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					Investor Pages Research
By Pam Spooner
                                                                                                                                                         The one stop comparison
May 2010                                                                                                                                               website for private investors


Background note to property
investment markets – May 2010
With specific focus on the hotel and leisure sector, and fractional ownership concept


✱ 1. COMMERCIAL PROPERTY –                                                           Advisory (another tracker of property in the                           across retail, office and industrial still falling.
OVERVIEW                                                                             region) said that rental values in both residen-                       Only residential US property showed gains in
Mixed signals have emerged from the com-                                             tial and commercial property in Dubai are                              both capital and income (rental) returns.
mercial property sector over recent months,                                          likely to continue falling in coming months,                               In the UK, there have been signs that the
particularly in the UK, but also in various                                          especially for lower quality buildings in the                          London office market is improving. Property
other regions around the world. The massive                                          least developed and integrated communities.                            giants British Land and Land Securities both
problems in Dubai, for example – where                                               Nevertheless, Landmark also suggested that                             reported stronger full year numbers, in late
some US$323 billion worth of construction                                            certain residential units in key locations and                         May, and both issued positive statements on
projects are now reckoned to be on hold – hit                                        within high quality developments should see                            recovery after better conditions became appar-
the headlines in late 2009 and have since sent                                       stable prices.                                                         ent in the second half of 2009/10.
shock waves through bond and equity mar-                                                 There was some good news from the US                                   Land Securities, for example, reported a
kets around the world.                                                               property market in early May. The Investment                           pre-tax profit of over £1 billion, against the
    The situation in Dubai appears now to have                                       Property Databank (IPD) Index showed the                               £4.8 billion loss declared for the year to 31st
stabilised, after the state-owned Dubai World                                        first positive return in more than 18 months,                          March 2009; most of the 2010 ‘profit’, however,
reached a repayment agreement with creditors                                         with the US quarterly Index showing a 1.2%                             came from a valuation surplus of over £860
on US$23.5 billion of debt. Also, Meed Projects                                      total return for Q1-10; within that figure there                       million. Revenues actually fell 20% to £251.8
(which tracks the construction industry in the                                       was a 0.5% decline in capital values in                                million. British Land reported a return to prof-
Middle East) says around US$114 billion of                                           the quarter.                                                           it, with its portfolio valuation rising 13.5%
new projects will be awarded in 2010.                                                    Sector figures from the US, however,                               against the prior year, and NAV up 27%
    However, there are still plenty of uncertain-                                    showed that commercial property in the                                 to 504p.
ties in regard to values. Last month Landmark                                        region is still in trouble, with capital values                            Yet the optimism from these commercial

                                    3 Year Performance Graphs - GBP Total Return                                                                 1 Year Performance Graphs - GBP Total Return


                      FTSE ALL UK PROPERTY INDEX (NAV)                                                                                   FTSE ALL UK PROPERTY INDEX (NAV)

            110                                                                                                           115

            100                                                                                                           110

             90
                                                                                                                          105
             80
                                                                                                                          100
             70

             60                                                                                                             95




                                                  FTSE ALL UK PROPERTY INDEX (NAV)                                                                             FTSE ALL UK PROPERTY INDEX (NAV)

  SOURCE: FTSE Group, data as at 14 May 2010                                                                   SOURCE: FTSE Group, data as at 14 May 2010




Figure 1.



