Newsletter - July 16 , 2002

What is My Restaurant Real Estate Worth?

Part 2   Written By:  Richard D. Williams    HVS Food & Beverage Services

In Part I of my article I presented one method for quickly arriving at a “ballpark” value for your restaurant business and the personal property used in conducting your business. To view part I, click here. This article, Part II, is a basic introduction to the valuation of the real estate, including the land and improvements, i.e., the building, landscaping and parking lot. Restaurant improvements are typically designed to accommodate a specific concept or type of restaurant, and may require extensive remodeling to suit the needs of a different owner or tenant if the original restaurant operator vacates the property, even if the improvements continue to be used as a restaurant. The value of the improved site and restaurant building components may be higher or lower than the original cost to purchase and prepare the site and build a restaurant building, depending on the age of the improvements and whether the building is occupied by an operating restaurant business.

Appraisers of restaurant real estate normally consider three approaches to value: the cost approach, the sales comparison approach, and the income approach. Each approach has strengths and weaknesses depending on the age and condition of the improvements and whether the building is occupied by an operating restaurant or is vacant. The cost approach is used to estimate the cost of purchasing a site suitable for restaurant development and building a restaurant on the site, including the cost of landscaping the site and paving the parking lot. The sales comparison approach considers recent sales of restaurant properties that are comparable to the subject restaurant property in location, size, and brand affiliation (if the restaurant was in operation at the time of sale). Adjustments are made to the sales prices of the comparables to account for differences between the comparables and the subject property. The income approach considers the actual or projected rental income that could be generated by a restaurant business occupying the building.

The first method of valuing restaurant real estate presented is the cost approach. New restaurant buildings and the underlying land are often purchased by individual investors or REITs (Real Estate Investment Trusts) at a price that reflects the cost of purchasing a vacant parcel of land and constructing, and equipping, a chain-affiliated restaurant on the site. Investors often prefer chain-affiliated restaurants because chains have a track record of past success and ample financial data upon which the investor can base the decision to purchase.  Typically, investors purchase restaurants in order to lease them to operators.  These sale/leaseback transactions are considered financing vehicles, as opposed to arm’s-length real estate sales transactions. The purchase price is negotiated based on the rate of return required by the investor and the amount of rent the operator of the restaurant business can afford to pay, based on the sales expected to be generated by the restaurant business operation. The price paid is an “investment value” rather than a “market value” because the terms of the purchase are tailored to meet the requirements of an individual investor, and are not necessarily a reflection of what a “willing buyer and willing seller” would agree to in an open market.

Because a new restaurant building is usually designed with a specific concept in mind, it is appraised as a “going concern.” The appraiser of restaurant real estate most often will provide the client with an opinion of the “value in use” of the property operating as a specific brand or concept. “Value in use” for a restaurant is based on the premise that the value of restaurant real estate is dependent on the restaurant business producing a revenue stream great enough to cover the return of and return on capital invested in the land and improvements. Until such time as the restaurant operation reaches a stabilized level of revenue, the highest value indication, when a building is new, is often derived using the cost approach, and is identified in the industry as the “full value” of the land and building.

After a restaurant property is four years old, the cost approach begins to lose its validity. Restaurant properties are purchased in the re-sale market for two main reasons including anticipation of rental income in the future to the owner of the property (rent to the landlord), and occupancy by an owner/operator of the restaurant. The income approach carries more weight than the cost approach for these properties.

A second method of valuing restaurant real estate is the sales comparison approach, or market approach, which attempts to value the subject restaurant real estate based on the selling prices of similar properties. This approach is the least reliable of the three valuation approaches when applied to restaurant real estate, because it is almost impossible to find a sale of a restaurant property that is truly comparable to a subject property.  This is true even if the comparable’s concept and chain-affiliation are the same as the subject property and the comparable is in the same geographical area as the subject property.  Many subjective adjustments must be made to the sale prices of the comparable restaurants to arrive at an indication of value for the subject property. Typically, the appraiser makes adjustments to comparable sale prices for differences in conditions of sale, location, access, visibility, and volume of business generated by the restaurant compared to the subject property. However, it is very difficult, if not impossible, for the appraiser to truly identify what was going on in the minds of the buyer and seller when they were making their purchase and sale decisions.  This is the greatest weakness of the sales comparison approach. 

In addition, allocating the sale price between real estate, personal property, and business value is always problematic. Nevertheless, the sales comparison approach is used by appraisers to derive capitalization rates to be applied in the income approach to value, and to provide a range of values for the subject property that can be used as a test of reasonableness for the values indicated in the cost approach and the income approach.

