The Economist called it a victory for "ungovernability", the rejection of a credible technocrat for a clown, a "fulminating satirist" and an enemy of politics-as-usual.
Like most events in the eurozone, the Italian election provoked some fairly apocalyptic press coverage – and for good reason. The impact of European politics on the global economy isn’t to be scoffed at. Europe remains in a state of social and political crisis; the Italian vote for Beppe Grillo’s unknown brand of popular discontent and civic republicanism was, without doubt, a vote against the politics of austerity.
But for the most part this didn’t ‘rattle’ world markets in any meaningful sense. European stocks dipped temporarily, but yields on Italian bonds never reached the levels of 2012.
Economic forecasts for the European hotel market don’t look too negative either. According to Jones Lang LaSalle, global transaction volumes for 2013 will reach $32 billion by the end of the year, up from $31.8 billion in 2012. That number might be 74% lower than 2007, where volumes reached a freakish $122.3 billion, but it suggests a confidence that things are at least unlikely to get worse. Even without a clear-sighted European strategy for growth, markets seemed to have finally stabilised. The message seems clear: welcome to the new normal.
"The Italian election may have been unsatisfactory as far as the global economy is concerned, but there was considerably less focus on it than there would have been 18 months ago," says Mark Wynne-Smith, CEO of Jones Lang LaSalle Hotels. "I was out in Asia when the results were announced. The market there is highly reactive to geo-political events, so it was interesting this time around to see very little happen. I think it’s because this is just the way Italian politics is going to be. Provided it’s within a certain bandwidth, these aren’t the type of events to derail a market."
That qualified confidence seems to have been the take-home message at this year’s Hotel Investment Forum; however subdued transaction volumes are compared to historical averages, asset prices are finally beginning to come down and reflect the expectations of buyers.
Market stabilisation
In the two years following the financial crisis, banks were rightly concerned about selling distressed assets at prices that wouldn’t cover their original loans, but by holding declining assets on their balance sheet, new lending has been deeply constrained. The acceptance that this is now a protracted slow-down has forced a rethink around the value of their portfolios, creating a far more reasonable confluence between buyers and sellers.
"Last year we were talking about whether investors might invest," says Wynne-Smith. "This year we were very firmly talking about transactions. I think the mood swing is far more committed. There is a general sense around the market that 2013-14 is clearly a good time to be placing money in hotels. None of these investors are factoring in a lot of revPAR growth, because that’s unlikely to happen. It’s more about investment repositioning and finding fair value in the assets that you’re acquiring. We’ve reached an equilibrium where things are unlikely to get worse."
Alongside traditional real estate funds, alternative asset managers like Blackstone and Starwood Capital have already made significant investments in the first quarter. And their confidence, together with a strong US real estate sector, has created ripple effects around the rest of the market.
"This is a very good environment for our business," says Martin Kandrac, managing director at Blackstone. "We are seeing more and more opportunities where owners are willing to sell because of lagging or disappointing top and bottom line performance. We focus on buying broken assets and capital structures that we can invest in and fix."
That continuing uncertainty doesn’t suit everyone. In common with most markets, hotel real estate offers easily financed core assets, higher yielding core-plus assets and even higher risk transactions with corresponding returns.
"The market requires all of that capital with all of the varied return expectations in order for it to function efficiently," says Wynne-Smith. "At the moment, private equity capital is finding more transactions which suit their criteria than some of the others. Of course, the minute they buy, they’re looking to exit. Nothing has changed in terms of the model it operates on. It’s more a question of where the liquidity is – private equity is well funded and capable of taking some large transactions down. They do have the support of lenders now."
Alternative investors
Away from private equity, the overall level of debt has started to improve. According to the same report by Jones Lang LaSalle, global liquidity will reach higher levels in 2013 than at any stage since the onset of the financial crisis.
"The environment is getting better, but it’s still very selective," Kandrac says. "There is still a lot of distress out there. However, we are seeing signs of improvement compared to last year or six months ago. There are more lenders out there with better levels of leverage and lower cost of debt. I think that’s likely to carry on throughout the year. It won’t be completely transformational, and nor will it be as vibrant or deep as the US funding market. But it’s definitely a marked improvement."
Not all of the new debt is coming from banks, most of whom have the same budget for lending this year as they had in 2012. Pension, insurance and sovereign wealth funds have all started to enter the hotel real estate market as alternative sources of senior debt.
"That’s the good news for the European hotel sector," says Wynne-Smith. "The mainstream real estate market has seen an influx of new lenders from insurance companies to offshore banks. Clearly, it takes a bit of time for that new money to reach the hotel sector. It tends to happen when mainstream real estate lending gets more competitive and lenders start looking around for other sectors that offer higher margins. So it’s coming, but I wouldn’t expect there to be any significant move for next 12 months."
However much the market enthuses about transactions, lending and growth, nobody wants a return to the levels of leverage seen during the boom years. The phrase ‘the new normal’ is not supposed to capture the market’s bitter resignation to a new economic reality; it’s a normative claim, about where Wynne-Smith says "hotels should be".
"If you go back to the old-fashioned metrics of never borrowing more than 60% of the value of an asset, that’s probably about right," he says. "We’re not saying you can’t do some additional funding, but it’s a more sustainable, more positive business model than was used in the past."