                                                                                        www.investorpages.co.uk
MAY 2010



property leaders was largely focused on the           this view is bolstered by the fact that former       about the importance of American tourists.
office market in central London. While British        Ernst & Young star John McCready remains a           The relative weakness of all European curren-
Land’s statement talked about its £475 million        property ‘tsar’, and he is being urged to initiate   cies against the US dollar and Japanese Yen is
commitment to re-starting new office develop-         £40 billion of public property sales over five       likely to stimulate tourism across the region;
ments in the city, it also referred to “modest        years, instead of the ‘£20 billion over 10 years’    other visitors from Asia, and from BRIC coun-
recovery” overall this year amidst a “fragile”        already outlined.                                    tries, are also likely to be encouraged by the
economic recovery.                                                                                         change in relative currency values.
    The Q1-10 report at the end of April from         ✱ 2. HOTEL AND LEISURE                                   Indeed, hotel and tourism could prove to
the Royal Institution of Chartered Surveyors          PROPERTY                                             be one of the few bright spots across European
(RICS) gives a clearer picture of the current         Analysis from Deloitte, the accountants and          economies in the current year. Whether inter-
state of commercial property markets. The             business advisory firm, said earlier this year       national visitors will be able to counterbalance
report said that available space in central           that recovery in European hotel performance          likely poorer domestic demand is hard to
London had declined for the second successive         may be on the horizon: “Demand has experi-           judge. Also, the STR Global results to which
quarter, so that rental expectations have             enced an upturn since October 2009, before           Deloitte refers, pre-date the € crisis, which, at
moved “above zero” for the first time since the       pushing into positive territory in December          time of writing, appears ongoing.
last quarter of 2007.                                 2009 - up 4.2%. STR Global results for                   For March 2010 the STR Global Hotel
    The RICS figures in fact showed the biggest       January 2010 also show a healthy 3.3%                Index showed hotel occupancy in Europe aver-
jump on record in expectations for central            increase in the region against January 2009”.        aging 55.0% on a ‘year-to-date’ (YTD) basis.
London office rents, resulting in a boost to the          Alex Kyriakidis, Global Managing Partner         That represents a rise of 4% against the March
national average rental expectation. Away from        of Tourism Hospitality & Leisure at Deloitte,        2009 YTD number. In the whole of 2009 occu-
London, available office space continues to rise      added: “No strong rebound in European                pancy levels averaged 60.6%, 6.4% down
“at a broadly similar pace to Q4”, the report said.   tourism and hotel performance is expected in         on 2008.
    Letting activity for both office and industri-    2010, but further declines will now be city spe-         Demand in the 12 months to March also
al space rose for the second consecutive quarter      cific rather than the norm. Demand should            recovered, rising 5.3% across the region, and
nationally, although RICS reported that invest-       continue to return as more people travel to and      revenues rose 10.5%. RevPAR also rose strong-
ment demand outside of the capital was less           within Europe. This will give hoteliers an           ly, by 9.2% YTD to March – this compares to a
buoyant. Indeed, some surveyors in the RICS           opportunity to grow occupancy and then aver-         21.1% fall in revPAR across Europe in the
report were voicing concerns at the end of Q1-        age room rates and revenue per available room        whole of 2009.
10 about prospective demand for office space,         (revPAR). However, it will be difficult to sur-          There were similar signs of recovery in the
given the likelihood of cuts in public sector         pass pre-recessionary levels this year.              Middle East and North Africa regions: occu-
spending. Several UK regions have become                  “Hotels in London however, are an excep-         pancy rose 3.3% to 64.7% in the year to
