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LONDON-Investors across Europe are increasingly recognising the potential benefits of investing in the hotel industry through sale and leaseback structures. And according to Jones Lang LaSalle Hotels, a shortage of available public equity finance will make this largely European trend spread quickly to the Americas and Asia Pacific, flying in the face of analysts’ continual down-beat view of this form of financing.

Mark Wynne-Smith, Executive Vice President of Jones Lang LaSalle Hotels said: “The pressure for operators to deliver maximum value to shareholders in an environment of increasingly limited capital resources is fuelling this trend. In order to satisfy the need for growth, operators are almost forced in to sale and leaseback agreements for lack of suitable alternatives.”

But these agreements can actually work well for both parties. They provide an innovative method of off-balance sheet financing that presents a win-win situation for both the investor and the operator: the investor has a realisable form of security for his investment while the operator has a tranche of newly acquired development capital. It was a sale and leaseback deal through the Royal Bank of Scotland that enabled Nomura to acquire the Méridien portfolio in 2001 with its new capital injection.

Arthur de Haast, Managing Director Europe, Jones Lang LaSalle Hotels said: “Despite Europe seeing a total investment of just under €3.5 billion in sale and leaseback agreements in the last two years, analysts continue to take a one-sided view of this type of structure. They focus on the negative impact on the balance sheet that occurs when assets become long-term liabilities. But while the pressure for expansion exists and available public equity is scarce, operators will continue to participate in sale and leaseback contracts rather than run the risk of satisfying neither party.”

Traditionally sale and leaseback structures have been used as a method of financing hotel acquisitions mainly in Germany, France and the UK although now open and closed ended funds, pension funds, high net worth individuals and property companies are starting to be interested in sale and leaseback transactions. Jones Lang LaSalle Hotels’ most recent research suggests that this trend will continue throughout Europe with many firms such as Hilton and Six Continents trying to find a balance between their franchised, owned, leased and managed assets.

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