London, 4th March 2002 � Prudent hotel investors will have to pick their market exposure in Europe more carefully than ever in 2002, according to a report to be released this week by Jones Lang LaSalle Hotels.

Jones Lang LaSalle Hotels and LaSalle Investment Management will jointly issue the Hotel Investment Strategy Annual (HISA 2002), providing investors with recommended investment opportunities for the coming year.

According to the report a reasonable prospect exists of Europe�s economy outperforming the US in both 2001 and 2002.  In turn Europe�s hotel markets stand to show stronger growth levels in 2002 than their US counterparts.  �Dependant on their source markets, some cities will fare better than others, with the Southern European markets showing the most promise at this stage.  New supply increases will be key� points out Arthur de Haast, Managing Director, Europe at Jones Lang LaSalle Hotels. 

�Business demand is likely to come back first and strongest, whilst the long-haul leisure market will lag this recovery as the nervousness persists� adds Mr de Haast.  The operating markets should demonstrate signs of stability in the first half of the year, and some hotel budgets set for 2002 in the aftermath of September 11 look to be overly pessimistic.  

�The prospects for Europe appear to be strengthening rather than weakening which will bring renewed interest.  This will be reinforced by current sentiment, which believes asset prices having softened will now harden, causing a greater convergence between buyer and seller expectations.  As a result we believe that transaction activity in 2002 is likely to be similar to 2001, possibly showing a slight increase in single asset transactions.  Corporate activity is also likely to pick up during the latter part of the year, with the consolidation of Europe�s small to mid-cap hotel companies likely to continue� stated Nick Marsh, Executive Vice President and head of the European Investment team.

According to Jones Lang LaSalle Hotels, these are the investment priorities for 2002:
 

Jones Lang LaSalle Hotels� recommended investment strategies in 2002 include:

• Focus on locations with high levels of domestic and regional demand
• Investigate sale and leaseback opportunities in the current low interest rate environment
• Target the main gateway cities (ie London, Paris, Amsterdam) in the medium term, if product is available, as they will show the strongest growth over five years
• Utilise regional centres, less reliant on US and international demand, to support portfolio performance in the short term
• Focus on Southern Europe which is set to show the strongest GDP growth rates over the period 2001-04
• Gravitate towards high quality sectors or the budget sector � avoid mid-tier hotels
• Exercise caution towards Central and Eastern European markets where there have been significant supply increases eg Budapest and Warsaw
• Look to acquire branded or brandable assets
• Target cities that are well connected with both budget and full-service airlines
• Seek to add value in 2002 via restructuring and repositioning assets to take advantage of the upswing
• Look at individual assets operated by a mid-tier brand that is a possible take-over target, with the prospect of re-branding to a top-tier brand to realise a yield kick
• On a corporate level, look at hotel companies where there is a discount to net asset value.

Spain is set to enjoy the strongest GDP growth in the EU over 2002 to 2004 which will have a direct impact on the country�s hotel markets given the high proportion of domestic demand.  2002 also gives Spain the EU presidency which should generate increased government and corporate hotel demand.  Growth will be slower in 2002 in both resort and city markets compared to the phenomenal growth levels enjoyed in recent years, but Spain will be one of the stronger performers in 2002.  �We see an increase in investment activity in 2002 as more product comes to the market and owners seek to take profits reaped over the past several years and are more motivated to sell.  Domestic investors are turning to real estate as a safe haven as the Spanish stock market has suffered in the wake of the Argentinean crisis� states Mr Marsh.

An increase in motivated sellers is also likely to occur in Paris in 2002, particularly owners with short to medium-term investment horizons such as the US equity funds, according to the report.  �These types of owners entered the market in the late 1990s and are unlikely to see further asset appreciation in the short term and may judge the time is right in the cycle� adds Mr Marsh.

2002 is likely to see limited growth in Germany�s major city markets, with Munich expected to be the strongest performer.  Frankfurt and Hamburg should experience marginal growth, with Düsseldorf recovering from the poor performance in 2001.  Overall the economic recession, cutbacks in corporate travel and lower attendance at trade fairs will impact hotel performance in 2002.  However, German institutional investors are cash-rich and have become increasingly active in the hotel sector as a means of diversifying their portfolio.  

Prague should be the strongest performer in Central and Eastern Europe in 2002 as the European conference market rebounds.  Both Budapest and Warsaw are suffering from excess supply and falling demand in the current climate.  �The investment markets in Central and Eastern Europe are not refined highly illiquid.  It remains a market for opportunistic investors and for investors with a medium to long term horizon� stated Mr Marsh.

North America  - Recovery By Late 2002

Despite the current hand wringing, US hotel markets are much better positioned than in past recessions, and high-income yields and relative stability will attract continued investor interest.  Contributing to this are several factors:

• Because lenders required more equity and used tougher underwriting standards, the building cycle of the 1990s was more constrained.  The greater equity contributions will prevent many hotels from sliding into foreclosure situations.
• Hotel yields remain high.  The average cap rate for hotels is currently 11.0%, compared to general real estate at 9.3%.  Since 1991, hotel cap rates have contracted 100 basis points, while 10-year treasuries have fallen by three times that amount.
• Many of the country�s metropolitan areas have diversified since the last recession, which should result in quicker recoveries for most cities.

Asia Pacific � A Year of Financial Restructuring  

The economic recovery that occurred post the 1997-1998 crisis faltered during 2001 as most Asian economies felt the effect of the global economic slowdown.  However, the standout economies of Australia, China and India have remained relatively unaffected and continue to post economic growth.  Recovery for most markets is anticipated by Q4 2002; however, the planned financial restructuring in Asia�s largest economies, which stalled during 2001, may be further tested in 2002 given the current economic climate.

For the Asia Pacific, investors expressed the strongest buy sentiment for Bali, Beijing, Phuket, Shanghai and Sydney.  The region�s markets vary greatly in terms of availability of debt, treatment of non-performing loans and vendors� price expectations.  These factors impact on the feasibility of hotel acquisition and development across the markets.