Hotel investors look to European REITs for exit

Britain and Germany are set for a wave of hotel REIT flotations led by private equity firms, according to a report by real estate advisor Jones Lang LaSalle.

Private equity firms now account for 41 percent of the €20.6 billion ($26.2 billion) worth of European hotels bought and sold in 2005, compared to just one percent in 2000.

But with both the UK and Germany working on plans to introduce real estate investment trusts (REITs), Jones Lang says the strategy to exit via the tax efficient structures or similar listed vehicles offers a “quick, clean exit with several properties in a single transaction.”

Morgan Stanley, Blackstone and Lehman Brothers have been involved in some of the largest deals in Europe.

Last year, for example, Lehman Brothers, GIC – the investment arm of the Government of Singapore – and Realstar bought 73 UK hotels from InterContinental Hotels Group in a €1.4 billion deal.

Such buyers are taking advantage of a trend among hoteliers to sell off real estate while maintaining management contracts to run the hotels, although investors have also proved willing to take on the operational risk in return for attractive yields.

Exiting the investments via a REIT in the UK would mark a new cycle of hotel ownership, following a wave of post-2000 public-to-private deals by investors who believed the stock market failed to value the underlying property in the business.

However, the report also points out that in the UK details over the tax treatment of converting assets into the newly created tax efficient structures are yet to be worked out ahead of their introduction in January 2007.