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Global Hotel Liquidity: Depth is Not An Issue

Investor demand for hotel portfolios spiked over the past six days as roughly $5.6 billion in global M&A deals came to market.

So it goes in the sweltering realm of hotel sales. What’s perhaps more significant than dollar volume, however, is geographical range of demand. From an Intercontinental hotel in Okinawa to a Seattle-area Marriott, this broad-based slew of deals suggests that 2007 may blow out last year’s record $72.5 billion in global hotel deals.

Jones Lang LaSalle hotels doesn’t report quarterly volume of investment sales deals, but it’s clear that 2007 could easily topple 2006 for annualized sales volume. The recent deal frenzy also proves that global hotel liquidity has never before been as strong — and capital is freely moving around the world.

“For the first time in two decades, trends in hotel investment throughout the major regions of the world have fallen into line with strong growth in investment activity experienced in every market,” says Art Adler, CEO of the Americas at Jones Lang LaSalle Hotels.

It’s tough to beat this prolific buying binge for its sheer breadth and dollar volume. Last Thursday, for example, Dallas-based hotel REIT Ashford Hospitality Trust (NYSE: AHT) bought a 13,640-room portfolio of U.S. hotels for roughly $2.4 billion. The following day, the Morgan Stanley Real Estate Fund spent $2.36 billion for a portfolio of 13 Japanese hotels owned by All Nippon Airways Co.

Only the weekend forced a momentary respite from deal making. Yesterday, Innkeepers USA agreed to go private for $800 million after Apollo Investment Corp. accepted a $17.75 per share offer.

This liquid market should stick around, too. Experts expect buyer momentum to accelerate over the next few months as the booming leisure and business travel sectors fill hotel rooms throughout the world. The busy summer travel season is also coming up in the Northern hemisphere. Demand for rooms has spurred buyside interest in entire portfolios. But the same sources also caution that the global hotel market is highly volatile, which could make some of these outsized bets particularly risky if the market turns.

Cheap debt and lofty growth projections are driving this wave of deals. As a result, many U.S.-based opportunity funds and institutional investors such as Apollo and Morgan Stanley are scouring the globe and snapping up hotel portfolios. According to Jones Lang LaSalle Hotels, many of these domestic investment groups are going offshore in search of higher yields. Hotel returns in Far Eastern markets such as China and Thailand should be roughly 300 basis points higher than similar properties in the U.S., reports JLLH.

“Cross border investment in hotels will become even more pronounced as 2007 progresses,” says Adler. He also expects the global ownership composition to shift in a positive direction as more “institutional investors, REITs [and] property funds” gobble up portfolios. “[This] may lead to reduced transaction volumes as these investors typically hold on to assets for loner periods,” he explains.

Given how frothy demand is for hotel assets today, that’s indeed a step in the right direction. As most real estate investors know — some all too well — short term holders are also more likely to become panicked sellers at the first sign of trouble.

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