inc. Daily rates in the U.S. fell 2 percent to $97.18. In Europe, they rose 1.9 percent to 97 euros.
Host Hotels & Resorts Inc., the largest U.S. lodging real estate investment trust by market value, in July announced the purchase of the 266-room Le Meridien Piccadilly in London for 64 million pounds ($100 million). The company has 95 percent of its rooms in the U.S., according to data compiled by Bloomberg.
Retaining Value
“Many European markets have a very high barrier of entry,” for new construction, said Gregory Larson, executive vice president of corporate strategy at Host Hotels, said in a telephone interview. “That limits future supply growth. In such markets, assets tend to retain a very high value, which from a hotel owner’s perspective is obviously great.”
Hyatt Hotels Corp., the chain controlled by Chicago’s Pritzker family, expects to have a higher percentage of rooms abroad than in the U.S. within 10 years, Chief Executive Officer Mark Hoplamazian said in January. The company is seeking acquisitions in Italy and Spain, he said.
Redefine International Plc, the London-listed property investment company formerly known as Ciref Plc, said last month that it acquired five Holiday Inn hotels in London from Splendid Hotel Group, the U.K.-based hotel owner and operator, for 106.3 million pounds ($167 million).
“We are starting to see some interesting opportunities,” Redefine CEO Helder Pereira said in an interview last month. Redefine is looking at other properties in London and other European cities, he said.
More Diverse
DekaBank Deutsche Girozentrale’s property unit on July 1 said it bought the Hotel Renaissance Arc de Triomphe in Paris for 114 million euros ($146 million), while London & Regional Properties Ltd. and Starwood Capital Group LLC bought London’s Cumberland Hotel from the Royal Bank of Scotland Group Plc the same day.
DekaBank has preferred to buy European hotel this year because the currency risks of purchasing U.S. assets mean the return on investment must be higher, Thomas Schmengler, head of DekaBank’s real estate investment unit, said in an emailed statement.
“Investment opportunities in the U.S. in the past months haven’t met our demands,” Schmengler said.
Greater Resilience
Another advantage of Europe is that the markets are more diverse across the continent and less prone to a continent-wide economic slump, Arthur de Haast, global chief executive officer of Jones Lang LaSalle Hotels, said in an interview in July. Properties in countries including France and Germany, as well as cities such as London, traded “reasonably well” even when global economies shrank last year, he said.
Many U.S. hotels acquired during the peak years of 2006 and 2007 were financed with a high percentage of debt, putting additional pressure on values. U.S. loans secured by more than 1,625 hotels with a total outstanding balance of $40.3 billion may be in danger of default, according to Realpoint LLC, a credit-rating company that tracks commercial mortgage-backed securities. Loans are put on the company’s watch list because of late payments and decreasing occupancies or cash flow.
“The European market didn’t decline quite as much in 2008 and 2009 and remained more liquid than the U.S. market,” said de Haast. “There’s also more equity in Europe. Leverage is generally lower in Europe, particularly in continental Europe.”
To contact the reporters on this story: Nadja Brandt in Los Angeles at nbrandt@bloomberg.net; Armorel Kenna in Milan at akenna@bloomberg.net.
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