Although the hotel markets worldwide have undoubtedly been adversely affected by the attacks, there is underlying strength in the sector. And while the challenging market conditions present risks, there are also definite opportunities for the well-informed investor.

The immediate impacts of the terrorist attacks and the subsequent invasion of Afghanistan on the hotel market have varied around the world.  �In the Americas the effect has been devastating, with hotels in the US, Canada and Caribbean reporting plummeting occupancies.  US hotel RevPar bottomed in the week following the attacks, down 37.3% over the previous year, but has since posted a slow and painful recovery� stated Arthur de Haast, Managing Director Europe at Jones Lang LaSalle Hotels.  �Continental Europe has been somewhat more removed and distanced from the conflict and hotels with strong domestic demand have been insulated to a degree.  However, hotels with a high exposure to US demand are feeling the cutback in international travel� continues Mr de Haast.  He adds �economic vacillation in Asia has driven a fall in hotel performance ratios, which had begun even prior to September 11th, but has now gathered significant pace�.  

Nick Marsh, Executive Vice President of Investment Sales at Jones Lang LaSalle Hotels states �the reaction of the global investment community to the events of September 11th has been swift.  It appears that deals in Europe and Asia Pacific are on track, although prices have softened slightly.  This compares to the US where investors are adopting a �wait and see� stance and 2001 is likely to close with a lull in buying activity�.  

Out of uncertainty comes opportunity, particularly for counter-cyclical investors who are willing to accept lower short term cash-flows.  �The hotel sector will recover as it has done in the past and these investors will enjoy considerable capital and income appreciation in the medium to long term� stated Mr Marsh.  However, access to capital will remain a critical factor in the hotel investment arena.  �Market uncertainty will be priced into hotel transactions as investors adopt differing assumptions as to their expectations for recovery and growth.  On the debt side we will see lower loan-to-value rations and higher debt-service-coverage ratios� said Mr Marsh.  He adds �although lending institutions are understandably cautious, they are active and deals can be financed�.   

Europe

Co-author Anna Town, who leads Jones Lang LaSalle Hotels� European research effort states that Europe has not been gripped by investor panic.  �There is a �proceed with caution� sentiment emerging with investors unwilling to make a rash or knee-jerk reaction.  Investors with a longer-term view are likely to show continued faith in the sector and while investment volume in Europe is likely to be low for the rest of the year, there will be some opportunities for the astute investor� said Ms Town.  

�Capital sources are likely to be hotel operators with large war chests following the disposal of non-core assets, investment funds (particularly in Germany) which have seen significant capital in-flows and are obliged to place their capital, high net-worth European and Middle Eastern buyers, whilst US managed capital is expected to become less competitive� added Ms Town.

Comparisons with the Gulf War conflict show that Continental European hotels markets felt a limited impact from the temporary reduction in travel.  �The UK market suffered so significantly in 1991 due to its higher exposure to US demand and its economy which was more advanced in the cycle with GDP growth falling.  In stark contrast, Continental European economies saw an expansion of 3.1% in 1990, an acceleration to 3.5% in 1991 and did not turn negative until 1993� said Ms Town.  �Thus we can conclude from history that the economic situation rather than individual incidents such as the Gulf War had the greatest impact on Europe�s hotel sector� she added.  Although Europe�s economic growth forecasts have been revised in the wake of September 11th, the power-house economies of Spain, France and the UK are still showing robust consumer sentiment and are best placed to weather the US economic recession.

Markets most at risk include gateway cities with the highest exposure to US demand, namely London, Paris, Rome, London and Amsterdam (particularly in the luxury segment); hotels at major airport hubs; convention cities in the short term with a high incidence of international business as non-essential travel is cut; as well as European leisure destinations with a high exposure to US demand and Summer 2002 is potentially at risk as travel decision making is delayed.

USA

In the United States, several encouraging investment-related scenarios have come forth. �We are seeing a narrowing of the gap between bid and ask prices as owners in private equity markets realise 2000 was a peak in hotel values,� said Arthur Adler, Americas Managing Director of Jones Lang LaSalle Hotels. �Also, the potential exists for a hotel sell-down by institutional investors who may find themselves overweight in this asset class. Combine this with the historically low interest rate environment, and some counter-cyclical buying opportunities should emerge in 2002. On the capital markets side, a spike in restructuring requirements will allow proactive lenders to enter the market with loans that have a more favourable risk-to-pricing relationship.�

Apart from curtailed tourism and air travel, from an investment perspective, some fundamental weaknesses that the U.S. hospitality market must overcome include stock market shocks, threats to price integrity brought on by discounted rates and limited capital availability as some lenders balk at uncertain cash flows and values.

Markets most at risk in the USA include those leisure destinations dependent on long-haul air travel such as Hawaii and the Caribbean; large US cities reliant on long-haul air travel and business demand; the luxury sector which will feel the impacts most keenly; airport hotels; convention cities such as Atlanta, Las Vegas, New York and Chicago.  Washington DC and New York as the focal points for the terrorist attacks are also set to suffer a significant short term hit.

Asia Pacific

As the most geographically isolated region from the events of September 11, 2001, the Asia Pacific hospitality markets have had limited negative effects to date. 

�New Zealand and especially Australia are perceived as safe havens from current threats,� included co-author Michelle Webb, who heads Asia Pacific research for Jones Lang LaSalle Hotels. �The strength of the Chinese economy and its status as an emerging tourism market is also favourable, but, on the downside, we are witnessing troublesome political and social environments in Indonesia and the Philippines.�

David Gibson, Asia Pacific Managing Director, stated, �Recent events have the potential to compel some owners to sell already struggling hotels and opportunistic investors will emerge if there is an attractive proposition.  Given the current conditions there is the opportunity for consolidation in certain local markets, with a number of investors readying themselves for opportunistic purchases. �  He adds �China is currently the investment hotspot in Asia, draining capital from most other markets.  With a forecast GDP that far outweighs its neighbours, the 2008 Olympics and an economy that is not reliant on trade and tech production, China is regarded as a relative safe haven destination�. 

There are other opportunities boding well for the Asia Pacific hotel investment markets. They include the anticipation of capturing displaced tourism and special events from the U.S. and Middle Eastern markets; the trend toward residential conversion of hotels, particular in Australia; the consolidation of the tourism industry; and further introduction of discounted international airfares originating from the region.

Naturally researchers at Jones Lang LaSalle Hotels composed this report with the assumption that any military response will be confined to a small region of the world and will be relatively limited in scale. It is also assumed that much of the �war on terrorism� will be conducted at a political and financial level, supported by a security crackdown on terrorist networks.