hotel investment highlights feb 09

Hotel transaction volumesmark precipitous drop

Global hotel transaction volume posted an 80% decline in 2008,reaching $24.2 billion.

Lower leveraged groups including institutional investors andsovereign wealth funds stepped up their share of investment activityamidst a less competitive buying environment.

Global hotel transaction activity is expected to gather pace in thesecond half of 2009.

March 2009

Hotel Investment Highlights

Jones Lang LaSalle Hotels, the first and leading global hotel investment services firm, is uniquely positioned to provide the depth andbreadth of advice required by hotel investor and operator clients, through a robust and integrated local network. In 2008, Jones Lang LaSalleHotels provided sale, purchase and financing advice on over $3.7bn worth of transactions globally relating to more than 120 assets. Inaddition, advisory and valuation services were provided on more than 600 assignments. The global team comprises over 240 hotelspecialists, operating from 32 offices in 19 countries. The firm’s advice is supported by a dedicated global research team, which produced 87publications in 2008 in addition to client research. Jones Lang LaSalle Hotels’ services span the hospitality spectrum; from luxury singleassets and large portfolios to select service and budget hotels, resorts and pubs. Their services include investment sales, mergers andacquisitions, capital raising, valuation and appraisal, asset management, strategic planning, operator selection, management contractnegotiation, consulting, industry research and project development services. Jones Lang LaSalle Hotels’ clients have access to the resourcesof its parent company, Jones Lang LaSalle (NYSE: JLL). www.joneslanglasallehotels.com.

ContributorsArthur de HaastGlobal CEO

Arthur AdlerCEO, Americas

Katleen van den BrandeVice President Research, [email protected]

Mark Wynne-SmithCEO, EMEA

David GibsonCEO, Asia Pacific

Karen WalesVice President Research, Asia [email protected]

Sue Lin HengVice President, Global Hotel Capital Group

Lauro FerroniResearch Associate, Americas [email protected]

Cover: Jones Lang LaSalle Hotels advised Starwood Hotels & Resorts in the sale of the 219-key Turnberry Resort Scotland, UK in 2008

Global overviewWith the exception of Europe which benefited from an infusion ofcapital from the Middle East, all other regions have seen significantlyreduced cross border capital inflows as investors sought to investcloser to home and in markets they were most familiar with. In 2008investors from Asia Pacific, America and Europe accounted for100%, 80% and 65% of all transactions within their respectiveregions.

Reflecting the desire of investors to mitigate perceived risk,investment in mature markets has dwarfed that of emerging markets– in 2008, 90% of all transactions took place in mature marketsworldwide with the lion’s share concentrated within Western Europe,United States and Japan. Within the second half of 2008, this figureis even more pronounced, with investment in established marketsaccounting for 94% of all hotel transactions undertaken globally.

Due to significant consolidation activity within the first half of theyear, REITs overtook private equity as the largest net buyer of hotelsin 2008, although unsurprisingly overall activity for both groups wassignificantly reduced in the second half of the year. Conversely,longer term, lower leveraged groups including institutional investorsand sovereign wealth funds have stepped up investment activityamidst a much less competitive buying environment – both groupswere responsible for the acquisition of approximately $2 billion worthof hotel assets in 2008, and are expected to remain active buyersgoing into 2009.

Looking ahead, all indicators point to a subdued first half of 2009 ascredit sources remain lean and investors wait on the sidelines untilmarkets bottom. Distressed sales are not yet widely evident andfollowing the trend from the second half of 2008 we expect that themajority of the deals that take place within the first half of the yearwill be done on either an all-cash basis, with assumable debt orsome level of vendor financing, or on very low leverage terms.

As the year progresses, however, and as transaction volumesapproach decade trough levels, we believe the combination ofdeteriorating trading fundamentals and the build up of refinancingpressures will result in a narrowing gap between buyer and sellerexpectations and further retractions in investment yields. As suchglobal hotel transaction activity is expected to gather pace in thesecond half of 2009.

Hotel transactions volumes start to approach decade troughThe global hotel transactions market posted a steep decline of 80%over 2007 levels to total $24.2 billion in 2008. Whilst still higher thanthe historical decade low of $10 billion in 2002, 2008 sawprogressively larger declines in transaction volumes with everysuccessive quarter to reach a low of $1.9 billion in the last quarter ofthe year, traditionally a very active period. This represents theweakest fourth quarter performance for the global hotel transactionsmarket over the decade.

Hotel Investment Highlights · March 2009 1

Source: Jones Lang LaSalle Hotels

Global hotel transaction volume 2000 - 2008

Volum

e ($B

)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

H1 H2

The magnitude of the year-on-year decline is largely attributable tothe lack of large portfolio sales, which were prevalent in 2007. In2008, only one portfolio transaction of over $1 billion occurredcompared to 17 in 2007. In addition, the majority of transactionswere smaller in lot size – only 54% of global hotel transactions weremore than $100 million, compared to 87% of all transactions in 2007.

By region, the largest drop was recorded in the Americas (-81%),followed by Asia Pacific (-77%), whilst EMEA proved to be moreresilient (-58%). With $11.8 billion worth of hotels traded in 2008,EMEA accounted for almost half of global transaction volumes andreplaced the Americas, which has led the market since 2004, as themost active market for hotel investment.