very dependent on government spending, so             tion. The capital had the advantage of an inex-      March, having averaged 62.9% in 2009, which
that UK budget cuts will be scrutinised closely       pensive currency compared to the US dollar           was 10.9% down on 2008 averages. Demand
for potentially positive and negative impacts on      and euro throughout the downturn along with          rose 9.6% and revenues by 3.4% in the 12
commercial property markets.                          limited new supply, and did not experience the       months to March, although revPAR slipped
    As RICS members in Barnsley put, it “Very         massive drop off in tourism that some                back 2.5% in the period, presumably because
much a static market with a lot of people wait-       European cities did. Increases in leisure visits     much of the 2008/9 revPAR number was
ing for the next announcements on govern-             from international and domestic tourists             accounted for by pre-booked winter holidays.
ment action”.                                         counterbalanced a 20% drop in business trav-             Other recent statistics for hotels offer some
    The continued difficulties for the Euro and       el. Combined with strong revenue manage-             further hopeful signs of stabilisation. The
for sovereign debt levels generally must also         ment, London is leading European hotels out          worldwide Hotel Price Index showed that the
hamper investment confidence across Europe,           of the recession. Hoteliers there have been able     average price of a hotel room in 2009 was 14%
and it is clear that small towns across the UK        to push up average room rates since November         lower than in 2008. In fact, 2009 prices were
and the Continent are the ones bearing the            2009 and could possibly achieve double-digit         lower than those prevailing in 2004, when the
brunt of the economic slowdown and                    revPAR growth this year.”                            HPI began. However, in Europe the fall in
property slump.                                           As Marvin Rust, Global Managing Partner          room costs was better than the average, at
    Although many observers fear major nega-          of Hospitality at Deloitte pointed out along-        -13%, and the average rate of fall was clearly
tives because of public sector job cuts, there are    side the report: “As a general rule, hotel perfor-   slowing in the fourth quarter. For example, the
some UK property pundits who are already              mance will be closely tied to trends in              year-on-year fall in room prices averaged just
looking for the opportunities. Just before the        consumer confidence and GDP growth. With             7% in Q4, against a fall of 14% in Q3, minus
General election, Sir Stuart Lipton (former           the US dollar strengthening further we could         17% in Q2 and minus 16% in Q1.
boss of property group Stanhope, and now              see a welcome return of the American tourists            With occupancy levels and room rates
working again with Elliott Bernerd) urged any         to the UK towards the back end of this year.         clearly still depressed, valuations for hotels
new administration to undertake a full audit of       This remains our most important source mar-          around the world are similarly well below their
publicly-owned property with a view to identi-        ket and one that tends to spend well when they       peak. The still subdued outlook for GDP
fying asset sales. With central and local govern-     are here. On the other hand, corporate travel        growth across Europe, for example, suggests
ment owning an estimated £370 billion of              budgets continue to be scrutinised in cost cut-      that valuations will remain relatively low
property and land, Sir Stuart suggested that          ting programmes, and while some rebound              throughout the rest of this year at least.
there is bound to be some “low-hanging fruit”         will occur, demand will remain weaker                Nevertheless, as long as there is no further seri-
to be harvested to help repay Britain’s debts.        than normal.”                                        ous deterioration in economic performance –
    There is some hope that the Tory-LibDem               Clearly, Mr Rust’s comments will also apply      no ‘double dip’ recession – then it looks rea-
budget will show progress on such asset sales;        to European venues, including his remarks            sonable to assume that hotel values generally


