Global Hospitality Outlook: A Year of Guarded Optimism
- Feb 22, 2012
Despite the recent volatility in the global financial markets, this year is shaping up to be another year of guarded optimism for investors in the global hospitality sector.
By Michael Fishbin,
Global Hospitality Leader, Ernst & Young L.L.P.
This year is shaping up to be another year of guarded optimism for investors in the global hospitality sector.
From an equity perspective, a considerable amount of capital allocated to real estate is waiting to be deployed, and companies continue to plan raising capital through various means, including initial public offerings. Assets that are located in prime global gateway cities are getting the most focus and attention from investors, who are seeking such opportunities due to the perceived relative safety, which includes steady demand growth and higher barriers to entry. Even as demand increases and equity capital continues to come in, the availability of debt to fund investments is still unknown. A continuing shortage of readily available debt capital is anticipated as many lenders continue their strategy of “extend and pretend” while waiting for more advantageous opportunities and try to avoid balance sheet issues until there is more clarity in the market. However, there have been signs that banks may have a greater willingness to force sales of leveraged assets where the equity is underwater. In Europe, for example, some high-profile portfolios have been going through such sales processes, and their degree of success will be influential in determining the speed at which equivalent assets come to market.
In the United States, there continues to be a strong preference for assets in core markets by both equity and debt players. Banks, still working through legacy investments, are carefully screening opportunities while life insurance companies, sitting at full capacity, are looking to infuse capital into select, best-in-class properties and sponsors. The market has seen an increase in opportunistic lenders, who are capitalizing on the uncertainty by helping to fill the void left by more traditional lenders. They are seeking higher returns by focusing only on more junior tranches, including mezzanine and preferred-equity positions. Foreign equity investors continue to view the United States as a relatively safe harbor to deploy capital and look toward key gateway cities, where they can enjoy additional return on their investments if the U.S. dollar strengthens. Investors are looking at major flags in these cities, and with profits driven by room demand, there is a renewed focus on operators who are hotel specialists as they are the key to driving the results investors expect and lenders project.
In Europe, despite the uncertainty around the unresolved sovereign debt crisis, prime real estate assets in core markets (primarily gateway cities), such as London and Paris, are still looked upon as safe investments. A polarization of the marketplace has occurred as investors with a flight-to-quality mentality focus on core cities in Western and Central Europe and the Nordic countries. In the United Kingdom, the limited availability of debt has affected the volume of transactions in the market, with major U.K. banks still nursing extensive legacy issues and being somewhat reluctant to lend to the hotel sector, aside from low-risk, single asset deals. In Germany, investor interest in hotels remains high; real estate is still seen as a relatively stable asset with regular cash flows. Consequently, the scarcity of debt has had an impact on the development and transaction markets; investors with cash available are at a clear advantage.
In Asia, although the real estate market fundamentals and regional economic outlook are positive, investors have become more cautious in light of the geopolitical events that have started to affect sentiment. Return requirements of both equity and debt have widened, and in many markets, investors are required to commit additional equity. China remains a bright spot as both foreign and domestic investors continue to focus on increasing their portfolios in the country. Since China is still a growing and developing market, the country is focusing on the stability and development of its real estate market. As a result, developers had more difficulties in obtaining capital from traditional means in 2011, and some are using alternative sources for financing. Still others are looking for opportunities to form partnerships with foreign investors in order to gain access to capital. Japan also continues to be a focal point as one of the region’s most active countries for investment and transactions.6 Core foreign funds continue to move forward with due diligence, and opportunistic funds are seeking deals because of the significant availability of capital ready to deploy.
Around the globe, despite the recent volatility in the global financial markets, existing real estate investment trusts and IPOs still remain top of mind for many real estate companies as an alternative strategy to fuel growth and as a means by which to access the public equity markets.
Despite the costs and risks associated with operating a publicly traded company, public and going-public real estate companies are using this approach to address capital requirements, reduce debt, take advantage of distressed investment opportunities and capitalize on what is viewed as a prolonged economic and real estate recovery. A public real estate company must consider the common success factors and investment risks of being public, which typically revolve around market, asset, management and balance sheet characteristics.