Volum

e ($B

)

0.0

10.0

20.0

30.0

40.0

50.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

H1 H2


Americas hotel transaction volume 2000 - 2008

Volum

e ($B

)

0.0

10.0

20.0

30.0

40.0

50.0

2004 2005 2006 2007 2008

Luxury Upscale Mid-scale Select service


Americas hotel transaction volume by property segment

Transactions slow across all segmentsDuring 2008, investment in luxury hotels and resorts comprised 12%of Americas transaction volume. Upscale and mid-scale assetsaccounted for 38% and 22% of transactions, respectively. Theremaining 29% was invested in select service assets, down from 39%in 2007 which saw several large select service portfolio transactions.

AmericasHotel transaction volumes mark precipitous dropHotel transaction volumes in 2008 across the Americas regionslowed to $9.7 billion, from a record-breaking $48.8 billion achievedduring 2007.1 Across the Americas, transactions were recorded inthe U.S., Canada, Mexico, Jamaica, Barbados and Anguilla.

Transaction volume in the U.S. alone reached $8.5 billion in 2008,down 81% from the $45 billion recorded in 2007. Despite marking aprecipitous fall, transaction volumes in 2008 still exceeded thevolumes realised during the trough years of 2001 to 2003.

Decreasing liquidity and deteriorating demand fundamentals causedtransaction volumes to trail off as the year progressed. The firstquarter of 2008 was the strongest, with transactions amounting to$3.9 billion, slowing to $684 million in the fourth quarter. Portfoliotransactions marked the most staggering decline, down 89% to $4billion in 2008. Single-asset volume slowed 59% to $5.7 billion.

2 Hotel Investment Highlights · March 2009

Slowdown in lodging fundamentals exacerbated during Q4U.S. RevPAR maintained year-over-year growth through September2008. But waves of dire economic news, particularly the severedifficulties experienced by the banking and financial servicesindustry, intensified the decline of lodging fundamentals beginning inOctober and full-year 2008 RevPAR declined by 1.9%.2 Hit hardestby decreased demand are luxury hotels and resort properties. Theluxury segment recorded a 5.2% RevPAR drop during 2008, withmonthly declines as high as 20.7% in November.3 U.S. RevPAR isforecast to decline by 11.2% in 2009.4

1 Excludes The Blackstone Group’s acquisition of Hilton Hotels Corporation (tracked as a globaltransaction)

2 STR Global3 STR Global, compared to November 20074 PricewaterhouseCoopers, January 2009

Across the Americas, surveyed average cap rates for newacquisitions had increased by 60 basis points, reaching 9.2% inOctober 2008 (over our June 2008 survey). Cap rates will continueto climb in 2009 as cash flows decline and the weighted averagecost of capital remains high.

Top single assets continue to garner investor interestThe top 10 Americas single-asset transactions in 2008 amounted to$2.2 billion, representing 23% of total transaction volume. Theaverage price per key of these top ten single assets amounted to$366,000, down from $523,000 for the top 10 transactions tracked in2007. In 2008, only eight single-asset transactions exceeded the$100 million mark, compared to 31 such transactions in 2007.

Comparing the price per key decline across all transactions in 2008from 2007 is not representative as several large select service hotelportfolio transactions in 2007 deflated the average price per key.However, analysing single-asset transactions only indicates that perkey values decreased by 7% in 2008 from 2007 levels.

Americas top single-asset hotel transactions 2008

Property nameHyatt Regency Waikiki

Fontainebleau MiamiBeach Resort

Hyatt Regency Century PlazaOne & Only Palmilla

Renaissance M Street Hotel

James HotelSheraton Grand Sacramento

Hyatt RegencyOrange CountyHotel 57

Sheraton GatewayLos Angeles Airport*

LocationHonolulu, HI

Miami, FL

Los Angeles, CASan Jose

Del Cabo, Mexico

Washington, D.C.

Chicago, ILSacramento, CA

Garden Grove, CA

New York, NY

Los Angeles, CA

Closing dateJul-08

Apr-08

Jun-08Feb-08

Feb-08

Jan-08Apr-08

Oct-08

Jan-08

Aug-08

Price ($M)410.0

141.3

136.6130.0

112.0

99.0

97.0

375.0 (1)

315.0 (2)366.5

Rooms1,229

726 172

355

297 503

654

200

802

1,500(post renovation)

Price per key ($)333,605

504,821 1,831,395

398,028

459,768 258,449

171,254

495,000

120,948

Buyer Whitehall Street Real Estate

Funds & Hyatt Corp.

Nakheel Hotels

Next Century AssociatesNakheel Hotels

Affiliate of LosanHotels World

Denihan Hospitality GroupDavid Taylor &CIM Group Inc.

Inland AmericanLodging Group, Inc.

Apple REIT Eight

The Harp Group

SellerAzabu Buildings Co Ltd

Fontainebleau Resorts, LLC

Sunstone Hotel Investors, Inc.Whitehall Street Real

Estate Funds

Northview Hotel Group LLC& Westbrook Partners

The James GroupCity of Sacramento

Ashford Hospitality Trust

Rockpoint Group

Lubert-Adler

(1) Represents purchase of 50% stake in asset(2) Represents total enterprise value, includes 27-holes of golf. Nakheel Hotels purchased 50% stake in asset

*Vendor advised by Jones Lang LaSalle HotelsSource: Jones Lang LaSalle Hotels


The largest single-asset transaction recorded in the Americas during2008 was the sale of the Hyatt Regency Waikiki. The transactionwas announced in 2007 but did not close until July 2008 following aprice reduction. Also topping the list was Nakheel Hotels’ 50%investment in two resort properties, the Fontainebleau Miami BeachResort and One & Only Palmilla in Los Cabos, Mexico.

