Hotel Investment and Lending Outlook 2012 – Survey Results

PKF Consulting’s outlook calls for bottom line improvement of 7.0% in 2012 and 7.5% annually over the 2013-2016 period.  PKF recently conducted its 2nd annual Hotel Investor and Lender Survey in Fall 2011 to better understand current industry sentiment towards investment in and lending to the accommodation sector. Despite clouds of economic uncertainty, most industry participants are feeling optimistic that hotel performance is improving and lenders are active in the sector. However, from an investment perspective there does not appear to be industry consensus on where capitalization rates are headed, with an equal distribution of responses.  PKF’s outlook for 2012 is for modest downward pressure in capitalization rates. This, combined with continued increases in bottom line performance, suggests improvement in hotel values.

Hotel Financing Outlook
The results of the respective Investor and Lender surveys suggest some similarities as well as differences in expectations on where hotel financing may be headed in 2012.

• Loan-to-Value Ratio (LTV) – Both Investors and Lenders share similar expectations on the continued prospects for higher Loan to Value ratios, with the majority of respondents anticipating a 60-69% LTV range.

• Amortization – Both Investor and Lender responses indicate an expectation for longer amortization periods, with the majority of respondents anticipating amortization periods in the 20-25 year range.

• Interest Rates – Perhaps not surprisingly, there was a divergence of opinion on interest rates between Investors and Lenders, with Investors anticipating, or perhaps hoping, for continued lower interest rates (<5%), which is not an expectation shared by the Lenders.

In terms of 2012 activity, Hotel Investors indicate that they will have a higher number of loans renewing in the upcoming year.  Lenders also indicate that they expect to be issuing more loans in the upcoming year.

Hotel Investment Outlook

The survey was designed to capture investor and lending attitudes over the four most recent hotel investment cycles as follows:

• 2000 through 2004 – Strong performance, impact of 9/11, SARS, and recovery
• 2005 through 2008 – Industry peak
• 2009 and 2010 – Economic and industry downturn
• 2011 – Early industry recovery

Investors were asked to identify their return expectations over each of these four time periods.  Their expectations for overall capitalization rates against historic earnings are presented in the following table.

Based on the results of the survey, there does not appear to be a consensus on where investor return expectations or capitalization rates are headed in 2012. Approximately 28% of the investors surveyed believe that there will be no change relative to 2011 capitalization rates. Of the balance, more see downward pressure (lower return expectations) as opposed to upward pressure (higher return expectations).  Downward trending capitalization rates suggest lower return expectations which can be a factor of greater access to debt and/or equity, lower interest rates and a higher risk tolerance.

PKF’s outlook is for a modest downward trend in capitalization and discount rates in 2012, driven in part by the continued improvement in industry performance and in part by an increase in hotel investment interest nationally.  However, there remain strong variances based on market and asset specific factors.  The table below presents PKF’s 2012 outlook, although in some cases we at PKF would be looking at capitalization rates well above or well below these ranges.

Overall, based upon our 2012 projections and the results of 2011/2012 Hotel Investor and Lender Survey, we anticipate further increases in asset values over the short to mid term.

Copies of the detailed 2011/2012 publication can be purchased for $500.00 + HST.  Please contact PKF Toronto at pkftoronto@pkfcanada.com or PKF Vancouver at pkfvancouver@pkfcanada.com.

Tyler MacDonald, Senior Consultant
PKF Consulting, Toronto