Summary
Hotel investment is currently more attractive for the following reasons:
• Global Economic stability together with strong GDP growth in major economies, all favor strong travel and tourism demand. Businesses send more people traveling, a large chunk of the population has more disposable income to spend on travel and vacation which, together beef up hotels occupancies and average room rates at record high. Once hotel industry fundamentals are strong and sustained, hotel profitability increases, positively impact property values, and eventually improves economic and financial returns.
• The availability of debt for hotel acquisitions is at an all time high, while interest rates remain near historic lows (and according to Business Week Feb 19 07, the consensus seems to indicate another 4 to 6 years of low cost of debt). Lender sizing and pricing of debt has become much more liberal and aggressive in their quest to place capital.
• Easier access to debt from a borrower's perspective, is also explained by the lender’s ability to offload their loans on the secondary market through securitization (Commercial Mortgage Backed Securities (CMBS), more competition amongst lenders, all contribute to low cost of funds available.
• Basic principle of diversification of risk. Spread your risk in different asset class.
• Supply of new hotels has been kept under tight leash, which helped sustain high profitability for existing hotels.
• Hotel investment has reached an institutional status in terms of alternative real estate investment, which makes it more secure and more mainstream and therefore makes it more competitive with other asset class.
Analysis
On my way back from ALIS (Americas Hotel Investment Summit), the consensus shows for another 24 to 30 months of robust hotel performance which supports current property values. However, it seems that we have reached a plateau and that real estate values will remain stagnant during that period and slowly declining as new supply will hit key markets in the Americas, pressuring existing hotel performances.