Among the top 10 single-asset transactions was Lubert-Adler’s saleof the 802-key Sheraton Gateway Los Angeles Airport for $97million, a transaction advised by Jones Lang LaSalle Hotels.Additional notable single-asset transactions advised by Jones LangLaSalle Hotels included the sale of the 696-key Hyatt RegencyPhoenix for $96 million and the sale of the 500-key Hilton DallasLincoln Centre for $72.25 million.

High-quality, branded, well-located assets are favoured by mostlenders and accounted for much of the transaction volume during2008. But during the last two months of 2008, no larger full serviceassets transacted, reflective of the illiquid debt markets.

Large portfolio transactions absent in 2008In 2008, no portfolio transactions exceeded the $1 billion mark in theAmericas, compared to eight such transactions in 2007. The largestportfolio transaction recorded during 2008 was Inland American RealEstate Trust’s acquisition of 22 assets from RLJ Development for$900 million. While the deal closed in February, it was announced in2007 in a less restrictive financing environment.

Also among the largest portfolio transactions was Chartres LodgingGroup’s acquisition of five Adam’s Mark properties from the HBECorporation, encompassing over 4,800 rooms. In August 2008,Jones Lang LaSalle Hotels represented Prudential Real EstateInvestors in the sale of three Monaco hotels located in Chicago,Denver and Salt Lake City for $186 million, commanding a price perkey of $306,900. In addition, Jones Lang LaSalle’s Real EstateInvestment Banking group arranged the acquisition financing for thebuyer.

Average price per key for Americas single-asset transactions

$224,000$183,000$170,000

Average price per key200620072008

Year$62,400,000$52,200,000$39,500,000

Average price


Highly-leveraged investors became net sellers during 2008Private REITs were the largest buyer of hotel assets during 2008.While overall Americas transaction volume dropped by 80% in 2008,private REITs’ investment in hotels actually increased by a third.Institutional investors and owner/operators were also among themore active buyers during 2008, acquiring $1.7 billion and $1.4billion in assets, respectively. Both REITs and institutional investorswere net buyers in 2008.

Institutional investors will likely be among the more active buyergroups during 2009. REITs and public hotel companies will likelycontinue to shed assets as they seek to preserve cash, pay downdebt and invest in their own shares. Private equity groups, havinginvested over $50 billion in Americas hotel real estate from 2005 to2007, will not re-emerge as active buyers in the near term untiloperating fundamentals stabilise and liquidity improves.

Global and inter-regional capital flows on the downturnInvestments funded by ‘global’ sources of capital (such as privateequity firms that source capital globally despite being based in theU.S.) declined greatly during 2008, as highly leveraged investorssuch as The Blackstone Group largely withdrew as buyers.


Americas top portfolio transactions 2008

Rooms

4,867590606

4,061Price per key ($)

221,620

107,869 406,780306,931

BuyerInland American Real

Estate Trust Inc

Oxford LodgingFerrado Group

Cornerstone Real EstateAdvisers, LLC

SellerRLJ Urban Fund (Affiliate

of RLJ Development)

HBE Corp.Andre Balazs PropertiesPrudential Real Estate

Investors

Hotels

543

22Price ($M)

525.0 240.0 186.0

900.0 Location

MultipleMultipleMultiple

MultipleProperty nameRLJ Urban Fund InlandHospitality

Adam's Mark PortfolioBalazs PortfolioKimpton Hotel MonacoPortfolio*

Closing dateFeb-08

Feb-08Apr-08Aug-08


Region buyer and seller net shift 2007 and 2008

-30% -20% -10% 0% 20%10% 30%

Net shift^

Sovereign wealth fund

2007 2008

REIT (public & private)Public company

Private equityPrivate company

Institutional investorHNWI

Hotel operatorGovernment

Developer

^Net shift = the difference between the respective group's market share as a buyer and itsmarket share as a seller during the year. A positive net shift indicates group was net buyer;a negative net shift indicates net seller


Region source of investment - change in market share 2008 over 2007

North AmericaMiddle East

GlobalEurope

DomesticAsia

-15% -5%-10% 0% 5% 10%

Change in market share


Hotel operators and private equity groups were the largest sellers byvolume during 2008, selling assets totalling $2.3 billion and $2.1billion in value, respectively. Private equity groups were the mostpronounced net sellers during 2008.

The proportion of capital from European and Middle Eastern buyersrelative to total transaction volume increased in 2008, accounting for6.2% and 7.1% of acquisitions, respectively. However, the absolutevalue declined in both cases. Furthermore, Asian investors did notacquire any hotel assets in the Americas in 2008. During 2009,foreign investors will likely keep their capital closer to home until theU.S. economy stabilises and better buying opportunities emerge.

Lack of liquidity to further drive down transactionsWorsening demand fundamentals and the continued financingdrought are expected to cause Americas hotel transaction volume toslow further during 2009. Transaction activity during the first half of2009 is expected to remain very subdued as access to creditremains exigent.

In the meantime, hotel transactions more likely to get done are thosewith seller financing, assumable debt or with low-leverage investors.Sales of select service assets will be less impacted during 2009 dueto their relatively smaller transaction size and the potential to financesuch acquisitions through community banks and SBA loans.

Transactions will pick up later in the year as owners face moredistress due to cash flow falling short of debt coverage and/or due tomaturity defaults. Also, as lenders increasingly take control ofassets, they will sell some assets as liquidity returns. Loans willcontinue to be written down, which will allow lenders to sell at currentmarket values. The pick-up in the transactions pace will also bedetermined by pending legislation. Furthermore, investors willincreasingly make decisions to dispose of assets as the gapbetween sellers’ expectations and investors’ view of value narrows.

