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Report sees global hotel sales strong, steady

GLOBAL hotel sales are expected to match last year’s levels, driven by funds restructuring their portfolios rather than high income growth, says the latest hotel investment outlook by the JLL Hotels & Hospitality Group.

EMEA — Europe, the Middle East and Africa — is expected to see volumes grow to US$22.5 billion from US$20.5 billion last year.

The Americas are seen flat at up to US$31 billion and the Asia Pacific region is also seen steady at US$8.5 billion this year, the report said.

Last year saw shifts in the most active buyers and fragmentation in the market.

Institutional investors accounted for 20 percent of activity — four times the level of 2015.

The share of acquisitions by private equity investors and investment funds fell to 25 percent from 40 percent.

Institutional investment is expected to stay steady this year, while private equity buyers could become more active.

More brand M&A activity on deck

The case for hotel brand consolidation is that markets reward growth. Hotel brands are on a never-ending quest to bolster their presence and business.

With the natural attrition of properties and limits to supply growth, the surest way to grow is often by acquiring operators with management and franchise contracts.

And with revenue-per-room falling across mature markets brands and management companies are looking to boost earnings before interest, tax, dividends and amortization and efficiency by adding properties.

So, consolidation among operators and real estate owners alike is expected due to key players’ need to remain competitive. Two of the most preferred investment markets for 2017 are Japan and Australia, followed by Thailand, Vietnam, China’s Hong Kong, Singapore and the Maldives.

For Japan and Thailand, there will be good buying opportunities while stock options remain limited in Australia, Hong Kong and Singapore.

Japan in particular will see a continuation of limited-service portfolios and one or two key trophy assets brought to the market.

Australia’s overdue supply wave will begin this year. New stock is certain to place pressure on room rates in Brisbane and Perth.

But in Sydney and Melbourne, where occupancies neared the 90 percent mark in 2016, expectations are for the new supply to be more than matched by demand.

Major cities in Australasia will dominate, with elevated activity in both the churn of existing hotels and new-build opportunities in Sydney, due to the city’s robust fundamentals.

Queensland leisure markets such as Cairns and the Gold Coast are in demand as airline capacity and the low Australian dollar stimulate domestic and inbound travel, which has translated into solid trading performance.

In New Zealand, Auckland will start to see opportunities for new supply within three to five years.

A major issue is the role of capital flowing out of China this year.

The government announced significantly tighter measures on outbound capital in mid-December for “non-core” business activities, but interest from mainland investors is not expected to grind to a halt.

Chinese capital continues to look for trophy assets in pre-eminent global markets such as London, New York, Paris, Hong Kong, Singapore, Tokyo and Sydney.

Investment prospects remain favorable for Chinese investors. With the potential weakening of yuan, transactions in the US and Europe, with a 7 percent return, remain attractive.

Even at low leverage levels, Chinese investors are able to realize returns of 15 percent, which exceed those seen at many investments at home.

That said, due to tighter capital controls, a number of transactions pursued by Chinese buyers will go on hold, especially those over US$1 billion.

Hotel occupancy in the US reached a record last year, despite an increase in supply.

But growth has become more uneven, with a handful of major markets such as Houston, Miami and New York expected to have negative growth this year.

The strongest performers will be secondary markets along with the west coast and Washington.

Investors expect cap rates to mark a slight increase in 2017, driven by slowing hotel income growth and interest rate increases.

But the market’s size and liquidity will make the country a top target for investors.

To project the amount of capital targeting hotel investments in 2017, it helps to examine the source of funds that are driving transactions, the report said.

Japan typically has a strong domestic market, making it less reliant on outside forces.

The UK market became dramatically more domestic in 2016 as foreign investment slowed, but this is expected to slowly reverse.

The US, on the other hand, saw a record proportion of offshore capital in 2016. But 2017 stands to be the year of the domestic investor in the US, driven by an increase in buys from private equity funds and Real Estate Investment Trusts, while investment flows from major recent buyers, such as Chinese mainland investors, slow.

Europe is coming out of a challenging year for real estate investment.

First and foremost, investors became cautious in the lead up to Britain’s EU referendum, taking a “wait and see” approach.

A series of terrorist attacks hurt a number of top tourist destinations and the continued threat has kept some foreign travellers away.

Europe suffered the most protracted slowdown in investment last year.

Germany overtook the UK as the second most liquid global market, securing US$5.5 billion of hotel deals.

The UK reported a 73 percent decline in hotel transaction volumes, closing the year with US$4.4 billion in deals, mainly due to a decline in portfolio transactions.

This year, Europe is expected to see the most significant improvement of all global regions with favorites including Spain, Ireland and Portugal.

Germany will also remain active, despite an expected minor decrease in investment volumes following a record 2016.

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