LONDON-Private equity groups are expected to dispose of their European hotel portfolios through new REITs or IPOs, predicts Jones Lang LaSalle. Private equity groups have been aggressive buyers of hotel portfolios across the continent in the past couple of years, accounting for 41% of the $20.6-billion market last year.

This compares to 1% in 2000. They have been able to capitalize on a trend in the industry as hotel groups sought to shed assets, mainly through sale/leasebacks, to focus on management and operation of hotels. These disposals have appealed to funds– including those run by Morgan Stanley, Lehman Brothers and Blackstone–which have been able to buy hotels on higher yields than office or retail.

Recent deals have included the $3.2-bilion sale of Société du Louvre to Starwood Capital and the $1.9-billion acquisition of Intercontinental Hotels’ UK portfolio of 73 hotels by Lehman Brothers and the Government of Singapore. Blackstone spent $790 million in March on the purchase of Hospitality Europe. The trend has seen a massive diversification in ownership patterns, says the report. So, in Paris, for instance, 21% of hotel rooms are owned by Americans, 8% by Middle Eastern investors and 13% by (non-French) Europeans.

But private equity groups are “not long-term holders of real estate” and are likely to exit, says the report, with a public flotation, the most attractive method. It adds that the introduction of REITs in the UK and Germany increases the likelihood of this happening. “Property companies and private equity firms are expected to explore the possibility of exiting via the REIT market now that the legislative process has begun in Germany and the UK,” the report says.

Despite the incursions of private equity groups into European markets, some countries, particularly Spain and Italy, are still dominated by domestic investors, JLL finds. The report also predicts a record number of hotel transactions across the world this year. Global transactions reached $41 billion in June 2006 but this could exceed $60 billion for the year, a 33% increase over last year’s $45 billion.

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