New CMBS originations not expected in near termLending activity had already slowed drastically in early 2008, andcame to a near stand-still during the latter part of the year.Prospective borrowers must hence rely almost exclusively onbalance sheet lenders (insurance companies, national and regionalcommercial banks and community banks), many of whom remaincautious amid the economic uncertainty. Furthermore, alternativelenders have emerged for both senior and mezzanine lending giventhe extremely favourable risk-adjusted returns that can be achieved.

Leverage levels on senior hotel loans are expected to remain around50% to 60%, and sizing will primarily be based off coverage ratios —in the 1.45x to 1.60x range — and higher debt constants. Non-recourseloans are virtually non-existent. Loan terms will contain coupon orindex floors preventing borrowers from benefiting from the historicallylow LIBOR and Treasury rates. Furthermore, pricing for senior debthas increased significantly due to the demand for debt capital.


5Insurance companies, national and regional commercial banks and community banks

Jones Lang LaSalle Hotels advised Lupert-Adler in the sale of the 802-key Sheraton Gateway Los Angeles Airport in 2008

Spain was the only country which experienced growth in hotelinvestment volume in 2008. The property market in Spain has beenone of the most affected in EMEA. With property prices plummetingacross the country, investors were eager to snap up cheap deals inthis notoriously illiquid market, leading to a total disclosedinvestment volume of $1.2 billion compared to $0.5 billion in 2007.Growth in activity was also experienced in MENA with a number ofhotels sold in UAE, Egypt and Israel.

In contrast to 2007, hotel transactions were dominated by vacantpossession deals and those subject to lease contracts. Managementcontracts accounted for just 7.8% of the transacted volume,substantially down from the 22.9% recorded in the previous year.

Q4 of 2008 brings end to years of positive trading growth2008 proved to be the start of a challenging time for hoteliers inEMEA. Although the year started off strongly across the region, hotelperformance began to deteriorate in the second half of the year, inparticular following the failure of several banks in September.

Overall growth in average room rates early in the year was able todrive positive year end results for the majority of the region.Occupancy levels, on the other hand, showed a fall during 2008particularly in the fourth quarter. Only a few cities experienced adecline year on year, with this predominantly a result of new supplycoming on stream.

Growth in room yield remained strong in the Middle East, althoughreduced substantially in Dubai towards the end of the year, showingthe region is not immune to the current market conditions. AlsoEMEA’s gateway cities, London and Paris, continued to reportgrowth in hotel performance. Deterioration in occupancy did becomeapparent, especially in the last quarter of the year but this wasovershadowed by strong performance earlier in the year.

The picture was not as positive in eastern Europe, where marketstend to be highly dependent on international tourism. Strongestgrowth in this area was reported for Istanbul and St. Petersburg,while star performers of recent years such as Prague and Budapestsaw falls of up to 11%.

EMEA hotel transactions down 60% in 2008Following five years of consecutive growth, hotel transactionvolumes across the EMEA region fell by 60% to $11.8 billion in 2008,a clear example of the impact that challenging economic conditionsand illiquid debt markets had throughout the year. This reduction inhotel investment activity was mainly due to fewer portfoliotransactions as illiquidity in the debt markets made it difficult to raisethe quantum of finance seen in recent years. Portfolio transactionswere down 74% in 2008, accounting for only 45% of the total dealvolume in the year, compared to 69% in 2007.


EMEA

Volum

e ($B

)

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

H1 H2


EMEA hotel transaction volume 2000 - 2008

While the credit crunch began to slowly impact the investmentmarket in 2007, the first three quarters of 2008 still saw a number oftransactions close, reaching a total volume of $10.9 billion.Nevertheless, this was a substantial fall compared to the previousyear as vendors refused to lower their price expectations. In the faceof economic uncertainty, and with the collapse of Lehman Brothersin September, the debt markets became increasingly more cautiousand expensive. The September events proved to be an eye openerfor many with only $852 million transacting in the last quarter, an82% decrease compared to the same period in 2007.

The strongest fall in investment volume was reported for the UK,where the investment volume decreased by almost 70% year onyear. Results on the continent were slightly better but nevertheless,the UK remained the leading country in EMEA based on transactedvolume, with $3.2 billion accounting for 27% of the total marketvolume. Germany and France also saw a significant proportion ofhotel investment activity, with around $1.5 billion and $1.0 billionrespectively. Germany maintained its second place and accountedfor 12.3% of the total investment volume, whereas Francerepresented 8.5%.


Debt market tightens Raising senior debt in EMEA for hotel real estate has become anincreasingly challenging proposition over the past 18 months. Theclose of the securitisation and Pfandbriefe markets has cut off asupply of cash whilst balance sheet lenders are hoarding theirPounds and Euros, further compounding the slowdown in lending.

Some of the large balance sheet lenders are still open for businessbut as the only show in town, they are in a position to be veryselective with the deals they consider. As there is no certainty inwhere property values lie, Loan-to-Value covenants have becomeovershadowed by conservative Debt-to-EBITDA multiples. Currentlending parameters are mirroring those in the late '90s with Debt-to-EBITDA multiples targeted at between 5 and 7.

The fall in the SWAP rates has softened the increase in marginswhich have reached 300 basis points, leaving overall debt costsrelatively static while amortisation schedules have taken a back seatas most loans are offered with a maximum term of three to five years.

