With trading performance gradually improving across Europe, the volume of transactions increased significantly in 2005.

Deloitte has recorded total transaction volumes at circa €10 billion for the first nine months of 2005, well ahead of the same period last year. So if 2005 is set to be a bumper year, who is buying and what is driving their decisions?

The hotel property market was once the preserve of trophy asset hunters and publicly quoted companies, but things are now changing. The industry is attracting a broader mix of investors who are seeking better returns than they can find in the bond or stock markets or more traditional property markets such as office, retail or residential.

The European hotel industry is also changing shape, as companies seek to become "asset-lite" and divest themselves of their real estate interests.  Encouraged by the equity analysts' call to split the bricks and "brains", a number of hotel operators have put slices of their portfolio on the market to realise value for their shareholders.  A selection of significant portfolio transactions in Europe over the last nine months can be seen in the table below.

A selection of significant European portfolio transactions (January - September 2005



The UK has again experienced the highest volume of activity, accounting for circa €4.8 billion (nearly 50%) of the transaction activity in Europe so far this year. The single largest transaction which took place in the UK in the period to September 2005 was the sale and manage-back by InterContinental Hotel Group of 73 Holiday Inn assets to a consortium comprised of Lehman Brothers, Realstar Group and GIC Real Estate (LRG) for €1.5 billion.  

Whitbread disposed of 46 UK Marriott Hotels for €1 billion to Condor Overseas Holdings (a Joint Venture between Marriott International and Whitbread) to focus on the budget sector. Marriott assumed management of the hotels in May.  The sale of 11 Hilton properties to Stardon UK Ltd for €160m saw some of the hotels subsequently being re-branded Holiday Inn. 

Several significant transactions have taken place in France. The largest was the acquisition of the controlling interest in Groupe Taittinger SA and Société du Louvre by Starwood Capital for €2.1 billion in July.  Societe du Louvre owns the Concorde Group, whose assets include 14 luxury hotels (mostly in Paris), as well as the 800-plus Envergure Group, Europe's second largest budget hotel chain. The value attributed to Societe du Louvre was €1.69bn. Societe du Louvre includes not only the luxury and budget hotels business, but also Baccarat (crystal) and Annick Goutal (perfumes).

Duke Street Capital sold its budget hotel chain B&B hotels to French investment firm Eurazeo. Additionally, Paris-based Accor hotels sold 128 properties to Foncière des Murs, a French consortium for €1 billion, and in a separate transaction negotiated a sale and leaseback deal with London and Regional on four properties based in the UK. The following portfolio transactions are also of note:

• In July, Swallow Hotels bought eight hotels from Corus for a total of €48.6m and 20 hotels from the North British Trust Group (NBTG) for €109m. 17 of the hotels bought from the NBTG were located in Scotland where Swallow hotels already has a significant presence. This takes the number of hotels in the Swallow portfolio to over 90.

• Elmville (50% owned by Corus Hotels) was acquired by Leverguide, owned by a high net worth individual. The portfolio included five regional hotels which were sold for €65m or €186k per available room (PAR).

• Butterfly Hotels completed a sale and leaseback deal for four Ramada hotels in East Anglia with WG Mitchell for €24.8m or €105k PAR.

• In addition to the 16 hotels sold to Hoteleiendom (where Copona is the main shareholder), Copona also disposed of a further 14 Scandic and Quality hotels to ESO Invest IAS for a total of €140m, or €65k PAR.

 

Investment Trends

The hotel industry has seen a shift in investor profiles as hotel operators continue to look to separate the bricks and the mortar from the day to day operations of the business. The market has seen a number of US and other foreign investors enter the market.

US based investment fund Colony Capital purchased eight Swissotel properties across Europe as part of the circa €850m acquisition of the 41 luxury hotels from Raffles Holdings.  This purchase followed Colony Capital's European subsidiary's earlier announcement of its intention to invest €1 billion in Accor in the form of bonds redeemable in shares and convertible bonds.  The Accor investment represented Colony Capital's largest investment to date in Europe. 

Private Equity investors have been notably active in the industry this year, and have been behind some of the biggest European transactions. The high level of liquidity, lower interest rates and improved debt terms coupled with a fall in returns on traditional asset-classes means that hotel assets are an increasingly attractive proposition. Private Equity transactions in the period to September 2005 accounted for over €3.9 billion, which represents circa 38% of total transaction activity in Europe.

Hotel operators have been the principal vendors, retaining their market share by selling their hotels on either a sale and leaseback (Thistle with Topland) or sale and manage back basis (IHG with LRG).  These conditions have stimulated the private equity interest in the hotel sector coupled with the lack-luster performance of public markets have served to increase interest in the hotel sector from High Net Worth Individuals (HNWIs). HNWIs have accounted for over €866m of single asset transactions in Europe, some 28% of total single asset transactions in Europe. They have been particularly active in the UK market and represented over €650m of single asset transactions in the UK which accounts for approx 58% of the total UK single asset transactions.

Overall 2005 has been a bumper year for transaction activity. This buoyancy in the market is expected to continue into 2006 as consolidation continues, and hotel operators continue down the "asset-lite" route.  

Julia Felton
HotelBenchmark
+44 (0) 20 7007 3438
Email: jfelton@deloitte.co.uk

The HotelBenchmark™ Survey contains the largest independent source of hotel performance data outside of North America and tracks the performance of over 6,500 hotels and 1.2 million rooms every month. Monthly surveys are produced on the following areas:

• Four regional rate and occupancy surveys covering Asia-Pacific, Europe, Central & South America and the Middle East & Africa.
• Eleven country/sub region rate and occupancy surveys for Australia, Benelux, China, Germany, Italy, New Zealand, Nordic Countries, Qatar, Southern Africa, Spain and UK.
• Two city rate and occupancy surveys for London and Paris.
• Monthly profitability surveys on Germany and London.
• On an annual basis we produce profitability surveys tracking performance across all regions of the world.
• Daily HotelBenchmark™ tracks rate and occupancy everyday for a number markets across the UK, Europe and the Middle East. Coverage is building rapidly since launch in early 2005.