Allocations of sale prices are problematic because business value can make a significant difference in the sale price of an operating restaurant. For example, say that two identical quick-service restaurant buildings (same square footage and seating capacity) are situated on pads of similar size in front of a neighborhood shopping center. One of the restaurant buildings is occupied by a McDonald’s restaurant, and the other building is owned by an independent restaurant operator and is called “Fred’s Tacos.” The McDonald’s property sells for $1,800,000 and the Fred’s Tacos property sells for $750,000. Assuming both restaurants are in operation at the time of sale, the sale price represents a “value in use,” which may be higher or lower than the “market value” of the real estate if it were to become vacant. The difference in sale price may be attributed to business value over and above the value of the land, improvements, and FF&E. Note that this is an important consideration in valuing restaurant property for ad valorem property tax purposes, as an assessor is typically instructed to exclude business value so that only the value of the real estate, and in some states personal property, is taxed.

A third approach to valuing restaurant real estate is the income approach. In this approach, the appraiser assumes that the property is rented to the restaurant operator at a market rent, even if the property is owned by the operator and no rent is paid. This assumption is made in order to isolate the income to the land and building from income attributable to the investment in furniture, fixtures and equipment (personal property), and the return to the restaurant operator for taking the risk of running a business (business value).  The economics of the restaurant business dictate that an operator cannot pay more than 8% of gross revenue in occupancy costs and still have an adequate return of and on the investment in FF&E, and an equitable return on the capital invested in the operation of a restaurant business.

Typically, rent on the land and building ranges from 5% to 8% of the gross sales of the restaurant. There may be different variations, such as 5% of food sales and 8% of beverage sales, but overall rent should be in this range if the restaurant operation is to be successful over the long-term. There are exceptions to this range, as in the case of a food court in a retail mall. Percentage rent in a food court can be as high as 10%, or $40 to $80 per square foot per year, but this is mitigated by the large volume of customers generated by the mall retailers and the fact that the restaurant operates in a small space and shares a large dining area with the other operators in the food court.

Valuing the land and building in use as a restaurant requires knowledge of market rent for similar type properties in the restaurant’s neighborhood. If there is no lease encumbering the property, the appraiser assumes that the restaurant is leased at a market rent. If the property is encumbered by a long-term-lease at below market rent, with no additional rent based on a percentage of the restaurant’s sales, the value of the land and building may be negatively impacted.

If the operating restaurant is paying rent based on a minimum rent plus a percentage of gross sales, the income approach to value may indicate a value for the subject real estate, which is higher than the cost to buy the land and build a restaurant on it. On the other hand, if the restaurant has ceased operation and is no longer a going concern, the “going dark” value of the vacant restaurant building may be far lower than the “value in use” when the restaurant was in operation.

When the income approach is used to value the land and improvements of a proposed restaurant, the value derived depends heavily on the projection of the restaurant’s stabilized gross revenue estimated by the appraiser. Because the real estate’s “value in use” is directly related to the potential revenue generated by the restaurant, the indication of value is only as reliable as the projected restaurant food and beverage sales. The projection of stabilized gross sales can be estimated with relative confidence in the case of a chain-affiliated restaurant with a past operating history in multiple locations. However, projecting revenue for a new restaurant concept requires experience in the restaurant business supported by market research in the area where the restaurant is to be built.

The combined “value in use” of the land and restaurant building can be approximated by capitalizing the net income stream that would flow to a hypothetical landlord, after the deduction of vacancy and credit loss, and management expense, assuming the building and land is leased to the restaurant operator at market rent. The key determinant in calculating the value of the subject property is the selection of an appropriate capitalization rate.  For example:

As shown in this example, a one-percentage point difference in the capitalization rate results in an approximately $213,000 difference in value. This emphasizes the importance of choosing a capitalization rate that is derived from the market by analyzing comparable sales and interviewing buyers and sellers who are actively involved in the market for restaurant real estate investments.

After each of the three approaches to value has been considered, the appraiser reconciles the three indications of value, or range of values, to reach a conclusion of value for the subject property. The weight given to each approach to value may vary depending on many factors including the age of the improvements, whether the property is vacant or occupied, the length of time the restaurant has been in operation, the credit worthiness of the restaurant operator, and the availability of comparable sales of similar restaurant properties. In conclusion, the valuation of restaurant real estate and business value is complex and dependent on many variables. In this two-part article, I have attempted to explain, in simple terms, the methodology used by an appraiser experienced in valuing restaurant real estate and the business value

Richard D. Williams
HVS Food & Beverage Services
7883 S. Locust Court
Englewood, CO 80112-2426
303-771-4104 

Digital certificates for frequent travellers soon?

