Jones Lang Lasalle Hotels' 2003 Hotel Investment Strategy Annual Outlines Investment Strategies For Turbulent Times
As the world faces war and the hotel markets remain depressed, where are the opportunities for the astute investor?
"The outlook for the global hotel sector in 2003 is that flat occupancy and weak average daily rate will be the norm rather than the exception," said Arthur Adler, Managing Director and CEO-Americas of Jones Lang LaSalle Hotels. "Strong RevPAR growth will be a rarity across major markets. At the same time, investment yields for top quality unencumbered properties in the larger and more liquid markets will be under downward pressure.
Investors have good risk-return opportunities if they stay several steps ahead of the rush to safety. Three major recommended strategies include:
- Sell properties to investors who demand the lowest-risk assets in the safest markets and are willing to pay top dollar for them.
- Buy properties one step ahead of the "core crowd" in markets that have yet to attract low risk capital, but are large enough that they soon will.
- Reposition properties in need of capital improvements and sell into the core market.
"For the strongest markets, in terms of sound fundamentals at a reasonable price, we point investors to Canada, some parts of the United States, Australia, South Korea, Singapore, Amsterdam (city centre), Barcelona, Rome, Milan and regional UK markets," said Adler.
"Canada will show more resilience to the global slowdown than the United States. It experienced less of a bubble economy and benefits from a weak currency. During 2002 Canada's hotels have experienced a lesser decline in RevPAR than their U.S. counterparts and many markets even posted a gain. In 2003 we expect to see a growth of approximately 3% in RevPAR across the major city markets, with Montreal, Toronto and Edmonton outperforming," said Adler.
"Mexico, despite being caught up in the economic woes of the United States, has made impressive improvements in the stability of the peso and the health of its banking sector," continued Adler. "It is poised to do well when the Unites States recovers and represents a logical location for well capitalized investors looking for diversification and high returns. Mexico offers high growth rates, an expanding middle class and in some cases, well established tourism infrastructure."
As well as keeping on top of the hotel market cycle, astute investors will achieve the greatest returns by overlaying this analysis with the individual hotel asset cycle, according to the Hotel Investment Strategy Annual 2003.
"Too often focus is given to macro-cycle issues, with an individual asset's life cycle given little emphasis. Investors should focus on developing a short-, mid- and long-term strategy for each asset in their portfolio, and a pre-determined exit strategy," said Melinda McKay, Senior Vice President of Jones Lang LaSalle Hotels.
"Areas for consideration include the age of the asset, product positioning (including affiliations and marketing strategies), capital expenditure - both discretionary and non-discretionary and value impact and no value impact - as well as return on investment analysis. Investors should also pay close attention to the operating strategy including branding, management, risk management and fixed costs issues (particularly insurance) to maximize value from the individual asset within the hotel market cycle," included McKay.
As world markets become inextricably linked and travelers touch more destinations, hotel investment has increasingly become a global concern. Unlike pure real estate, this has grown not only from the widening search for acceptable returns, but also from a desire to build a dominant global presence.
McKay continued, "Excluding the brand building benefits, from a pure investment perspective, the benefit of going global is primarily diversification and the opportunity to earn higher returns. Capital will tend to flow from low-yield origins to higher-yielding destinations. In the world of low inflation and single-digit returns, yield is king and the wider geographic perspective, the better the chance of finding it."
"In our initial investment advice we advised that massive discounts to replacement would not be available and this has held true. Yields are unlikely to compress significantly in 2003 due to the price pressure from leveraged buyers, the risk premium that hotels must earn over interest rates is unlikely to widen further, higher yields in the secondary markets or publicly traded hotel real estate will reduce pressure on the core, direct markets and an increase in assets being offered for sale will also reduce yield pressure," concluded McKay.
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