REPORT FROM ITALY—Italy’s hotel market is up for sale, but skittish investors have left the country’s transaction landscape muted at best.
Though many independent and family-owned assets are struggling under crippling debt and risk insolvency, potential buyers have been turned off by high asking prices and questions about profitability. To make matters worse, Standard & Poor’s last month downgraded Italy’s government debt rating from A+/A-1+ to A/A-1.
When the market was at its peak during 2007, deals volume totalled €1 billion (US$1.3 billion), according to Roberto Galano, executive VP of Jones Lang LaSalle Hotels Italia. During 2008 the figure dropped to less than €600 million (US$795 million), and in 2009 it fell to €230 million (US$305 million). Last year, transactions totalled €330 million (US$437 million).
Year-to-date transactions volume is only €50 million (US$66.3 million), Galano said, though he acknowledged a single large transaction could significantly increase that figure.
On average, Italy accounts for 6% to 7% of the volume of the real-estate deals within the Europe/Middle East/Africa market, he said.
“(Since the beginning of) this year there have been very few deals, at least the ones known. There is a bit of impasse, unlike other years when there was little more movement somehow”, Galano said.
A market for sale
Though transactions remain stagnate, a number of factors in the country are pushing a considerable number of assets to market. The global economic crisis is the major issue, according to Clara Garibello, research director at Scenari Immobiliari, an independent research institute focused on the real-estate sector.
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Another concerns the makeup of ownership in the country. Italy’s hotel industry is dominated by family-owned businesses, where generational turnover and long-standing issues with deferred maintenance often force owners to sell, she added.
In addition, major hotel brands are in the process of unloading real-estate in an attempt to shed leverage given market volatility.
“The trend is to go towards franchising and management contracts”, said Elena David, CEO of UNA Hotels and president of AICA, the Italian association of hotel chains.
That influx of assets has piqued the interests of potential buyers who are eyeing consolidation in the market.
There are opportunities) in Italy, primarily in the budget and economy segments, Galano said. “Italy will not become like the Unites States—absolutely no”, he said. “There won’t be such big chains. But we can surely improve our real-estate (consolidation)”.
Unione Alberghi Italiani, for one, is a relatively new player that is making some headway.
“The objective of Unione Alberghi Italiani is to work at the consolidation of the hotel real-estate ownership in Italy”, said Francesco Noseda, the company’s managing director. “We buy the real-estate and also the management rights; preferably the both. Then we entrust someone, a private or a group, to manage the property … primarily through rental agreements, without excluding management contracts ”.
The company aims to establish a group of 70-roo to 100-room hotels in the 4-star segment, primarily in provincial towns such as Parma, Piacenza, Bologna and Mantova.
Unione Alberghi is targeting five acquisitions per year, or about 20 in four or five years, with a return on investment of 6% of the asset’s value, Noseda said.
“We are evaluating many properties … Italy is probably the most fragmented market among the big countries with significant tourist flows”, he said. “Old families still owns (many) hotels and the presence of the chains, especially the international ones, is very limited … The market is so fragmented, (and) that offers absolutely extraordinary opportunities for consolidation. It’s an incredible source of acquisitions also because many properties are so old that need resources for renovations and refurbishments”.
Supply versus demand
Another dam to the flow of potential deals is the considerable disparity between asking prices and asset values. Buyers are unlikely to yield a profitable return when they are being asked to make such a hefty investment, UNA Hotels’ David said.
“Many hotel owners have ideas, in terms of real-estate values, that would have been justified before the crisis. But, as the market (has fallen), what was worth €100 in 2007 could be now worth €50 or €60 or €70”, Galano said.
Valuations in Italy are often based on a rate per square metre, which only further drives up asking prices, Noseda said.
“Several times I had talks with owners that said: ‘My hotel is 2,000 square meters. Near here a square metre of residential housing is valuated at €10,000, and so my hotel values 2,000 times 10,000’. That’s a reasoning that doesn’t make any sense ... Usually we value the hotel only on its performances”, he said.
Making matters worse is the country’s lackluster performance of late. During August, Italy’s hotel industry posted a 5.7% decline in average daily rate and a statistically insignificant increase of 0.3% in revenue per available room, according to STR Global, sister company of HotelNewsNow.com
“Low profitability implies that the rent required by the investment could be non-sustainable for the lessee”, David said.
And without guarantees of profitability, banks are much less likely to lend, Galano said.
“The bureaucracy is the first element, and then the banking system—at least the Italian—is not inclined to give credit to the hotel sector”, he said. “Many acquisitions are financed by foreign banks. There are some Italian banks, such as Banca Intesa or Unicredit, that have been involved in the sector with their national clients, but it is difficult that this happens with the international investors”.