Frequent travellers may be carrying digital certificates soon if a current trial of a “secure-travel (s-travel) initiative” by members of the global aviation community working with smart card and biometric integration companies proves successful.

The project involving the International Air Transport Association (IATA) and SITA (a telecommunications solutions provider) aims to achieve “the highest level of identity verification for frequent travellers and contribute towards improving the security of the global air transport system,” IATA said.

Later this year, the European Commission and Swiss Office for Education and Science funded consortium will undertake trials in Europe, with plans to expand the service globally.

The s-travel project will include digital authentication of people to enable secure physical and electronic airline and airport processing for frequent air travellers.

The project will develop systems to authenticate passengers at both check-in and boarding stages.

SITA will assist IATA with the development of industry standards. IATA will define the enrollment processes and procedures for airlines to authenticate frequent travellers or their own personnel before issuing a smart-card containing biometrics and digital certificates.

The s-travel initiative will combine digital certificates (provided jointly by SITA and IATA), smart-cards (GEMPLUS) and biometric technology integration (KEYWARE).

IATA director general and CEO Pierre J. Jeanniot, said: “Strict procedures need to be followed to ensure the proper authentication of individuals and IATA’s participation in this initiative will involve defining the optimum enrolment procedures and processes.”

IATA said details are also being worked out to ensure that the s-travel system does not infringe upon the privacy of frequent travellers. 

2003 PATA conference to focus on Heritage

The Pacific Asia Travel Association (PATA) has announced a range of initiatives for the 52nd PATA Annual Conference, to be held in Bali, Indonesia, April 13-17, 2003.

The theme for Conference will be "Culture and Tourism: From Heritage to Legacy." PATA is encouraging the travel industry to take responsibility for the cultural inheritance laid at its door before passing it on as the legacy for a new generation. 

PATA aims to come away from the 2003 Conference with something of tangible benefit to cultural preservation. At the 1991 PATA Annual Conference in Bali, PATA issued its Declaration of the Environment. "I hope that the 2003 Conference in Bali will be an opportunity to accomplish a similar declaration on culture and tourism," said Chairman of the 2003 Conference Programme Committee, Mr. Alwin Zecha.

Three months after the highly acclaimed 2002 PATA Annual Conference in New Delhi, PATA Events has released an outline Conference programme for next year. Plenary sessions will debate topics such as "Sustaining Culture Through Tourism -- Fact or Fluff," "Culture and Tourism in the New Technological Age," and "PATA’s Grand Focus," a session dedicated to the importance of the PATA Grand Award categories of "Heritage & Culture," "Environment," "Education & Training" and "Marketing."

Three PATA workshops will also be introduced during the 2003 Conference. The aim is to allow PATA members and non-members to understand more about PATA. Workshops will focus on PATA Chapters, young tourism professional and life member viewpoints and the quest to formulate a code for cultural preservation in tourism. 

Conference registration fees for 2003 will remain the same as 2002, with the exception of local PATA member rates, which will be reduced as a gesture of appreciation for Indonesian host country support.

Participation fees, hotel rates, preliminary air discounts and 2003 PATA Annual Conference registration forms are already available online at www.pata.org.

Source:  ASIA Travel Tips.com  

Radisson SAS launches seven new hotels in first half of 2002

Radisson SAS Hotels & Resorts opened four new hotels in the first six months of 2002 in France, the UK, Ireland and Poland. Another three contracts were signed for hotels located in Birmingham, Ankara and Istanbul, thus bringing the international hotel chain's portfolio to a total of 149 hotels in Europe, Africa and the Middle East. In February Radisson SAS opened its first property in the heart of Paris. 

This intimate boutique-style property, located on the site of the former headquarters of well-known designer Louis Vuitton, is situated on the Avenue Marceau, just off the Champs Elysses, one of the best-known avenues in Paris. The cosmopolitan, chic and vibrant city of Leeds saw the opening of the Radisson SAS Hotel in May. 

Leeds' new and refurbished theatres, shopping malls, galleries, and waterfront dining district have earned the city a designation as an up and coming entertainment capital of the UK. The property has 147 guest rooms, including 40 Business Class rooms and one suite, with a choice of different room styles, such as Italian, Art Deco and Hi- Tech. Other facilities include eight first class state-of- the-art technology conference rooms for up to 70 delegates.

