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Analysts advise hoteliers to watch out for tougher times

16 March 2006

Hotel investors are still in confident mood, despite increasing concerns over how long the good times can last.

At the International Hotel Investment Forum in Berlin last week, Derek Scott, economic adviser at consultancy KPMG, warned the hotel industry against becoming too optimistic and complacent about the market.

Opening the annual hotel investment conference, Scott said: "Capitalism thrives on optimism and most people seem to be optimistic about the future.

"However, nobody can really explain why. And for pessimists, the low levels of bond yields across the world are warning lights that something is seriously wrong with the world financial system."

The consensus among the banks attending a discussion on debt, which included Barclays, Morgan Stanley, the Royal Bank of Scotland and Deutsche Bank, was that hotel transactions were currently highly leveraged against asset values.

One industry insider claimed this could cause problems in the future: "A change in world economics, interest rates or supply and demand could have implications for transactions being done at the moment at these high leverages."

But it was not all doom and gloom: the market in 2005 proved to be the most successful since 2001 and investment deals were predicted to continue throughout 2006.

A survey by consultancy HVS showed that European hotel values grew by 5.6% in 2005 and that growth had returned to 2000 levels.

HVS director Karen Smith said: "HVS recorded a 77% year-on-year increase in total investment activity to ¤15.9b (£11b) in 2005, fuelled by a significant number of investors seeking to diversify their property portfolio and acquire higher-yielding investments."

Although most growth was driven by Eastern European markets, only five markets out of 28 (Berlin, Munich, Barcelona, Athens and Lisbon) saw increases below inflation.

Joni Smith, associate director at CB Richard Ellis Hotels, remained upbeat about the hotel real estate market: "We've got so much more investor confidence, despite the cyclical nature of the business," she said.

"There are increasing numbers of investors looking at hotels as an asset class, and a huge amount of money going into real estate through pension funds. That will have a positive effect on hotel investment values."

Hotel investors have also moved away from sale-and-leaseback deals to more sale-and-manage-back contracts.

Jonathan Langston, managing director at Tri Hospitality Consulting, explained this was partly because investors understood the sector better now and could see additional potential earnings from hotels.

"They are betting on the increased earnings and increased values through sale-and-manage-back deals as opposed to the certainty but constraints of leaseback contracts," Langston said.

"I don't think it will knock sale-and-leaseback completely as these arrangements will still appeal to some investors."

By Emily Manson

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