Reduction in lot size and frequency of portfolio transactionsUnlike what had been the norm in recent years, 2008 hotel investmentvolume was made up mainly of single asset transactions, reaching$6.5 billion, whilst portfolio transactions achieved $5.2 billion.

The majority of portfolio transactions recorded in 2008 were madeup of two or three properties and we did not see many largecorporate transactions which were prevalent in recent years. Theexceptions to this trend were the sale of the Northern EuropeanProperties portfolio in Finland for $1.3 billion to a real estate fundmanaged by CapMan, and the sale of a 50% stake in Quinlan’sJurys Inn portfolio to the Oman Investment Fund for $872 million.Another significant portfolio transaction was the sale of two Thistlehotels in London to the Abu Dhabi Royal Family for $637 million,equating to just under $1 million per key (although the price wassignificantly influenced by the fact that these properties haveplanning consent to be converted into residential).

Throughout 2008, there were only 17 recorded single assettransactions with a volume in excess of $100 million, a significantdecrease on previous years which highlights the difficulties buyersare currently facing in financing large transactions.

Some of the largest sales experienced during the year compriseddevelopment sales in London. The Metropole Building was sold bythe Crown on a long lease for $266 million to a consortiumcomprising International Hotel Investments, the Libyan ForeignInvestment Company and Istithmar Hotels, who will restore thehistoric building and open it as a Corinthia hotel.

EMEA top ten hotel transactions 2008

LocationScandinavia

Ireland, UKLondon

Portugal, AlgarveItaly

London

Price per key ($)n/a

465,000999,000756,000596,000939,000

BuyerCapMan

Oman Investment FundAbu Dhabi Royal Family

JJW Hotels & ResortsEST Capital

Int’l Hotel Investments/LibyanForeign Investment Co/Istithmar

SellerNorthern European Properties

Quinlan PrivateCPC Group

StarmanStarwood Hotels & Resorts

Crown Estate

Closing date

Mar-08Jan-08Jan-08Feb-08

Mar-08

Aug-08

Price ($M)

872.0637.0265.0250.0266.0

1,269.0Rooms

n/a

638350419283

1,874

Property name

Thistle Portfolio (2 hotels)Meridien Portfolio (2 hotels)Starwood Portfolio (3 hotels)*Metropole Building

Barcelona 614,000 Sol Melia/ CAM, Invernostraand Caja Duero

Habitat Grupo Empresarial Jun-08 160.0 259Sky Hotel

Northern European Propertiesportfolio (39 hotels)

Jurys Inn Portfolio (50% Stake)

Paris 811,000 Westmont Starwood CapitalApr-08 239.0 294AmbassadorParis

London

1,221,000

832,000

Mussalam Family

ARG Hotels Limited

Caisse Autonome nationale de la sécurité sociale dans les mines

Gruppo StatutoJul-08

Sep-08 205.0

169.0 203

168Prince de Galles

Crowne Plaza London - The City*

(1)

(2)

(1) Room number reflects the 50% stake included in the sale(2) The sale involved the building but not the business


The market saw an incredible uplift in Middle Eastern capital, from5.6% in 2007 to 26.7% in 2008, as several countries have set upsovereign wealth funds for investment, driven by a desire to diversifyfrom their natural resource based wealth. 2008 saw a significantdecline in investments from the U.S. representing only 2.8% ofcapital invested in the region, primarily driven by the lack of privateequity groups in the market.

The Hotel Silken was sold by way of a forward commitment to theSpanish hotel investment fund Losan Hotels World for $207 million,representing $1.2 million per key although this transaction is yet tocomplete. The iconic Café Royal in Regent Street was also sold bythe Crown on a long lease to the Israeli property company AlrovGroup, who will redevelop the property into a five-star hotel.

Other large transactions included the sale of the Ambassador andPrince de Galles in Paris. The latter was bought by a Middle EasternInvestor for a sum of $205 million. Halfway through 2008, Statuto Groupsold the Crowne Plaza – The City hotel after acquiring the hotel at thebeginning of 2007. The hotel was sold to Galadani for $169 million.

Private equity firms move to the backgroundChanging debt markets are causing a shift in the most active buyertype as aggressive highly leveraged buyers, such as the privateequity groups, reduce their investment activity and give way to othercategories of buyers who have struggled to understand the privateequity pricing metrics during the last few years.

Surprisingly, private equity firms were still one of the main purchasersin 2008, however, this was largely due to their acquisition of theNorthern European properties portfolio for $1.3 billion. Overall, hoteloperators were the dominant buyer type in 2008. Although thegroup’s actual invested volume fell compared to 2007, their marketshare as a buyer in the market grew substantially as activity fromother investors fell to a greater extent. While hotel operators werenet sellers in 2007, market conditions made them net buyers in2008. Investment funds have also become more active in 2008 asthey tend to be less aggressive and have longer-term strategiescompared to private equity firms.

Being most affected by the weakening property market across theregion, property companies and REITs significantly reduced theirmarket share, with property companies even becoming the mainseller group in 2008. This is another significant shift from recentyears, when hotel operators led the way in sales as they focused onan asset-light growth strategy.

Although domestic capital has always been a main source ofinvestment, in recent years there was a significant increase in theamount of European and global capital. As investors became morerisk averse due to the financial turmoil domestic capital becameonce again the dominant source of capital, representing 34% of thetotal volume in 2008.



