Hotel Investment Outlook 2015 - Year of upward momentum - Hotels & Hospitality Group | January 2015
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Hotel Investment Outlook
2015
Hotels & Hospitality Group | January 2015
Year of
upward
momentum
Contributors Mark Wynne Smith Lauro Ferroni Global CEO Global Head of Hotels Research Mark.Wynne-Smith@eu.jll.com Lauro.Ferroni@am.jll.com Arthur Adler Kent Michels CEO, Americas Head of Research, Americas Arthur.Adler@am.jll.com Kent.Michels@am.jll.com Christoph Härle Jessica Jahns CEO, EMEA Head of Research, EMEA Christoph.Harle@eu.jll.com Jessica.Jahns@eu.jll.com Scott Hetherington Frank Sorgiovanni CEO, Asia Head of Research, Asia Pacific Scott.Hetherington@ap.jll.com Frank.Sorgiovanni@ap.jll.com Craig Collins CEO, Australasia Craig.Collins@ap.jll.com
Table of Contents 2 Hotel Investment Outlook 2015 5 Global Capital Flows 7 Performance Outlook 12 8 Key Takeaways 13 Appendix About JLL’s Hotels & Hospitality Group JLL’s Hotels & Hospitality Group serves as the hospitality industry’s global leader in real estate services for luxury, upscale, select service and budget hotels; timeshare and fractional ownership properties; convention centers; mixed-use developments and other hospitality properties. The firm’s more than 320 dedicated hotel and hospitality experts partner with investors and owner/operators around the globe to support and shape investment strategies that deliver maximum value throughout the entire lifecycle of an asset. In the last five years, the team completed more transactions than any other hotels and hospitality real estate advisor in the world totaling more than US $48 billion, while also completing approximately 4,500 advisory, valuation and asset management assignments. The group’s hotels and hospitality specialists provide independent and expert advice to clients, backed by industry-leading research. For more news, videos and research from JLL’s Hotels & Hospitality Group, please visit: www.jll.com/hospitality, download the Hotels & Hospitality Group app for iOS and Android, or view our e-magazine The Hotel Investor, available for iPad.
2 Hotel Investment Outlook I 2015
Hotel Investment Outlook 2015
2015: Loaded Spotlight on Japan in Asia Pacific
A rising tide lifts all boats, and the strong flow of cross-border capital Asia Pacific is expected to bring a steady increase of 13% more
into hotel real estate assets is galvanising increased deal momentum. transactions, lifting deal volume to $8.5 billion. Japan will be the stand-
We forecast global hotel real estate transaction volume to reach $68 out in the region, led by increased debt and investor confidence in hotel
billion in 2015. This represents a 15% increase on 2014 levels and the performance growth. Australia is expected to remain an active market
third-highest annual total on record. as well: its stable government and rise in tourism and investment
interest from China make it a continued safe haven for moderate
Our projection comes on the heels of a robust 2014, when global growth.
hotel transaction volume reached nearly $60 billion, a 10% increase
over the year before. Private equity investors are fully loaded and Wildcards
under pressure to invest funds. Asian money, driven by outbound A number of factors could impact our hotel transaction volume
Chinese capital, is growing rapidly due in part to increased activity from projections for the positive or for the not-so-positive. Starting with the
insurance companies. glass half full, a strong return in the European Commercial Mortgage-
The confidence that investors and lenders have in global hotel market Backed Securities (CMBS) market, although smaller than that of the
performance is expected to remain strong in 2015, with the year U.S., would increase demand for acquisitions in EMEA and stretch
representing the highest transaction volume in eight years, as investors equity further. More push from capital exporters in China and the
are ready to chase after top hotel deals. Middle East would put an upward pressure on deal flow as well. A
lowering of tourism taxes across a number of key travel hot spots could
U.S. in the driver’s seat also spark an uptick in travel.
As in recent years, the Americas region is expected to drive global And on the down side – political conflict, natural disaster, a pandemic
transaction volume with a projection of $34.5 billion in transactions. or other demand shocks have the potential to impact travel and
In the U.S., investors are disposing of assets purchased at the onset tourism. All eyes remain on the global economy: while the U.S. faces
of the recovery cycle and taking capital gains. Momentum is further a robust 2015, growth in EMEA remains irregular, and the BRIC
fuelled by the weight of private equity pursuing portfolio deals. countries, especially Russia, face some clouds. Also, recent global
Europe keeps pace forces stand to influence the movement of goods, capital and travellers.
