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March 10, 2015

Strong returns, fair value and more debt help to put Europe at the top of international hotel investors’ wish list

The Europe, the Middle East and Africa (EMEA) hotel investment market is set for another bumper year as it is crowned most attractive hotel investment destination, globally.

The latest figures from JLL’s Hotel & Hospitality Group show that EMEA is likely to see close to US$25 billion in hotel trades this year – up from US$21.5 billion in 2014 and representing 36% of all hotel transactions globally.

Much of this activity will be driven by large single-asset transactions, led by London and Paris, while portfolio deals are anticipated in the U.K. and Germany.

Global hotel real estate transaction volumes are expected to reach US$68billion in 2015 with global funds and private equity groups based in the U.S. and Western Europe leading the charge. The U.K., Germany and the US represent the biggest destinations for private equity capital globally.

“Whilst the question of fair value resounds through the sector, Europe still offers more upside on the recovery curve, with per-key values of assets still below the previous peak in both Western and emerging Europe,” says Christoph Härle CEO of JLL’s Hotels & Hospitality Group in EMEA.

“In 2015, we will see private equity investors look to higher yielding markets such as Southern and emerging Europe, as investors continue to follow opportunities.”

Asian money is also set to feature more strongly in 2015, driven by Chinese capital, and global gateway cities with direct flight connections to China such as London, Paris, Amsterdam, Dubai are high on investors’ wish lists. The region’s insurance companies have helped grow the swell of outbound capital from several hundred million dollars annually during the past several years to nearly US$1 billion in 2014.

North American private equity funds have cash to deploy in the short term and European yields remain some of the most attractive – especially at a time when prices continue to rise on home soil.

“Many European countries have additionally reached their occupancy ceiling. Thus, average rates will be the key driver of RevPAR moving forward, boding well for hotel profit increases. The Middle East is expected to see growth as well, and hotels in Africa will at times experience double-digit RevPAR growth,” said Härle.

Opening up of debt
Last year saw debt opening up in a controlled manner in the Eurozone as balance sheet lenders made their way back into the hotel lending space.

“2015 will mark the redemption of Commercial Mortgage-Backed Securities (CMBS) market as a debt investment product, in the UK and Continental Europe,” explains Härle.

“With improved underwriting standards and increased subordination levels, we expect bond investors to accept hotel assets as underlying security again, closing some of the funding gap in the space. The return of CMBS will provide potential for growth, which will help support the growing investor demand for acquisitions in EMEA and will stretch equity further. In addition, direct lending funds (Shadow-banks) are increasingly closing the LTV gap between the current 50%-55% senior position and the 75% LTV. More push from capital exporters in China and the Middle East will put an upward pressure on deal flow as well.”

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