-40% -30% -20% -10% 10%0% 20%

Net shift^

Sovereign wealth fund

2007 2008

REITPublic company

Property companyPrivate equity

Private companyInvestment fund

Institutional investorHotel operator

HNWIDeveloper

Region source of investment - change in market share 2008 over 2007

United StatesMiddle East

GlobalEurope

DomesticAustralasia

Asia

-15% 10%5%0%-10% -5% 15% 20%

Change in market share




OutlookAs the difficulties in the financial markets continue and investorsentiment worsens, it is expected that 2009 will be anotherchallenging year, with limited investor activity driven by a significantdrop in portfolio sales and further decline in single-asset volume. It islikely that investors will be fairly inactive in the first half of the year,with activity slightly improving in the third and fourth quarters as asmall number of banks come back into the market.


What we expect to see through 2009 is more consensus on pricingas both buyers and sellers accept that we saw truly exceptionalconditions in the last two years and we have to look back to the mid1990’s pricing metrics for where the market will settle certainly in theshort term. Investors’ focus has to be on making capex fundsstretch further and effectively managing both their operator andemployees as they cannot rely on the market to carry them forward.

Moreover, as owners see the need to refinance acquisitions andbanks start to take action on non-performing loans, it is likely thatthere will be some distressed property on the market, which shouldresult in increased investment activity. Investment activity will bemainly led by lower leveraged, long term players looking foropportunistic acquisitions which would not be available in morebuoyant market conditions. As investors continue to focus on localmarkets to decrease risk and given the increased importance ofrelationship lending, domestic investment will remain the dominantsource of capital.

We see the major lenders moving forward through 2009 with theselection of a variety of strategies to recover value in the mediumterm. This will mean some changes of ownership and control,including mergers, which will also cause the transactional activity toincrease in comparison to the first half. We also predict that M&Aamong some of the larger operators will increase as thedevelopment pipeline is reducing so quickly and the synergiesbetween merged operators will become increasingly attractive asmarket demand falls off.

Market conditions made hotel operators net buyers in 2008 and weare likely to see more of this type of activity in the short term as,apart from a small number of specialist hotel investors, operators arethe only stakeholder who really needs the properties in order for theirbusiness models to thrive.

While yields have been moving out for all commercial property,hotels in poor condition, weaker locations and encumbered bymanagement agreements are seeing the largest movement. In 2009,hotel investors will generally favour lease opportunities given theirmore reliable income streams, and either trophy assets in primecities such as Paris and London, or hotels in the economy sector,which trade well in down cycles.

Jones Lang LaSalle Hotels advised Gregory Park Limited in the sale of the 133-key Four Seasons Hotel Hampshire, England in 2008

Volum

e ($B

)

0.0

2.0

4.0

6.0

8.0

10.0

2000

2001

2002

2003

2004

2005

2006

2007

2008

12.0

14.0

Single asset transactions Portfolio transactions


Asia Pacific hotel transaction volume 2000 - 2008

Asia Pacific quarterly hotel transaction volume

Volum

e ($B

)

0.0

1.0

2.0

3.0

4.0

5.0

Q307 Q407 Q108 Q208 Q308 Q408

Hotels Development projects


Investment goes localLower volumes were largely attributable to the slowdown in activityby highly leveraged players, such as global private equity and realestate funds, who have dominated activity over the last few years.As lending institutions have grappled to understand the extent oftheir exposure, they have sought to limit their risk, reducing theamount of debt which is available (from both global and regionallenders).

Prior to monetary intervention in the second half of 2008, the cost ofcapital had increased with spreads widening between 50 and over150 basis points. Financing has also been made more difficult by areduction in loan to value ratios and strict adherence to interestcover guidelines by major lenders, to varying degrees across theregion.

As economic growth slowed through the second half of 2008 andinflationary pressures subsided, central banks started to loosenmonetary policy and interest rates have reduced. This is expected tocontinue through 2009 as governments seek to provide fiscalstimulus to local economies, providing some welcome respite toinvestors. These factors, combined with the ensuing positive yieldspread, are likely to tempt more investors back into market and instillsome semblance of confidence.

Asia PacificA hiatus of transactions in 2008Hotel transaction volumes across Asia Pacific slowed throughout2008 to total just $2.8 billion as the tight credit environment becamea stranglehold on global investment activity. While transactionvolumes – boosted by the sale of the Westin Tokyo ($714 million) –just pipped the 2005 total there was a notable decline in portfoliosales compared to the last few years. Compared to 2007, thenumber of transactions reduced by 40% whereas the dollar valuedeclined by a more significant 77% with very few large-scaletransactions occurring ($100 million plus).


A surge in investor demand, underpinned by an abundance of bothequity and competitively priced debt, resulted in record levels ofinvestment in the Asia Pacific hotel sector over the four years to2007. An improved outlook for earnings growth also aided thisunprecedented demand for the sector.

Having peaked in the second quarter of 2007, hotel transactionshave declined on average by 15% each quarter over the last 18months to record less than $400 million in the fourth quarter of 2008– traditionally a very busy closing period. A lack of money forproperty lending, coupled with weak investor sentiment, has led to astagnant market. It has also been difficult to price assets in anenvironment where there have been few transactions andaccordingly it will take longer to arrive at a balanced market than inthe past.

Asia Pacific origin of buyers and sellers net action 2008

-40% -20% 0% 20% 40%

Net shift

AmericasGlobal

EMEAAsia Pacific


Negative sentiment infiltrates discretionary spendingWhile remaining positive in most markets for the first six months of2008, hotel trading started to wane in the second half of the yearand with notable declines in some markets during the last quartercompared to 2007. The major financial centres – Hong Kong,Singapore, Sydney and Tokyo – recorded RevPAR declines ofbetween 5 and 15% during the last three months of the year, withmore pronounced declines in the upper tier segments.

