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Turn back the clock - Leases are back in favour for Hotels

Hotel investment market EMEA – A Weak 1st Quarter 2009

The EMEA hotel investment market experienced a weak first quarter of the year with investment levels reaching only €700m. This represents a decrease of 81% compared to Q1 2008, although notably levels this time last year were still quite strong despite the low full year volumes.

Mark Wynne-Smith, CEO of Jones Lang LaSalle Hotels, Europe, Middle-East and Africa said: "We have been predicting that the 1st half of this year would be very quiet and the volumes are low but within the range."

Looking at the source of investment in the first quarter of the year, domestic capital remained the dominant source, representing over 50% of the volume transacted. The strong activity of Middle Eastern capital (26.7% in 2008) did not continue in the first quarter of 2009 - no hotel transactions have been funded by this source of capital yet. Wynne-Smith continued: "Middle Eastern investors generally seek to acquire trophy assets which have not been offered in the market. Their current focus generally remains on distressed assets and we expect that whilst more distressed assets will come to the market in the second half of 2009, there will be very few cheap trophies".

Also in line with the predicted trend, hotels with the benefit of a lease contract were in favour again. "Investors are looking for security and are sensibly not willing to buy a property where the income is expected to fall. We also saw vacant possession deals as hotel operators are the only groups who really need the properties in order for their business models to thrive."

Clearly, the overall hotel investment volume will remain subdued in 2009 and is expected to end well below volumes achieved in 2008. "We have to accept that we are starting a new cycle. Peak years like 2007 - where we registered a volume of €8.6bn in the first quarter alone – are in the past" concluded Wynne-Smith.