These include significantly lower oil prices and the U.S. dollar standing
Europe, the Middle East and Africa (EMEA) will continue its forward at its highest level in more than a decade.
stride with a projected $24.7 billion in hotel trades in 2015. The bulk of
its sales 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. Outbound capital from the Middle East is anticipated to
remain strong.
Global hotel transaction volume
150 Asia Pacific
EMEA
Americas
100
Global
$Billions
50
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015F
Source: JLL Research
2015 I Hotel Investment Outlook 3
Opposite vantage points Debt markets opening up considerably
Two distinct investment models are contributing to a dual-faceted hotel We expect the availability of debt to continue to improve. The U.S. led
investment market. Private equity investors and discretionary investors the way in 2013, and the Eurozone came up in 2014, with debt opening
are charged by different drivers, which will shape the state of play and up in a controlled manner as balance sheet lenders made their way
acquisition victories in 2015. back into the hotel lending space. In Asia Pacific, Japan has been at
the forefront of the liquidity trend.
Under pressure: Private equity funds are flush with cash and have
a need to deploy capital, motivating them to push forward with deals. As the established banks continue to clean up their balance sheets,
After all, for those targeting the sector, real estate investment is their loan-to-value ratios (LTVs) are expected to increase, albeit at a
core business. For funds raised at the onset of the recovery cycle, measured pace. That said, 2015 will likely see an upward pulse on
there will be increasing pressure for the money to be placed during the base interest rates in the U.S., which could affect pricing on commercial
funds’ investment horizon. Private equity players will aim to time the real estate as a whole, and therefore have a trickle-down effect on
market right, deploy capital quickly, and find meaningful yield in their hotels.
three to five-year investment window.
Securitisation is returning as well, led by U.S. hotel CMBS issuance,
Global funds and private equity groups based in the U.S. and Western which is back to 60% of its previous peak. In EMEA, CMBS issuance
Europe will lead the charge here, with the U.S., U.K. and Germany will still be lower in 2015 though it faces big upside potential. In Japan,
as the biggest destinations for private equity capital. Private equity on the other hand, CMBS activity is unlikely to match the level seen in
investors will also look to higher yielding markets such as Southern 2014.
and emerging Europe, as well as resorts and secondary and tertiary
locations in the U.S. In Asia, private equity plays will remain limited to As a whole, lenders continue to be subject to tighter regulations under
core markets. Basel III, which includes increased tier-one capital requirements. LTVs
are generally plateauing below the levels seen in the previous peak.
Deal chemistry: Discretionary investors, on the other hand, have
fewer deployment requirements or market timing pressure. This group The hotel lending space in mature economies will continue to see the
includes sovereign wealth funds, institutions, developers and high entrance of “shadow banks,” or non-balance sheet commercial lenders.
net worth investors who will deploy capital only if they are attracted These lending sources include private equity investors, mortgage
to a property and a deal. These investors are expected to continue to REITs, hedge funds and direct lending sources. These outfits are
concentrate on primary markets in 2015. able to go where the traditional senior banks cannot – both in terms of
geography and LTV ratios. Depending on how fast traditional balance
Hold periods for discretionary investors are typically 10 years or more, sheet lenders get their books substantially clean, the shadow banks are
so they are less bound by market timing in terms of selling an asset here to stay.
at the next peak. In markets where the perception is that hotels are
Capital exports
getting increasingly pricey, discretionary investors will wait for the right
deal to strike. In terms of outbound capital, Asia, the Middle East and the U.S. will
continue to be the major exporters in 2015 with the intensity and
Values on the move momentum of these players notching up. Three main trends are
expected to shape the year:
The question of fair value is resounding through the sector.
Hotel valuations across Asia Pacific have generally eclipsed the Floodgates opening for Chinese outbound capital: Asian money
previous peak levels seen before the global economic downturn will feature more strongly, especially driven by Chinese capital, which
– in part because the region did not fall as deeply. Also in the is growing by leaps and bounds. Insurance companies have emerged
U.S. and Canada, hotel values are climbing above the previous as a new capital source from within the country. They have helped
peak, marking significant recovery milestones – but also pricier grow the swell of outbound capital from several hundred million
purchases. Europe still offers more upside on the recovery curve dollars annually during the past several years to nearly $1 billion in
with per-key values of assets still below the previous peak in both 2014. Global cities with direct flight connections to China are high on
Western and emerging Europe. Investors will continue to follow investors’ wish lists.
opportunities in 2015.