HVS Hospitality Enews Europe

Investor Appetite Appears Strong for Little Chef and Travelodge Brands

Following last week's announcement by the Compass Group that it is to dispose of both its Travelodge budget hotels and Little Chef Restaurants, there appears to be considerable interest for both portfolios. Compass is understood to favour a deal whereby the two brands are auctioned off separately and could realise a price of up to £1 billion. A more realistic price, however, is thought by some to be in the region of around £750 million. Whitbread is likely to mount a bid for the two businesses combined, although, if successful, its dominance in the budget hotel market may be subject to approval by the Monopolies Commission. Accor is another prime contender having recently announced its intention to extend its presence in the UK. Other trade bids are also likely from Cendant, which owns the franchise for Travelodge in the USA, Six Continents, and Scottish & Newcastle. With an increase in innovative hotel financing deals in today's market, financial institutions and venture capitalists are strongly expected to feature, with Cinven, 3i, Candover and CVC Partners all touted as possible buyers.

The Skylon's Not the Limit for McEniff Brothers

Following a decision by Jurys Doyle Hotel Group to dispose of assets which no longer fit within the group's strategic business plans, the 88-room Jurys Skylon Hotel and the 98-room Jurys Waterford Hotel exchanged hands for a total of €14 million. The two assets have been purchased by the McEniff brothers and will be renamed the Skylon Hotel and the McEniff Ard Ri Hotel respectively. The two brothers have recently merged their two separate business interests to form McEniff Hotels, a group of some ten hotels. The dynamic duo have plans to expand, firstly with the opening in Dublin later this year of the Grand Canal Hotel, and secondly with plans to invest in the south of Ireland, the UK and continental Europe. Ryan Hotels' two properties in Amsterdam and Brussels are understood to be of particular interest to the McEniff brothers.

Dutch Courage Pulls Through the NH Brand

NH Hoteles took the opportunity at its Annual General Meeting to officially announce the completion of the rebranding process of the group's 29 Dutch hotels, representing an investment of €4.6 million. With the exception of the recently acquired Astron Hotels, NH Hoteles plans to have completed the rebranding process throughout all of its properties by the end of the year. NH Hoteles is now ranked as Europe's third largest business hotel chain, operating 237 hotels, some 34,000 rooms. There are a further 35 hotel projects under construction, which will add a further 6,700 rooms.

Spanish Real Estate Rules - Trio Active in European Hotel Market

The Spanish real estate company Amrey Hotels has announced plans to invest a total of €108 million in various hotel construction projects in Barcelona, El Vendrell in northeastern Spain, and in Tenerife. All hotels are expected to be operational by 2005. Amrey is not new to hotel construction having previously invested €16 million in the recently opened 154-room Amrey Diagonal in Barcelona. The hotel project planned for El Vendrell will comprise a five-star hotel and 50 luxury apartments and will benefit from €66 million of funding. Meanwhile, the Spanish company Hovisa, owner of the Hotel Arts in Barcelona, has announced plans to become more aggressive in the hotel market with the intention of divesting all of its non-hotel assets, believed to total between €70 million and €100 million. Hovisa, which is majority owned by Deutsche Bank who hold a 75% stake, plans to invest €30 million in the construction of a hotel close by the Hotel Arts. Finally, Losan, yet another Spanish real estate company, has purchased the four-star, 66-room Mornington Hotel for €14 million and is expected to sign a management contract with the Spanish hotel chain Hesperia. Other Losan investments include two hotels in France, leased to High Tech Hotels & Resorts, and the Hotel Paris in Zaragoza, leased to Hotusa.

Danubius' Distress Call Over Dubious Profits

Danubius Hotels, the Hungarian hotel company, warned investors of a weaker trading performance than first budgeted and in doing so reduced its revenue and profit targets for 2002. During the first five months of the year revenues were down by €1.7 million compared with the same period the previous year, and a pre-tax loss of €4.5 million was reported, some €100,000 higher than the previous year's loss. A number of factors contributed to the disappointing results, including unfavourable currency movements, a fall in the number of tourists as a result of the weakness in the global economy and transatlantic travel yet to resume the at levels enjoyed prior to 11 September, and an increase in hotel supply which has resulted in more competitive prices. Danubius is said to be reviewing its strategy in order to respond to the difficult trading environment, with the aim of maximising full year profits.

