Recent research by Jones Lang LaSalle Hotels has revealed that a combination of three major factors is driving a significant increase in the number of new hotels under development in Europe.

"The constant desire of hotel operating chains to increase market penetration, an expanding pool of capital seeking a more diversified property investment portfolio, and the lack of available (or suitable) product, has led to a marked increase in new development across many European markets, the extent of which has surprised us," said Mark Wynne Smith, Managing Director of Jones Lang LaSalle Hotels.

"Theoretically, the correct time to be building hotels is at the bottom of the operating cycle so that the hotel opens when trading is improving and the market is able to absorb the new supply. While this may be generally true in many cities at present, and while total new supply in seven major European cities for the three years 2003-2005 is somewhat less than in 1991-1993 (about 10% of existing stock compared to about 11%), what concerns us is the level of new supply in certain markets where whole market occupancies are below 65%", continues Mark Wynne Smith.

Some of these cities are also experiencing an unusually severe drop in demand due to the international environment prevailing since 9/11. This suggests a long, flat trading period to come for a number of gateway European cities, even if economic conditions start to improve significantly and the Americans and Japanese start traveling again. In these cities, investment returns are likely to be held back in the short term.

However, there also appears to be an imbalance between investment in existing assets and that in new properties, which is inherently more risky. Using conservative methods of calculation, Jones Lang LaSalle Hotels has estimated the total amount being poured into new hotel developments in the three years 2003-2005 is €4.7 billion (approximately US$5.3 billion), which exceeds the current market capitalization of the InterContinental Hotels Group. If divided annually, it is almost equal to the total volume of transactions for trading hotels in 2002 (€1.5 billion or approximately (US$17.2 billion).

In most cases, investors in new developments will have secured a minimum guaranteed return from operators, so the downside risk is perceived to be limited. If all operators remain solvent there won't be a problem, but in certain countries – particularly Spain – investors are more at risk. The following table indicates the relative strength of European markets in relation to projected new hotel supply.



Madrid and Barcelona - Despite the extension of Madrid's infrastructure and the city's attempts to reposition itself as a short-break destination, the extensive supply additions of recent years, with further substantial supply expected in 2003-05, will continue to have a negative effect on the hotel market in the short to medium term. Demand shows little sign of improvement in the current international environment. Barcelona is also expecting major supply increases, especially in 2003 and 2004. Although the strength of trading in 2001 and 2002 reflects inherent strong demand, this is unlikely to absorb the new supply without adverse effects on trading in the short term.

Brussels – The situation in Brussels, already suffering from weak market fundamentals coupled with significant new supply, has been compounded by the ongoing plight of Sabena Airlines, which has resulted in a severe drop in airport arrivals. With the majority of demand coming from Belgium's major trading partner, Germany, and domestic visitors accounting for a mere 9% of demand, new supply is unlikely to be easily absorbed.

Düsseldorf and Frankfurt – Considerable new supply levels over the next few years are going to have a greater impact on both these markets than previously thought. Both are heavily dependent on weekday business travelers and trade-fair attendees, with a significant proportion of domestic visitors. Since business demand is generally expected to be slower in recovering than leisure demand, and since the German economy is not expected to show a good deal of growth in the short term, so these markets will find it difficult to absorb the supply increases currently projected.

Budapest and Warsaw – New supply has been affecting trading in both cities and is likely to continue to do so in the short to medium term, especially since neither has a strong leisure market. Warsaw in particular is facing the possibility of trading at below 45% occupancy in 2003. Although an improvement in trading is expected when Warsaw joins the EU in 2004, the glut of new supply in 2003 – most of which is expected in the 4- and 5-star market – will not be easily absorbed. With very little opportunity to drive rates when occupancy levels are so low, the implication is that in the medium term Warsaw should brace itself for some very difficult times.

Berlin - A weighty increase in supply in the 4/5 star sector is expected in the short to medium term, but the city's supply situation in 2003-2005 is much healthier than it was in 1991-1993. The city is currently struggling, but trading should not suffer in the same way as in other German cities because of the additional demand that is generated by its capital city status and growing leisure market. Trading will improve when the new Schönefeld airport is opened, with the date potentially being brought forward to coincide with the 2006 European football championships.

UK regions and London - The pattern in the UK is also fairly positive, with minimal increases in supply in the medium term balanced by a healthy mix of weekday and weekend demand.

Notes to Editor:

Hotel supply growth for 2003, 2004 and 2005 has been calculated on the following assumption:

· 100% of hotel rooms under construction will be completed and opened as scheduled, and
· 50% of hotel rooms proposed will be completed and opened as scheduled

Based on the absolute market size in 1990 and 2002 we have calculated the absolute increase in room supply between the given years.