Middle Eastern capital to remain strong: Outbound capital from the
Middle East, which has been active, remains strong and is expected to
Single-asset hotel transaction values today vs. previous peak
continue at a high volume and steady pace.
North American private equity funds have cash to deploy: These
38% funds need to deploy capital in the short term. European yields remain
13% some of the most attractive, with U.S. investors looking further afield as
-23% prices continue to rise on home soil.
EMEA Americas Asia Pacific
Source: JLL Research
While global mergers and acquisitions activity will be muted compared to 2006 and 2007, there is a compelling argument for consolidation among hotel companies. The market simply doesn’t require as many separate global hotel companies as are currently in play, so some consolidation within brand platforms is expected ahead.
2015 I Hotel Investment Outlook 5
Global Capital Flows
Flow of capital across the globe in 2014
12%
6%
15%
54%
81%
10%
6% 98%
7% 9%
76% 2%
24%
0%
39%
6%
57%
61%
74%
20% 43%
North America Europe Asia Global
Latin America Middle East Australasia Africa
Proportion of investment within each region by source of capital
Region Domestic Intra-regional Off-shore Global
North America 80% 1% 12% 7%
Latin America 34% 40% 26% 0%
Europe 38% 16% 36% 10%
Middle East 50% 26% 24% 0%
Africa 0% 0% 100% 0%
Asia 76% 22% 2% 0%
Australasia 43% 0% 57% 0%
‘% global investment’ refers to hotel transactions funded by private equity funds and investment banks that raise capital across a number of countries globally. Absence of arrow
connecting two regions indicates that no cross-border investment was tracked in 2014. Percentages of each of the regions add up to 100%.
Source: JLL Research6 Hotel Investment Outlook I 2015
Single-asset trades to hit all-time high Supply gap spikes opportunity
Globally, single assets will drive more than two-thirds of deals in 2015. In the world’s 30 most liquid hotel markets, the active supply pipeline
This shows just how favourable the market is getting – the volume represents, on average, 10% of existing stock. With few exceptions,
of single-asset transactions in 2015 is expected to eclipse the peak we expect these markets to absorb the new supply assuming demand
levels seen in 2007 – around $40 billion. This marks a difference from continues its growth curve. Supply growth is generally muted in mature
2007, when portfolio acquisitions accounted for three quarters of global economies: in the U.S., Canada, U.K., Germany and France, the
buys, showing that the mega-deals of the peak years are seen more as number of new properties under construction is below the long-term
outliers than a cyclical trend. average. On the other hand, some markets in Asia, such as Jakarta
and Manila, and in EMEA – namely Abu Dhabi, Doha, Jeddah, Lagos,
Makkah, Moscow, Muscat and Riyadh – face a total pipeline of 30%
Global hotel transaction volume by deal type of existing stock, and it could take some years for new rooms to be
absorbed.
140
120 But the bigger story is the ongoing dearth of quality branded hotels in
100 secondary and tertiary locations in emerging markets. Some emerging
80
markets with large middle classes have a distinct supply gap: Brazil is
$Billions
the notable example here, with the number of quality hotel rooms per
60
1,000 residents in Brazil just one-tenth of that in the U.S.
40
20 The countries on the International Monetary Fund’s list of 25 emerging
0 markets have nearly a four percentage point spread between projected
real GDP growth and supply growth. In mature markets, the spread
19 8
20 9
20 0
20 1
20 2
03
20 6
20 7
08
20 9
10
11
20 2
20 13
20 4
05
20 E
F
9
9
0
0
0
0
0
0
1
0
14
15
19
20
20
20
20
20
historically tracks at closer to one percentage point.
Single Assets All Other Portfolios Mega Portfolios >$2 bn
While big cities in many markets across the Middle East and China
Source: JLL Research face a glut of new room openings, these countries’ secondary and rural
locations are underserved based on the aforementioned imbalance
between GDP growth and actual supply growth. In most cases, the
Markets which will see portfolio deals in 2015, including some over the risk factors of an unknown market, no ‘boots on the ground,’ and lack
$1 billion mark, are the U.S., Western Europe and Japan. In the U.S., of experience are keeping investor groups from traversing into this
these transactions will consist of branded mid-market hotels; in Europe territory.