2                                                        www.investorpages.co.uk
                                                                                                                                               MAY 2010



are now at or near the bottom. Individual loca-       ✱ 4. TIMESHARES AND                                  sell even for as much as the original purchase
tions, however, will always produce significant       FRACTIONAL OWNERSHIP                                 price, let alone for more.
variations and defy the averages, both in terms       The timeshare industry around the world –                Having said that, most buyers do not take
of occupancy, room rates and revPAR.                  in which rights at particular resorts or loca-       on a timeshare with investment intentions –
                                                      tions are purchased - is now well established        they are looking only for a reliable annual holi-
✱ 3. HOTELS AS ASSETTS AND                            and very large. According to the UK-based            day in places they like and with accommoda-
OPERATING BUSINESSES                                  Timeshare Consumers’ Association (TCA),              tion standards they know and trust. The
One of the principle difficulties in evaluating       six million families now own a timeshare,            structure of timeshare is that buyers pay a one-
hotels arises in identifying the worth of the         and there are generally well-regulated ways          off payment for the ‘right to use’ and an annual
physical property and, separately, of the             of buying, selling and exchanging any time-          management fee (covering cleaning, mainte-
operating business. Most analysts agree that          share rights.                                        nance etc of the accommodation). The man-
it is the operating business which matters                All timeshare is self-catering, and there are    agement fee is always payable, even if you do
most in terms of valuation, and, for the big          two basic forms of timeshare ownership –             not visit.
hotel chains and brands, this is always true.         ‘fixed week’ and ‘floating system’. In the first,        According to the TCA, the best resorts and
So much of the operating efficiency and prof-         owners have the right to spend a fixed amount        locations are run by the owners, through a
itability (reservation systems, staff training,       of time in a specific apartment or villa, which      timeshare club and committee. Certainly, you
group marketing) is tied into the brand or            may or may not have accompanying leisure             are less likely to encounter problems with
any franchise agreement. As one leading               facilities. Owners can choose to stick with          timeshare clubs, and buyers need to be aware
industry commentator has said (Jim Butler,            spending the same week or fortnight in the           that there are still unscrupulous developers
of JMBM), “what is the value of the underly-          same place each year, or use one of several          around exploiting the timeshare system, even
ing real property of a Marriott, Holiday Inn,         exchange systems to swap their ‘rights’, chang-      though the industry has become better regu-
Hilton, Hyatt or Four Seasons if it loses the         ing time period as well as location.                 lated and more respectable than, say, 20
brand and professional management? It                     In the second, you own a time period with-       years ago.
becomes just a big box hotel with no name,            in a seasonal band of time, and each year you            There are scams affecting European resorts
no reservation system and no professionally           have to book the week you want; this will be         right now, and the TCA in fact is preparing
run staff ”. For this reason, evaluating big          subject to availability. This floating timeshare     court cases against a handful of developers and
hotels or big brands is particularly complex.         right can also be exchanged, and where the           their banks and credit card companies on a
    For privately run, generally smaller hotels       timeshare is a “club points” purchase owners         variety of grounds, and seeking compensation
the task of ascribing value is somewhat sim-          can accumulate points, or use only part of           for many consumers. These cases are likely to
pler, but even here the questions of location         them each year.                                      hit the headlines in the coming months.
