9th November 2001��The view from leading industry executives was cautiously optimistic at this year�s 13th Hotel Industry Investment Conference which was hosted by Andersen, American Express and Jones Lang LaSalle Hotels.  More than 250 senior executives from the hospitality industry converged at the Royal Lancaster Hotel, on 7th November 2001, to consider the prospects for European hotel investment during this period of uncertainty.  The general consensus was that economic recovery would be evident from late 2002 and the current period of volatility and downturn would be tempered by the industry�s long-term stability. 

The events of 11th September and the comparison with the Gulf War understandably featured heavily in the analysis and presentation content. Speakers highlighted that hotels are more profitable now compared to the early 1990s and have greatly improved efficiencies, more sophisticated financial structures and reduced new supply threats. Consequently, although the rate of decline for US hotels� RevPARs is expected to be double the 2.5% fall experienced in 1991 at the height of the Gulf War, the industry is in a far stronger position to withstand the effects.  Among all the gateway cities in Europe, London is expected to bear the heaviest drop in RevPAR at 14% for the full year.

The impact of 11th September has resulted in investors exercising more caution, taking a longer-term investment view and there are clear signals that geographic diversification in real estate will reduce investor risk. Although returns are expected to be lower than for some years, the sector is likely to continue to offer good relative value for the astute investor, supported by low interest rates. 

In comparison with US and Asia, Europe is well placed to attract global capital. Prior to September 11th, the volume of capital committed to the European hospitality sector was at record levels with more than €8 billion invested mainly through a series of portfolio transactions including Le Meridien, Posthouse, Scandic and Swissotel. US opportunity funds had US$19 billion targeted at European real estate at the beginning of the year, much of which remains unspent, and evidence suggests they have not retreated home.  German open-ended funds too have €10.8 billion of funds targeting real estate. Other buyers include private equity investors, a number of hotel operators with big war chests as well as high net-worth European and Middle Eastern individuals.

Key points from speaker sessions

Kevin Grice, Senior Economist, at American Express Bank provided a macro-economic review of Europe. 

• The events of 11th September accelerated a slowdown already underway in Europe�s economies.  Spain, France and the UK are best placed to weather the economic crisis, whilst Germany is the closest to a technical recession.  
• Europe should avoid some of the pain currently being experienced in the US due largely to the firmness of European consumer sentiment. Consumer sentiment is coming under some pressure now, but is still much stronger than it was in the early 1990s at the time of the Gulf War. 
• The Eurozone has a 50% chance of entering a recession as unemployment is rising and business capex is falling.  But this recession risk is much lower than in the US, where recession looks inevitable.  In Europe�s favour is the ability to reduce interest rates much further, low inflation, lower oil prices, solid wage growth and the probability that capex will fall less than is likely in the US.  The UK has only a modest chance (20-30%) of entering a recession.

• There are significant plus points for property despite 11th September impact; low supply increases in all sectors, low interest rates, positive yield gaps, high liquidity and a lack of over-pricing in mature markets.  
• Hotels only account for 6% of all cross border acquisition activity in the real estate sector.  Given the pool of equity available, this has to represent a massive opportunity for hotel investment going forward. 
• The strongest and dynamic city economies for investors in real estate over the long term are likely to be Paris, Dublin, Helsinki, London, Munich, Stuttgart, Zurich, Frankfurt and Milan.  Strong demand for real estate in these cities will in turn drive hotel performance.  

• Europe�s hotel investment markets have not ground to a halt as a number of deals have closed since the terrorist attacks including the Berners Hotel in London, Heathrow Park Hotel, the Basey Hotel in Brussels, Radisson SAS Manchester and the Holiday Inn Bonn.  
• Trends going forward in the investment markets include; some sellers sitting tight waiting for confidence to return, volatility in pricing as bidders adopt differing assumptions for recovery, limited M&A activity, more �off-market� deals and opportunities for developers with operator partners targeting institutional capital.
• Over the next 12 months investors have the opportunity to find positive yield gaps on individual assets, whilst private equity holders may take smaller to medium sized quoted companies private.  Opportunity also exists in secondary cities with less reliance on the US markets and domestic and safe holiday destinations. 

• Europe�s gateway hotel markets have taken a hit from the events of September 11th, with London suffering the most (down 22% in RevPAR for the month of September); Paris (an 18% decline) followed by Amsterdam (with a 12% fall).  The rate of decline in gateway city RevPAR is likely to slow in November although remain negative for the remainder of the year and may not move into positive territory until mid to late-2001.  In 2002 London�s hotels may experience a possible 10% decline in RevPAR and 12-15% decline in gross profits.
• Outside major gateways the impact of the downturn in US demand has been limited due to the greater importance of domestic demand and the local economy.  Southern European regional cities appear to be most resilient looking forward, whilst Germany may falter in 2002, as economic growth stagnates.  Looking forward, hot sectors in Europe include economy/budget hotels and resorts, notably master-planned destination resorts.  Hot markets include Spain, Portugal, Italy and Greece.
• Positive trends include the resilience of the budget sector; a possible boost to domestic demand due to a propensity to stay closer to home, slowing supply growth; increased budget airline activity; an enhanced labour pool, and the opportunity to accelerate refurbishment programmes.  Nick also suggested further M&A activity in 2002 was likely.

• Institutional activity has increased significantly in the hotel sector via sale and leaseback transactions with operators.  The split between �the bricks and the brains� is underpinned by operators being able to achieve higher multiples on their real estate than their shares, while retaining part of the cash-flow.  Institutions see long term growth in the sector, believe that stock markets undervalue hotel real estate and that the shortage of capital translates into attractive pricing.
• Hotel operators (such as Hilton International) are keen to free up equity in real estate to fund further expansion and development of their brand, without additional debt obligations and relinquishing representation. 
• Institutions (such as the Royal Bank of Scotland) find the hotel sector attractive as it is operationally mature, but in terms of financing and investment it is just emerging, offering opportunities for investors.  They look to operators to provide some equity in the partnership and avoid straight management contracts.
• September 11th has not dampened the appetite of institutions for hotel investment as they take a long term view and are not deterred by short term volatility.  History suggests that the hotel sector will be the first real estate market to recover.

• Companies with owned and leased assets would be hardest hit following the events of September 11th, whilst those with a larger portion of management and franchise contracts (such as Six Continents) would be better placed.
• Operators such as Hilton International who have removed assets from their balance sheets via structured finance transactions were also better positioned.
• The analysts did not foresee widespread consolidation for the industry, however they did not rule our stock for stock deals if recovery was achieved in Q3-02.  The most likely activity will be for mid-sized quoted hotel companies to be taken private by a majority shareholder.
• Gateway cities were the choice for opportunistic investors in the current environment as they would bounce back first, despite the current fallout in demand. Defensive investors should go for provincial cities or franchise agreements.