Investment in hotels market looks set to stay buoyant

Buoyant investment in the hotel market is likely to continue this year as returns remain higher than those from commercial investments.

Joni Smith, associate director of property consultancy CB Richard Ellis Hotels, told delegates at KPMG's New Year Hotel Summit in London last week that the high value of yields had been the driving force behind investment in the hotel sector.

Despite some yield compression, returns on hotel investment remain at 6-7%, above the 5% return expected for commercial real estate.

This has been driving up
hotel values and giving hotel owners increasing opportunities to release capital at strong prices.

Smith explained that operator and brand strength had become a new way of measuring the total value of a property and its potential financial performance.

"Because intangibles and not just the financial value of hotel investments are being factored into values, it's appealing to a broader range of investors," she said.

Smith predicted more money would come into the sector, especially from private equity investors and because of the changing nature of pension fund investment requirements.

She added: "At the start of 2006, demand remains high in the sector and further yield compression is expected."