some will include full service hotels as well. In Japan, the lion’s share
of transactions will be comprised of portfolio sales.2015 I Hotel Investment Outlook 7
Performance Outlook
RevPAR is projected to grow by 5-8% globally in 2015, notwithstanding to see growth as well, and hotels in Africa will at times experience
regional variances. In the Americas, pockets of particularly strong double-digit RevPAR growth. Growth is expected to be a bit more
growth will include the U.S., driven by healthy demand fundamentals moderate in Asia: up in Japan and Indonesia, slowing in China – with
and low new supply. the exception of Shanghai – and largely stable in India. Based on
previous expansionary cycles, which have lasted seven to nine years
Many European countries have reached their occupancy ceiling. in the hotel space, the market still faces several years of future growth,
Thus, average rates will be the key driver of RevPAR moving forward, notwithstanding demand shocks.
boding well for hotel profit increases. The Middle East is expected
RevPAR growth expectations for 2015
U.S. and Canada Average rates will
Asian growth prospects
seeing drive RevPAR
mixed; Japan expected
accelerating growth in Europe
to outperform while
RevPAR growth as many markets
China, excluding
due to low have reached
Shanghai, still in decline
new supply occupancy ceiling
4%
7%
5% FLAT
5%
5%
5%
India stable on
lower new supply
pipeline
Overheated
markets will cool Australasian
Growth trending
off in Middle East, growth rising on
upward in Mexico
while those that increasing tourism
but slowing
were in distress and sound market
in Brazil
will show signs of fundamentals
improvementAfrica represents the last untapped frontier for development
2015 I Hotel Investment Outlook 9
The last frontier Who will move first? Private equity funds seem like the most logical
group to re-shape their mandates and be more aggressive in non-
Africa is slowly finding a place on the global hotel investment radar core markets. They account for 45% of deals in mature markets, but
screen with its rapidly growing economy. In the last 24 months, represent roughly 25% of transactions in emerging markets. They are
investors’ ambitions in the market have moved from pipe dream to thus far less active in emerging markets, where yield potential is strong
strategic plan – especially in Nigeria, Kenya, Ghana and Angola. The and competition is lower.
Fundo Soberano de Angola, a sovereign wealth fund from Angola, has
allocated $500 million in equity capital to a hotel development fund for
Africa. Acquisition volume by market type
But investing in Africa is not for the faint of heart. Interest across 100%
the continent remains very niche; funds are specialised and limited, Sovereign wealth fund
90%
and a large portion of development is government-sponsored. In Real estate investment
80% trust
addition, hotel investment in Africa often remains contingent on other
investments related to infrastructure and natural resources. Investment fund /
70% Private equity
Some describe the region as a virtual pipeline because hotel 60% Other
developments tend to take a long time to complete. The extended 50% Hotel operator
timeline is due to a confluence of factors including onerous ownership
40% High net worth individual
structures, limited infrastructure and an inadequate pool of local
development and management partners, as well as the overall difficulty 30% Developer / Property
company
of doing business. 20%
Corporates
These factors impact developers’ momentum as well as willingness to 10%
Bank / Institutional
proceed. Many investments continue to go into “on again, off again” 0% investor
Mature Emerging
mode. That said, Africa represents the last main largely untapped
frontier for hotel development potential.
Source: JLL Research
A chill in the BRICs
By creating a mandate to penetrate the risk factors and approach a
In Brazil, the slowing of economic growth has investors concerned, similar share of investment in emerging markets to match the level
but the clout of the middle class remains strong. And with a huge deployed in mature markets, private equity groups stand to gain
imbalance of high demand versus institutional quality hotel supply, another several billion dollars in collective investments per year.
investors and developers willing to move the ball have winning plays to This would address both their need to deploy capital as well as their
make. However, as in all emerging markets – if nobody moves, nobody requirement to achieve meaningful upside.
wins.
Ownership structure
Investors would rather leave Russia alone for now, given the near-
In mature markets, nearly 50% of full service hotel stock is owned
term economic outlook. Home-grown demand is spurring a need for
by private equity funds, real estate investment trusts and institutional
more mid-market properties, but overall hotel performance growth
investors. On the flip side, the panel of emerging countries has nearly
opportunities are muted.
half of its high-quality stock owned by developers, corporates and
India remains one of the most difficult places to invest. In addition to groups tied to high net worth investors, most with no clear exit strategy.
expensive land, projects are often riddled with bureaucracy, red tape,
and competition with other real estate developers. Hotel ownership composition
Outside of Shanghai, China faces a significant risk of oversupply in the Corporates
higher tiers of hotels. There is, however, opportunity in the economy Sovereign wealth fund
sector, where demand is increasing throughout the country.
