The Expert: Investor Sentiment Sinks

Deteriorating economic fundamentals and liquidity restrictions have caused investor sentiment to plummet. There does not seem to be a single hotel market that is sheltered from today’s dour economic realities. Jones Lang LaSalle Hotels recently conducted its biannual Hotel Investor Sentiment Survey, which highlights decreased trading performance expectations and cautious investment intentions across the Americas, Europe, the Middle East, Africa and the Asia-Pacific area.The survey reaffirms that the alignment of operating and transaction cycles witnessed over the past few years, as well as the globalization of capital flows, has magnified the impact of the current crisis. The importance of geographic diversification is diminished, as investor sentiment for all three regions is now largely aligned and moving downward.Sentiment for short-term trading is negative for all 87 international markets that the survey tracks. Short-term expectations are most bearish for the Americas, followed by Europe, the Middle East and Africa and Asia-Pacific. Notwithstanding, sentiment across international gateways is less negative for the six-month, short-term outlook and markedly more optimistic for the medium-term, two-year horizon. The trading outlook is strongest for Washington, D.C., Moscow and Mumbai, though the survey predates recent events in India.Against a backdrop of uncertainty, hold sentiment among investors jumped 11 percentage points to its highest level since late 2002, marking the dominant global investment strategy. The sentiment to buy declined 7.3 percentage points and is well below the long-term average. Cities attracting the highest buy sentiment today include San Francisco, Rome and Shanghai.The sentiment to build is now hotel investors’ least favored strategy, dropping most significantly in development hot spots like Dubai, Bangalore and Cancun/Riviera Maya. While bolstering existing supply, stalled projects coupled with subdued profits will impact operators’ growth plans. As the movement in global capital takes a breather, assets that do come to market will be shopped more by domestic and regional investors.Investor expectations for a leveraged internal rate of return and cap rates retracted reflective of the weaker short-term outlook. Cap rates increased by 90 basis points in Asia-Pacific and by 60 basis points in the Americas and in Europe the Middle East and Africa, and capital values will continue to come under pressure in 2009.