and management experience and reputation                  US      group      Wyndham        Worldwide          Also, some of the current scams in time-
are tricky areas to assess. However, they are         Corporation is NYSE-quoted and probably              share are using different terms in their sales
always relevant and have an impact on the             the largest provider of ‘vacation exchange’ ser-     pitch – anything from ‘vacation club’ to ‘holi-
basic financials of the business – occupancy          vices (it owns the RCI brand), and its               day club’ and even ‘fractional ownership’.
and room rates, operating margins and cash            ‘Wyndham Exchange & Rentals’ division,               “Some dishonest traders are using the ‘frac-
flow requirements.                                    “offers leisure travellers, including its 3.8 mil-   tional ownership’ phrase to avoid the loss of
    Arriving at an actual value per room for any      lion members, access to over 65,000 vacation         credibility which has hit the timeshare indus-
hotel, therefore, is not an easy or even clear for-   properties located in approximately 100 coun-        try because of previous scams”, says the TCA.
mula. In fact, per room values could well be          tries”. ‘Wyndham Vacation Ownership’,                    Real fractional ownership schemes focus
described as having more to do with art than sci-     “Develops, markets and sells vacation owner-         on investment returns, rather than holiday
ence, which is why hotel asset sale prices can sur-   ship interests and provides consumer financ-         and leisure rights, and offer both a share of the
prise heavily one way or another. At the time of      ing to owners through a network of over 155          underlying asset and a proportion of income
writing, there are press reports that Royal Bank      vacation ownership resorts serving over              derived from the asset. Any leisure or usage
of Scotland is expected to sell the Grosvenor         820,000 owners throughout North America,             rights (certainly in regard to property assets)
House Hotel (in London’s Park Lane) for               the Caribbean and the South Pacific”.                are an extra benefit, rather than a part of the
around £500 million. That figure can only be              In Q1-10 financial results from Wyndham          underlying returns. Room To Invest (RTI), for
‘ball-park’, since RBS now has a short-list of five   beat analysts’ estimates, and even reported          example, which has been offering fractional
potential purchasers apparently, and the sale         slight growth in diluted EPS. It also reported a     ownership in European hotels for the past
process still has some way to run. Given the vari-    7% increase in free cash flow in the quarter, to     three years, says that only around 10% of its
ables of valuation – even for such a prestigious      US$166 million versus US$155 million in              investors actually make use of their
venue – the followers of RBS’ fortunes could eas-     Q109, and Wyndham has been able to triple its        usage rights.
ily end up being shocked by the outcome.              quarterly dividend. Thus, the timeshare mar-             The concept of fractional ownership is not
    Of course, apart from direct investment in        ket appears to have been very much more              new; fractional ownership of aircraft leases, for
a hotel there is the opportunity to invest in the     resilient than other segments of the                 example, has been around for many years
shares of quoted companies, assessing these           leisure industry.                                    (appealing to wealthy individuals and business
businesses by the usual measures of share                 Whilst corporations such as Wyndham,             people who put in a lot of flying time each
price, ROCE, EPS, dividend yield and so on.           and many other holiday companies and prop-           year). All such schemes also tend to include
However, the purpose of this note is directed         erty developers, are still making good money         management agreements (someone has to
at making some assessment of the back-                out of timeshare, a spokesman for the TCA            ‘run’ the asset) and annual management fees.
ground to ‘alternative’ investments in the            states that, “timeshare is not a financial invest-       In property, fractional ownership is reck-
hotel and leisure industry, rather than any           ment and never has been” for individual own-         oned to have really got going in the 1990s
sector-specific equity evaluation.                    ers. Very few timeshares, if any, ever actually      when ski resorts in Colorado were developed


