Permanent slump; terminal decline. The Japanification of the world economy; a slow drip-feed of wintry gloom seems to have colonised the opinion pages since Larry Summers floated the idea of a secular stagnation at his recent speech to the IMF.
It’s hardly a concept loaded with seasonal cheer, but the point remains important: what if the underlying problem is here to stay? What if, after years of growth based on debt and bubbles, the current stage is more than a resolvable glitch in the business cycle?
The basic idea is easy to follow. Even with interest rates at zero and the money supply expanded through quantitative easing, the advanced economies seem unable to return to normal growth.
It’s a worry that’s reflected in the numbers. Aggregate growth for the G4 developed economies (US, eurozone, Japan, UK) has fallen 13% behind its underlying long-term capacity. Both the IMF and the OECD have revised their growth forecasts for the year downwards.
Even in nations that are experiencing slightly stronger growth – such as the UK, where the IMF predicts better things than any other G7 country – fears remain about what exactly this "nascent recovery" is built on.
In 2012, these fears surrounding the global economy were clearly reflected in the performance of the hotel market. Economic and political uncertainty in the eurozone, the US and the Middle East meant transaction numbers and hotel performance were significantly lower than the industry would have hoped for.
Even where plausible transactions did exist, buyers and sellers were engaged in what seemed like a permanent Mexican stand-off, unable or unwilling to accept the way prices had changed.
Going for growth
But fast forward a year, and the mood seems to have changed decisively. Though some markets remain problematic, global transaction activity – a strong barometer of market confidence – is up by 6%. This is, according to HVS, the highest level of hotel sales since the beginning of the global financial crisis in 2007.
"Performance in Europe has picked up particularly strongly," says Nick van Marken, global hospitality leader for Deloitte. "Clearly there are bright spots and less bright spots, but the most important thing is the optimism that the worst is behind us. Two years ago, we were asking how to do a deal in an environment where you can’t raise money. But the banking community has returned and is looking at lending again."
Nowhere is transaction growth more impressive than in the UK, where almost half of the total deal volume in Europe for H1 2013 took place. A total of £1.96 billion changed hands in six months – almost four times higher than 2012, according to research by Deloitte.
"The UK is coming out of the cycle much faster," says van Marken. "It tends to mirror what’s happening in the US, and it’s also more transparent and easier to get a deal done there."
Year of the portfolio
All this untrammelled optimism may seem a little bit alien – there has, after all, been precious few reasons to be cheerful since the financial crisis first set in. But numbers can be deceptive. While percentage growth in the US has been consistent throughout 2013, in Europe, most of the transactional activity for the year was clustered in a short burst in Q1.
Some of these deals were for single assets, but it was the larger portfolio agreements – ADIA’s purchase of 42 Marriott hotels, Constellation Hotels’ acquisition of the Group du Louvre properties in France, Starwood Capital’s purchase of Principal Hayley hotels and Fattal’s acquisition in Germany – that pushed up transaction volumes by over 160%.
"We had a number of big deals close in the first half of the year," says van Marken. "Some people interpreted it as a sign that the good times were back. But that’s only partly true. These deals closed because there is a greater degree of confidence, but it was also an issue of timing; they’d been going on for most of 2012. Low confidence, absence of debt and having only one buyer at the table meant they took longer than expected."
Things have certainly tailed off since that initial upswing in Q1. Aside from some prominent sales in Q3 – Blackstone’s acquisition of Concorde Opéra Paris and the sale of Hotel Eden to Dorchester Collection – transaction activity has faded.
Thankfully, that isn’t a sign of decreased appetite. There may be a limited number of investors that can do these kinds of large, billion-dollar portfolio deals, but, according to van Marken, the market remains enlivened by the transactions.
"I think we’re on the cusp of a significant uptick," he says. "Just look at the IPO market. Hilton has just doubled the amount they raised after only six weeks. And we’re estimating M&A deal volumes across all sectors will be up by 6% to the half year. Other metrics are equally promising. Private equity investment in Europe is at a six-year high. Risk appetite is at a six-year high. Against that backdrop I won’t be surprised if we see some very big deals coming through."
"The normal phase of the market is that these portfolios get broken up into smaller chunks," adds Mark Wynne-Smith, CEO of Jones Lang LaSalle Hotels. "I think that’s what we’re likely to see over the next two or three years. Instead of big portfolio deals, we’ll start to see the structure of transactions change with smaller portfolio deals or single assets becoming more popular."
Whether deals in 2014 move quicker than the previous two years remains to be seen. The new market confidence may mean convergence between sellers and buyers – one of 2013’s key trends – is actually quite short-lived.
"One of the consistent themes over the last 12 months was buyers chipping down on price," says Tim Helliwell, head of hotels at Barclays Bank. "But as sellers start to see improving bottom-line income, you wonder whether we’ll begin to see a phase where they start to hold out more."
Asia’s ascent
One place where growth is expected to continue into 2014 is China. More than 400,000 rooms are currently under construction in the major tier-two cities and IGH have just announced plans to double its number of hotels.
"We will continue to see huge focus here," says van Marken. "IHG now treats China as a separate region altogether. And other areas are looking strong too. Just look at Rosewood, they’ve announced major new-build projects in Bejing and Hong Kong."
China is also set to become increasingly important as a source of finance for the West as its institutional market grows.
"The big trend of 2014 is mainland Chinese capital," says Wynne-Smith. "We’ve sold hotels in Europe, in South East Asia and in the US to Chinese capital in 2013 and the transactions are getting bigger as more money appears to invest in key locations – from New York and San Francisco to London and Paris."
The latest Q3 figures released by Jones Lang LaSalle suggest the wider continent is doing equally well. RevPAR growth may have dipped in 2013 after a supply influx, but investment volumes were up 145% year-on-year by the end of September. Just like Europe, Asia is going through its strongest year since the start of the global financial crisis.
The story in the Middle East is obviously more complicated, with 2013 seeing a continuation of civil war in Syria, and major upheaval in Egypt and Libya, but some places are doing well. Saudi Arabia continues to grow and performance in Dubai has been particularly impressive with year-to-date occupancy rising by 79%.
"Dubai has had a very strong year in 2013 with excellent trading performance," Wynne-Smith says. "It’s not a place where we see a lot of transactions because the assets are tightly held. But the hotel market has performed well nonetheless."
Looking ahead
For all the success of 2013, certain core principles still apply. Having a good track record and a strong relationship with a lender remain as crucial to securing finance in 2013 as they have in previous years.
"Relationships remain key," says Helliwell. "This year, we supported Starwood Capital’s acquisition of Principal. It was a classic example of a deal for a very good client of the bank. We continue to be very keen on supporting sophisticated buyers of the right asset. And I think that strategy is one we’ve been focused on in 2013 and will be in 2014. It’s as much about the quality of the buyer as the quality of the asset – what are they looking to do to drive their investment going forward?"
With the memory of the past cycle still vivid – that focus on quality sounds particularly wise. The global economy may be running below its long-run potential, but in the hotel market, confidence has certainly returned.
