London, 13th February, 2002 � Following the events of September 11th, investor sentiment towards the European hotel sector has weakened according to Jones Lang LaSalle Hotels� Hotel Investor Sentiment Survey (HISS), which targets the world�s 1,800 largest investors and owners of hotel/resort properties. 

The encouraging news for the industry is that it is only short-term performance which investors believe will suffer.  The majority of investors believe that the medium term outlook for Europe�s hotel markets is strong.  �Investors do have faith in the sector and believe the majority of markets will stage a recovery over the medium term, with London leading the way.  They don�t believe that we are in a prolonged downturn� stated Arthur de Haast, Managing Director, Europe at Jones Lang LaSalle Hotels.

As a result of the medium term optimism, initial investment yields have not shifted significantly since the last survey.  �Investment yields remained stable in London and Paris, and even lowered in some German markets, highlighting investor faith in the sector� said Mr de Haast.  Return requirements are slightly higher to price in the additional risk in the operating environment.

Occupancy and ADR

Not surprisingly, investors believe occupancy and ADR are set to fall further in the short term, with London being labelled as one of the worst performers.  London has borne much of the downturn in US travel, acting as a gateway for US visitors, not only to the UK, but also to Continental Europe.  The US market had already dropped off prior to the events of September 11th due to the foot and mouth disease and the general deterioration in the US economic outlook.

Other markets investors expect to perform negatively in the short term include Edinburgh, Budapest, Birmingham, Prague, Warsaw, Brussels and Berlin.  In contrast, Milan is the only market to have a positive outlook in the short term.

However, investors believe that Europe�s hotel sector will stage a recovery in the medium term.  Only two markets remain in negative territory over the medium term, being Warsaw and Budapest, both cities which are facing a situation of oversupply.

While London has suffered the most, it is expected to make the most notable turnaround over the medium term.  Paris too is viewed by investors to recover in 2002, having also suffered heavily from the downturn in transatlantic travel.

Frankfurt is thought to be the strongest European performer over the medium and Southern European hotel markets are also in favour with investors � particularly Madrid, Barcelona and Rome.

Investment Yields

Investors are demanding higher returns in most European markets as they price in the heightened risk and uncertainty in the operating markets.  Average IRRs across Europe stood at 16.7% in December 2001 compared to 15.6% in June.

Investment yields have not shifted significantly, despite the impact on the trading market, highlighting the fact that buyers remain for European hotel assets, as well as the low interest rate environment.  Average initial yields have shifted out slightly over the past six months to an average of 9.1%, compared to 8.6% in June 2001.  Despite this, Europe still shows the lowest initial yields in the world.

London�s initial yields were at 8.4%, demonstrating investors� long-term faith in the market and its ability to attract hotel demand in the future.  Initial yields in Paris were similar at 8.0%, evidence of its position as a first tier investment destination.

All the German markets showed a tightening in yields over the past six months, which can be attributed to the lack of stock and the anticipation of further growth by many German investors.  Hamburg boasted the lowest initial yield in Europe at 8.1%. 

Market Cycle

Investors believe that over the past six months a number of European hotel markets have passed their peak and entered a downturn.  However, given their relatively positive outlook for the trading markets over the medium term, they don�t believe this downturn will be prolonged.  Markets to pass the peak since the last survey include Madrid, Barcelona, Paris, Berlin, London, Stockholm, Budapest and Warsaw. 

Other markets such as Amsterdam and Edinburgh fell earlier and are considered to be in the late downturn phase.

Investment Intentions

Investors do not intend to exit the European hotel sector on mass as a result of the challenging environment, with 50.4% of respondents intending to hold their assets and 30.1% stating they would make an acquisition over the next six months.

Markets high on the shopping list for investors are Rome and Milan.  They are also strong candidates for development, as are Barcelona, Madrid and Lisbon.

Global Comparison

The US hotel markets felt the biggest short-term shock in the wake of September 11th.  Investors and owners have clearly voiced their change in sentiment for the US hotel sector, with a sharp shift in the short-term outlook for occupancy and room rate to strongly negative. The strongest negative sentiment was found in the leisure markets of Hawaii and Orlando, whilst opinion is also firmly negative for New York, Boston and Chicago in the short term.  Of the 20 markets examined in the HISS, Washington D.C. had the most moderate negative sentiment.

Although all regions have been impacted, Asia Pacific is considered to be the least affected region in the short term, due to its geographic isolation and strength of certain economies. The stand out performers in the short term are Shanghai and Beijing and the resort market of Phuket. China has withstood the economic downturn of the region and continues to attract much of the investor interest. This is likely to accelerate in the lead up to the 2008 Olympic Games in Beijing.
 
Short Term Trading Expectations