The Hotel Investment Outlook

The latest comments about the world outlook for the Hospitality Industry as presented by ALIS Summer Update

Monday, August 17, 2009

Fuente: Calvet & Associates

As Jeff Higley (Editor-in Chief of Hotel and Motel Management Magazine) said in his “Twitter” page on June 2, the IREFAC (Industry Real Estate Financing Advisory Council) guys are the pulse of the industry. But, as he also noted, “…the IREFAC panel says the only way to get a phone call from your lender these days is to not make a payment.

The general opinion of the panelist of lenders who were present at The Americas Lodging Investment Summit (ALIS) coincided with the previous panel moderated by Raul F. Calvet during the CATHIE 2009 Conference: a gray cloud continues to hang over the hotel industry while even more so over the resort development business. Lenders today are favoring projects in urban hotels, especially in business destinations.

The overall consensus is that the industry will not return to “business as usual” as many were anticipating after the recovery process, but rather will arrive at a “new normal”--a condition which will be somewhat different than what we’ve experienced in the past. We anticipate seeing more traditional values on financial transactions as well as more of the old-style banking. Lenders and banking institutions will try to avoid raising values by leverage, one of the worst mistakes made during past years. Lenders participating on the ALIS panel also agreed with hoteliers’ opinions, stating that the year 2011 seems the most probable date for sustained recovery.

· Global Hotel Investment Volumes decreased in 2008 to one-fourth that of 2007, and in 2009, volumes have been even 22% less than 2008. Despite these volume numbers, new supply has not stopped increasing, as many construction contracts were already in place when the crisis started. However, very few new projects are confirmed, with the exception of such specific market locations as the Asia Pacific. In general, investment levels are down to those levels seen in 2002. Construction of new hotels is down 47%.
· Investment global environment shows a stronger trend to hold and/or buy existing properties than to build or sell. Most capital is waiting for distress investments.
· Yield requirements for lenders have to be above 18% and even 23% (IRR), and cap rates for the Americas is up to 10.4% from 8.6% in June 2008.
· The number one factor that will bring lenders into the market is capital availability.
· From the bankers’ perspective, hospitality real estate financing contracts have to be reserved today with higher percentages affecting bank net profits. This situation is favoring allocation of funds in other asset classes with better future outlook.
· Asset values in the hotel industry are down between 30% and 40% (back to 2003 levels). In today’s banking transactions, cash-flow (how much a property can afford to pay each month), is all-important, thereby jeopardizing the traditional 5-year exit threshold.
· Most 2008 loans will not be re-financed. However, it is possible that earlier loans could be re-financed, depending on the accumulated value remaining. Owners will have to absorb asset value losses.
· Probable scenarios for fast finance approvals in the U.S.: at least 35% equity, 5-year terms and 10% interest.
· Everybody agrees that after 2011, hotel industry financing will be a good business, but 2009 and 2010 will continue to present cash flow limitations and value losses.
· The good news is that medium financing packages will be easier to digest. Large projects above $100 million U.S. will have a difficult time syndicating banks.

Pressrelase of Calvet & Associates
published by Raul F. Calvet

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