The MICE market has been particularly hard hit with large-scaleconferences and corporate meetings postponed or cancelled, whilea reduction in food and beverage outlet revenues has occurred asconsumers have reigned in discretionary spending.

A counter to this has been a notable slowing in hotel developmentpipelines across the region with a number of announced projectsbeing put on hold. For example, Jumeirah recently announced theywould delay the opening of their first hotel in Shanghai, while anumber of hoteliers are reported to have shelved plans for hotelprojects in Indian cities; Bangalore, Hyderabad, Pune. Even projectsin New Delhi have been cancelled or delayed despite the upcomingCommonwealth Games in 2010.


Asia Pacific RevPAR growth 2008 (y-o-y): Key global cities

-30%

-20%

-10%

0%

10%

20%

Feb

Mar

Apr

May

June July

Aug

Sept Oct

Nov

Dec

30%

40%

50%

Jan

Singapore (4-star)Tokyo (upscale) Sydney (3-5 star CBD)

Hong Kong (4-star)

Source: STR Global, Jones Lang LaSalle Hotels

Medium term growth prospects remain strongWhile the short term outlook remains quite bleak, Asia Pacific hotelfundamentals are still relatively healthy. Medium term growthprospects remain strong as evidenced by two corporate investmentsin regional hotel operating platforms. Japan’s Orix Corporationacquired a stake in Tune Hotels in mid 2008, while Shinsei Bankacquired a stake in Lemon Tree Hotels in a joint venture with KotakRealty Fund.

Over the next few years, operators will find it increasingly hard togrow portfolios organically with less capital available for expansion.Strategic plans that were drawn up over the last few years will needto be critically evaluated to assess where the best growthopportunities lie. The recent bear run on the world’s share markethas also significantly reduced the market capitalisation of manypublic hotel companies which could result in some merger andacquisition activity.

Notable retreat from emerging markets Transaction volumes across Asia Pacific’s emerging marketsdeclined to a four year low as the flow of cross-border capital driedup and investors retreated to the safety of domestic or intra-regionalinvestment. Typically emerging markets attract high levels ofinvestment during periods of strong economic growth asopportunities in mature markets become scarce.

Investment in Asia Pacific’s emerging markets peaked through 2006and 2007 at 37% ($2.7 billion) and 20% ($2.5 billion) of the totalvolume respectively, topping the average annual level of investmentacross the entire region of the previous decade. Transactionvolumes through 2008 saw a notable reversal of this trend as theoutlook for global economic environment weakened and it becameclear that Asian economies, in particular China and India, had notdecoupled to a sufficient extent to shield their economies from theensuing downturn.

Hotel investment in China slowed to a four year low; hit by a slew ofgovernment regulations over the last couple of years, aimed atcooling the overheating property market. The frequent changes toinvestment regulations, as well as restrictive debt markets, havemade executing a transaction a lengthy process, particularly foroverseas investors.

The sale of the Grand Castle Hotel in Xi’an in a deal arranged byJones Lang LaSalle Hotels took around eighteen months tocomplete. The prominent 337-room asset, sold with vacantpossession, was divested following the completion of an extensiverefurbishment through an extensive off-market campaign. Theproperty was sold to Singapore-based Park Hotel Group, who alsoadded the Hilton Otaru in Hokkaido to its portfolio late in 2008.

Asian investors make in-roads across Australia as currencyweakensSignificant currency swings through the second half of 2008 alsostarted to impact hotel investment trends and is expected to remaina factor in 2009. Having been the domain of domestic investors overthe last few years, well capitalised Asian investors are being temptedback into the Australian hotel market, taking advantage of a weakerAustralian dollar, after dominating the scene in the 1990s whenmarket conditions mirrored today’s. Over the last 10 years, Asianinvestors have proved to be very countercyclical purchasers.

Asian investors snared two prime assets in Australia’s key cities in2008, Novotel Rockford Darling Harbour in Sydney and WestinMelbourne. On the contrary, Middle Eastern investors, who hadstarted to show greater interest in Asia Pacific hotels over the lastfew years, particularly in emerging markets, withdrew from themarket through 2008.



-40% -20% 0% 20% 40%

DeveloperGovernment

HNWIHotel/SA operator

Institutional investorInvestment fund

Private companyPrivate equity

Public company

REITReceiver

Sovereign wealth fundSpecialist hotel investor

Other

Net shift^

2007 2008



Asia Pacific top five hotel transactions 2008

Westin TokyoWestin Melbourne Hotel JAL City NahaNovotel Rockford Darling Harbour*Hotel Fortuna

Property nameTokyo

Melbourne OkinawaSydneyFoshan

LocationFeb-08Dec-08Jun-08Jun-08Mar-08

Closing date718.4105.676.872.870.6

Price ($M)438262304230408

Rooms1,640,183403,053252,632316,522173,039

Price per key ($)GIC

TA Enterprise BhdRisa Partners

TCC Land Capital Estate

BuyerMorgan Stanley

Cbus Zecs

Rockford Hotel GroupHotel Fortuna (Hong Kong) Ltd.

Seller


The RevPAR declines which were recorded during the last quarter of2008 are expected to gain pace through 2009 as consumersentiment remains weak, while government financial stimuluspackages are expected to take up to 12-18 months to take full effect.