                                                          www.investorpages.co.uk                                                                          3
MAY 2010



on a fractional ownership basis. According to            sive or trophy assets are involved; how much of      respectively) put Slovenia in the ‘safe’ category
US property consultants Ragatz Associates,               the initial valuation relates to ‘prestige’? HBOS    of national economies.
there were more than 250 fractional develop-             has lost a great deal of money by lending on             Also, in general, the STR and other industry
ments in North America by 2006, and the TCA              high profile, prestige assets; apart from            research suggests that destinations which have
says this is clearly the most developed market:          GuestInvest two years ago, the troubled bank is      not had mass appeal in the past are suffering
“there are few, if any, successful fractional            also expected to face a 90% loss on around           relatively less in the global recession, thus
ownership schemes in Europe”.                            US$1 billion of loans it made for development        underpinning hotel values and viability at such
    Any fractional ownership scheme can have             of a resort in Hawaii, which was also part of a      non-mainstream locations.
problems. There have been disputes as to ini-            fractional ownership scheme.                             Indeed, the key factor for any particular
tial valuations, sale values and structures, and             Despite such high profile, high cost failures,   destination appears to be its place in the devel-
management charges. As the TCA warns, you                fractional ownership schemes can and do              opment cycle, and the amount of available
have to assess the reasonableness of the price           work. Room To Invest, for example, has               hotel space. Many destinations in developing
you are paying for your asset. As stated earlier,        attracted investment and functioned success-         economies are still ‘early stage’ in their devel-
assessing the value of hotel assets is complex,          fully for three years now, as part of a wider        opment, so that investment selections in such
particularly where major brands or any kind of           offering of alternative investments. But it con-     locations are proving resilient. RTI’s approach,
rebranding is involved.                                  trasts strongly to the GuestInvest model – the       therefore, looks appropriate.
    In the UK we have had an example of these            TCA, by the way, examined the RTI brochure               Another significant advantage to the RTI
pitfalls in the collapse of GuestInvest two years        and concluded that RTI is similar to                 scheme is that it allows relatively low entry costs,
ago. In that fractional ownership scheme                 GuestInvest only because it is an                    varying from £2,000 for a low season room in
investors paid as much £400,000 for ownership            investment/returns, rather than holiday/             Slovenia up to £7,250 for a suite in Morocco,
of a room in high profile and fashionable                leisure, focused scheme.                             which has little seasonal variation. There is also
hotels in central London. The management                     RTI’s hotels are in selected locations which     no annual service charge, just annual manage-
company had borrowed around £500 million                 have limited development scope, so that these        ment fees that are deducted as a percentage of
from HBOS to purchase the hotels, before sell-           established venues are unlikely to see growing       room revenues. Whilst there is no commission
ing them in the fractional ownership scheme.             competition (the Medina within Marrakech,            charged on initial purchases, there is a 6% com-
With the near-collapse of HBOS and credit                and a mountain resort in Slovenia). They are         mission payable when investors decide to sell
crisis of 2008, GuestInvest was unable to con-           also hotels which function on what can be            via RTI; again, this does not look unreasonable
tinue, despite having attracted around 250 pri-          described as ‘core demand’, rather than as fash-     in comparison to other asset sale commissions.
vate investors.                                          ionable venues, such as the Blake’s Hotel in the
    Reported comment from Savills, the prop-             GuestInvest portfolio.                               ✱ 5. CONCLUSION
erty advisors, at the time of the GuestInvest                The asset valuations and projected returns       Fractional ownership of any asset can work, but
collapse highlighted the weaknesses of that              also appear much more realistic and likely to        the structure of the scheme needs to contain
particular scheme. “The concept of hotel room            be fulfilled, especially against the background      reasonable assumptions on initial valuations,
investment works, but the GuestInvest model              of continued tourism development in both             likely revenues – against both bad and good
is all wrong. The model was destined to fail...          Slovenia and Morocco and the shortage of             economic backdrops – and reasonable manage-
Firstly, with the backing of HBOS, GuestInvest           hotel room supply for both countries.                ment charges. Where hotels or resort properties
paid far too much for the hotel assets as they           Morocco saw GDP growth of 5.4% in 2009 and           are concerned, investors should also consider
stood. Then, having bought the hotels as trad-           is forecast to achieve 5.1% growth this year,        whether the amount of usage rights attaching
ing concerns, they closed the businesses down            and whilst Slovenia has seen its economy             to any investment is so big as to be detrimental
and ripped the hotels apart. Finally, they over-         shrink in the past two years, it is still rated as   to cash flow for the property – another of the
spent on the refurbishment. It all adds up to            one of the more successful economies in cen-         big problems which GuestInvest faced.
lots of capital expenditure, and no cashflow."           tral Europe. Budget deficit and government               RTI appears to have come up with the right
    The risks are clearly greater where expen-           debt levels (at 5.5% and roughly 37% of GDP,         balance in its business model; certainly it has
                                                                                                              significant advantages over the failed
Europe                                                                                                        GuestInvest structure. It is also, clearly and as
       Date               Occupancy                  RevPar                         Revenue
                                                                                                              the TCA concluded, a real fractional owner-
                     This Year   % Chg        This Year   % Chg               This Year          % Chg
                                                                                                              ship scheme, and not a timeshare in disguise.
        Total 2007        67.6                  101.16                       131,770,964,671
                                                                                                              For investors, the core questions must be about
        Total 2008        64.8         -4.3     101.90             0.7       134,265,698,165           1.9
        Total 2009        60.6         -6.4         80.41        -21.1       107,226,399,623         -20.1
                                                                                                              initial valuations and ease of exit, as is the case
    Mar YTD 2010          55.0         4.0          69.48          9.2        23,000,282,444          10.5    with all investments, particularly in the ‘alter-
                                                                                                              native’ category. ●

                                                                                                              BY: Pam Spooner, Editor, Investing for
Middle East & North Africa                                                                                    Growth
       Date               Occupancy                  RevPar                         Revenue                   Pam has been a financial journalist for more
                     This Year   % Chg        This Year   % Chg               This Year          % Chg        than 20 years, with national publications such
        Total 2007        69.0                      98.03                     14,198,653,904                  as The Times, Mail on Sunday, Evening
        Total 2008        70.6         2.4      119.46           21.9         17,890,851,279          26.0    Standard and Investors Chronicle. She also
        Total 2009        62.9       -10.9      103.03           -13.8        16,107,987,824         -10.0    edited Quest, the CFROI-based research
    Mar YTD 2010          64.7         3.3          111.57        -2.5         4,462,978,719           3.4    weekly for institutional investors published by
                                                                                          Data: STR Global    stockbroker Collins Stewart, between 2002
Figure 2.                                                                                                     and 2004.


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