Other (i.e. Government)
Mavericks and first movers, take note High net worth individual
Bank / Institutional investor
Liquidity gap: Emerging markets are now home to one-third of
investment-grade hotel rooms worldwide. However, only 10% of the Developer / Property company
world’s hotel real estate deals are happening in these markets. This Real estate investment trust
lop-sidedness will continue to swell because hotel supply growth Investment fund / Private equity
in emerging markets is more than twice as much as that of mature Hotel operator
markets. The increasing prevalence of a liquidity gap in emerging 0% 5% 10% 15% 20% 25% 30% 35% 40%
markets is creating an imbalance that can play to the favour of first Mature Emerging
movers.
Source: JLL ResearchIncremental new allocations into the hotel sector are paramount, in order for the hotel investment market in emerging countries to start to even inch towards liquidity levels seen in the U.S., Western Europe, Australia and Japan. The biggest opportunity is for companies who can develop and execute nimble and creative strategies and enter emerging markets.
2015 I Hotel Investment Outlook 11
The floodgates for Chinese capital are unleashed
Typically focused on multi-generational investments, Chinese investors
bring a new perspective to deal selection. Trophy and prestige play
more of a factor than pricing and market timing, and 2015 is lining up to
be China’s breakout year.
A red-tape-laden approval process for overseas investments valued at
more than $100 million previously hindered Chinese investors, leaving
many on the sidelines. But China’s Ministry of Commerce has changed
the rules, and effectively, changed the game. In late 2014, it lifted the
$100 million threshold while also loosening the approval process for
overseas investments.
The floodgates for Chinese capital are unleashed, and Chinese
insurance companies are taking the field. 2015 is expected to bring the
completion of their largest purchase to date: the $1.95 billion acquisition
of the Waldorf Astoria New York. Chinese insurance companies are
also looking at other ways to enter markets, such as the purchase of
management company Louvre Hotels, which represents a network of
1,100 mid-market properties in dozens of countries.
China’s policy change enables investors to more readily compete in
international bidding processes. This will have a mixed implication for
China domestically: on one hand, less capital circling the country might
temper the development pipeline in markets where supply is too high –
thus benefiting markets at home. On the other hand, China faces risk
that local investors won’t transact enough existing assets within China.
China outbound capital invested into hotels
6
5
4
$Billions
3
2
1
0
2011 2012 2013 2014 2015F
Source: JLL Research
China’s continued velocity and buying preferences will shape the future
of hotel real estate for some time to come. In 2015, Chinese capital
is expected to represent some $5 billion in global hotel investment,
making it among the top three exporters of capital globally along
with the U.S. and the Middle East. This comes just years after China
was not even in the top ten. We expect this level of activity to hold
steady and become the new norm, and there will be room for Chinese
investors to gain more scale in their preferred markets. Chinese
investors, undoubtedly, are on deck to shake things up.12 Hotel Investment Outlook I 2015
8 Key Takeaways
$68 billion in global volumes expected in
2015
A 15% increase on 2014 levels and the
third-highest annual total on record
Chinese capital to represent $5 billion in
outbound hotel investment
The Americas will drive global volumes,
with an expected $34.5 billion in
transactions
$24.5 billion in hotel trades expected to take
place in Europe, the Middle East and Africa
13% more transactions expected in Asia
Pacific, lifting deal volume to $8.5 billion
Single asset transactions will drive more
than 2/3 of deals in 2015
5-8% growth in RevPAR is projected
globally2015 I Hotel Investment Outlook 13 Appendix Sources and methodology This report includes hotel transactions tracked by JLL valued at $5 million and above. The sale price is not necessarily the actual contract price, but rather that reported in the press, the confirmed price, or amount apportioned to hotel component. This information is publicly available and JLL provides no warranty for accuracy. All dollars are U.S. dollars unless otherwise indicated. Local currencies have been converted to U.S. dollars using monthly average exchange rates. Definition of buyer and seller types Corporates: Public and private companies from whom investment in hotels is not their primary business activity and who do not operate hotels Developer / Property company: Property developers who buy with the intent of redevelopment HNWI: High net worth individual Hotel operator: Listed or unlisted companies that operate hotels or serviced apartments as their core business Bank / Institutional investor: Direct investment by pension funds, banks and insurance companies Investment fund / Private equity: Companies, including investment banks, which invest on behalf of other investors. Investments are opportunistic and require an active management strategy REIT: Real Estate Investment Trust or Property Trust. Includes Listed Property Trusts (LPTs) in Australia Sovereign wealth fund: Funds owned by a state composed of various financial assets
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