So long, partner; I hopeit was good for you too
Lovely sounding word, REIT - full of City-jargon mystery. Three years ago, no one in Europe really knew what a REIT was or how to pronounce it. Was it re-it, or re-urt or just plain reet? Whatever, it sounded powerful and strong, and everyone was talking about the real estate investment trust (for that's what a REIT is) as though it (or they) were the new gold standard in hospitality finance. South Sea Bubble more like.
They came, they saw and they tried to conquer. But they couldn't quite get their act together before the portcullis of due propriety shut them out. And so they went away again. A short story in the history of investment (see page 28).
Actually, that's not quite accurate or fair. Standard REITs still exist as US-based property companies, making healthy profits from rent. Their tax status, however, prevents them from operating businesses from their estates.
The REITs that have taken a tumble are the those that, until recently, enjoyed a paired-share or double-company status. This allowed them to collect rent AND operate businesses based in their properties. The profits were collected in the form of rents and mortgages and distributed, through a loophole in US tax law, to shareholders without payment of corporation tax.
There was nothing improper about this, but it gave the REITs huge reserves of purchasing capital, which left ordinary companies - such as Hilton and Marriott - stranded on the starting blocks when it came to any kind of takeover race. "False start, not fair" cried the establishment, with the result that the loophole has now been closed. Goodbye paired-share status; hello level playing field.
A year ago it looked as if a few paired-share REITs were going to march across Europe, mopping up hotels like anteaters at the Ugly Bug Ball. Now they appear to be retracing their steps.
They haven't gone away. Far from it - the likes of Starwood and Patriot are still very active in the market. But the blunting of their potential purchasing power has resulted in a deflation of share prices. "Back to normal" as one City analyst put it.
This sounds like a good thing, but there's a problem. "Normal", particularly in London, generally means "undervalued". And the continued undervaluation of hospitality shares means that investors are discouraged. Despite their apparent greed, at least the REITs were financing an expansion that might not otherwise have been possible.
The retreat of the REITs from Europe may reduce the sense of threat that existed when they were stomping around in their purchasing pomp. But with them goes some real opportunities to expand. Let's hope that the "smaller" investors left behind can create similar openings. n
Forbes Mutch
Editor
Caterer & Hotelkeeper
