Lack of Liquidity to Further Drive Down Transactions

Slowdown in global movement of capital as cross-border investment is curtailed

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. January 26, 2009

JANUARY 26, 2009 - Following an 80% drop in global hotel transaction volume in 2008, Jones Lang LaSalle Hotels forecasts that 2009 will exhibit a further decline, to levels last seen between 2001 and 2003, according to the firm's Hotel Investment Outlook 2009 report. The report reveals that $23 billion worth of hotels changed ownership in 2008, down from $113 billion in 2007, as the credit crisis and the chilling effects of the global economic slowdown took hold. With no short-term market recovery likely, the forecast for 2009 is for transactions worldwide to further decline to $19 billion in 2009.

"The United States registered the greatest decline in transaction volume, down 82% to $8.2 billion in 2008, followed by Asia Pacific, marking a decline of 80% to $2.5 billion. Our research highlights that EMEA proved comparatively more resilient -- transaction volume amounted to $12 billion, 58% lower than the level recorded in 2007," said Arthur de Haast, global CEO of Jones Lang LaSalle Hotels.

"The first half of 2009 will be equally idle as late-2008, but the second half of 2009 will likely see more activity - a shake out of investment portfolios as some investors will be forced to sell or make strategic portfolio decisions to dispose of assets even while pricing remains weak," said de Haast.

While equity is available in the marketplace, the credit markets will continue to be the greatest challenge facing hotel investors in 2009. Highly- leveraged investors such as private equity funds, the largest buyer group of hotel assets from 2005 to 2007, will shift to the sidelines in many markets, replaced by institutional investors, selected sovereign wealth funds and high net worth individuals.

Opportunistic investors are already searching for distressed assets. But 2009 will not produce a tidal wave of sellers because owners will be reticent to sell into an illiquid market unless forced to as a result of their weakened financial condition. Distress, to the extent that it occurs, will primarily be driven by debt maturities. "But there is little evidence that prime assets in top locations will reach a critical level of distress in 2009, and we expect few quality properties to come to market," said de Haast.

The year 2009 will see a continued slowdown in the global movement of capital as cross-border investment is curtailed in favour of maintaining capital at home. Investors have flocked to emerging markets based on runaway economic growth and attractive returns but in 2009 a number of cities in emerging markets will feel mounting pressure on operations.

Operators' expansion plans will be scaled back in 2009. "While providing respite for existing properties, construction delays and indefinite hold periods for hotel projects will put pressure on the ambitious growth targets of operators, who have largely avoided putting their balance sheets behind new developments. Operators will revise their pipeline projections and may have to inject equity to help developers get certain projects off the ground," said de Haast.

Once lending and economic fundamentals start to pick up, activity levels could rise relatively quickly if a consensus builds among investors and lenders that the bottom of the market is in sight and buyer and seller pricing expectations converge. However, this confidence is likely to be fragile for an extended period, making transactions tough to close for all but the most attractive assets.