As the year progresses, yields are expected to realign to moreaccurately reflect the quality of an asset as investors give greatercredence to the basics of hotel investment – location, income,management, contract terms and gearing. However, as confidencemounts and investors start to price in a trading upswing, yields willonce again start to contract.

OutlookRecovery (and market liquidity) will only come once the market re-sets its expectation to the new economic reality. Markets which re-price more quickly, such as Australia, are more likely to see deals in2009 once new pricing expectations are established. The crux,however, will be that until banks free up their credit restrictions, themarket will remain stagnant.

Transaction volumes are therefore expected to remain subdued inthe first half of the year but exhibit more activity in the second half ofthe year. Companies that geared heavily during the boom times nowface a triple impact – lower earnings, falling asset values andgrowing difficulties in rolling over debt. For those unable to refinance,the main options are cutting costs, raising equity or selling assets.


Jones Lang LaSalle Hotels sold the 338-key Ana Hotel Xian, China in 2008

Properties for sale


Property nameW Los Angeles - Westwood

W San Francisco

St. Regis Aspen

LocationLos Angeles, CA

San Francisco, CA

Aspen, CO

Property description Contact

Los Angeles

Los Angeles

Americas

W Los Angeles - WestwoodLos Angeles, California

W San FranciscoSan Francisco, California

St. Regis AspenAspen, Colorado

Note: Jones Lang LaSalle Hotels’ public listings are shown here. However, this represents only a fraction of what is available. As we tailor hotel investment to individual needs, a number of oursales are off market. Therefore, we encourage you to contact our operatives around the world.


Property name

Portfolio

Centre Property

La Villette

LocationFrance

France

La Villette,Paris, France

Alicante and Valencia

Property description Contact

Paris

London

Paris

Paris

EMEA

Ibis PortfolioFrance

Urbaclub Paris La VilletteLa Villette, Paris, France

Mercure Royal FontainebleauFontainebleau, France



Property name

Castello Rosso

Location

St. Petersburg, Russia

Property description

lease agreement guaranteed by Club Med

Sicily, 30 kilometres from the city of Ragusa

A4 Milan-Venice highway

rooms, a swimming pool and an elegant and modern spa

wine production of the nearby Langhe region and world famous truffles from Alba

59 well appointed guestrooms

Contact

Rome+39 02 8586 [email protected]

Milan+39 02 8586 8673

Milan+39 02 8586 8673

Marina UsenkoMoscow+7 495 737 [email protected]

Milan+39 02 8586 8673

EMEA, continued

Club Med KamarinaRagusa, Sicily, Italy

Methis HotelPadova, Veneto, Italy

Castello RossoCostigliole, Cuneo, Italy



Property name

Surfers Paradise MarriottResort & Spa

Swissôtel Merchant Court

Five-star hotel Sydney CBD

Novotel Langley

leading resorts and lodges

Location

Brisbane, Australia

Singapore

Sydney, Australia

Perth, Australia

Various, AustraliaContact

+61 7 3231 1416

Mark Durran (Sydney)+61 2 9220 [email protected]

+61 7 3231 1416


Mike Batchelor (Singapore)+65 6494 [email protected] Oakden (Singapore)+65 6494 [email protected]


Mark Durran (Sydney)+61 2 9220 [email protected] Desange (Sydney)+61 2 9220 [email protected]

+61 7 3231 [email protected] Collins (Sydney)+61 2 9220 [email protected]

Property description

just moments from key tourist attractions and corporate demand generators

swimming pool

recently refurbished guestrooms and suites

gymnasium, spa and undercover parking for 94 vehicles

conference facilities

lagoon, tennis court and private marina

management

across guest accommodation, food and beverage, conference and recreational facilities

skyline views over Sydney

Asia Pacific

Lizard IslandTropical North Queensland, Australia

Brisbane MarriottBrisbane, Australia

Surfers Paradise Marriott Resort & SpaGold Coast, Australia


Jones Lang LaSalle Hotels’ researchJones Lang LaSalle Hotels’ researchJones Lang LaSalle Hotels has made an extensive commitment toindustry research, integrating it into all services and providing clientswith a clear competitive advantage, based on tracking and analyzingthe hotel investment market for over a decade.

Hotel Investment Outlook (Global)An in-depth forward looking analysis, which tracks global hotelinvestment trends. The key investment drivers are assessed at aglobal, regional and country level.

Hotel Investor Sentiment Survey (Global)Our unique survey identifies the weight of opinion of future trendsand establishes a benchmark position on key issues, coveringalmost 90 major hotel and resort markets worldwide.

Hotel Investment Highlights (Global and regional)This concise newsletter identifies regional investment trends, hotmarkets and provides a forward looking analysis of the hotelinvestment market.

FocusOn (Global and regional)An in-depth look into significant topics of interest for the hotelinvestment market.

Hotel Intelligence (Regional)Comprehensive market reports, specifically assessing the hotelinvestment market and the key drivers for future developments.

Client research servicesOur team is dedicated to providing a seamless research service fromlocal data sourcing and single assignment analysis through to theconstruction of global investment, development and locationalstrategies.


Jones Lang LaSalle Hotels’ dedicated offices

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COPYRIGHT © JONES LANG LASALLE IP, INC. 2009.

All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means without prior written consent of Jones Lang LaSalle. It is based on material thatwe believe to be reliable. Whilst every effort has been made to ensure its accuracy, we cannot offer any warranty that it contains no factual errors. We would like to be told of any such errorsin order to correct them.

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