Orbis Sounds Out Echo's Old Stake

Orbis, Poland's largest hotel operator, has announced that it is in the process of sourcing an adviser to help with the acquisition of a 12.1% stake held by Accor in the hotel operator Hekon, which controls nine economy-class hotels in Poland. Accor, which itself owns a 25% strategic stake in Orbis, acquired the stake last April from the Polish developer Echo Investments for approximately €13.6 million, thus valuing the group at around €115 million. Orbis, whose recent performance has taken a battering as a result of the economic slowdown, reported revenues down by 12% during the first quarter to €40.2 million and a net loss of €4 million. Orbis's current strategy is to focus on its core business of hotels and other tourist services, while aiming to divest its non-core activities.

New KHIGs on the Block

Mövenpick has celebrated the opening this week of a five-star, €142 million hotel in the Rawsha area of Beirut, its first hotel in Lebanon. The hotel, comprising 293 luxury rooms, is one of ten properties in the Middle East owned by the Kingdom Holding Investment Group (KHIG). KHIG was formed as part of a consolidation move of Prince Al-Waleed Bin Talal's Middle Eastern assets into an independent investment vehicle. Additionally, KHIG plans to open later in the year a Four Seasons in Amman, Cairo, Beirut and Damascus and a Mövenpick in Tripoli.

Prague Hotel to Advance from Communist Era

The privatisation of the Hotel Praha, Prague, is almost complete following Prague 6 council's announcement that the winner of the tender, J&J Top, pledged €20.6 million for the property, which dates back to the communist era. J&J Top have until mid July to find the funds, otherwise the runners up in the tender may find their fortunes have turned. In second place came a company called Falkon Kapital, and in third place came the Devo Group in cooperation with Columbus Hotels. Elsewhere in Eastern Europe, the owner of the Ana Group, George Copos, has announced his plans to develop the group's hotel interests in Romania. By mid 2003 the Ana Group intends to re-open its Europa Hotel in the Black Sea resort of Eforie Nord following an investment of €12 million.

SAS Looks to Broaden its Hotel Horizon

Rezidor SAS Hospitality, which operates hotels under the Radisson and Malmaison brands, has plans to develop a new mid-market chain of hotels, one which will exploit the leisure market. Development will be targeted towards three-star properties located mostly in cities out of which Scandinavian Airlines System (SAS), the group's parent company, operates. According to Jorgen Lindegaard, Chief Executive of SAS, 'the new company would operate on the same basis as Radisson SAS, whereby it would operate as a management company and have no equity injected from the airline into the individual properties.' As yet no name for the brand has been chosen, although the group is reportedly in discussions with several hotel chains to switch selected properties to this new brand.

UK Brewer's Investors Ferment With No Strategic News Forthcoming

Scottish & Newcastle (S&N), the UK's largest brewer and operator of the UK's third largest budget hotel brand Premier Lodge, pleased investors by announcing a rise of 3.5% in its fiscal full year pretax profit of £442.3 million. Annual comparisons were difficult to make due to various disposals and acquisitions, but, overall, S&N achieved a 7.3% underlying profit growth for the year. Disappointment, however, was aired by both investors and market analysts when no news was forthcoming concerning the company's intentions to fulfill its financial obligation to Danone, to repay the £1.2 billion owed following its purchase of Kronenbourg. There is a strong belief that S&N will release up to £2 billion by the sale of its 1,500 strong UK pub division, with a partnership deal widely tipped under a similar deal to that completed with the Royal Bank of Scotland and its 1,100 tenanted pubs.

Portuguese Entrepreneur Invests in Hotel Construction

A Portuguese entrepreneur, Andre Jordan, is to invest €50 million in three construction projects in Belas Clube de Campo, which is near Lisbon and the tourist resorts of Estoril, Sintra and Cascais. The first project will include a tourist complex and the Hotel Dom Pedro Belas and will benefit from up to €29 million investment. The other two projects will comprise 60 apartments, four office blocks and a retail area.

Absolute Share Price Performance Over the Past Week 27/06/02-04/07/02

The European Hotel Market

It is with little surprise that the majority of European hotel stocks suffered as a consequence of the mass turmoil experienced in the worldwide stock markets. The FTSE 100 index crashed to its lowest level in five years and in doing so wiped £37 billion off the London stock market. Share prices plunged largely through fear of further corporate scandals following the collapse of Enron and Worldcom and fear of terrorist activity on 4 July, the US Independence Day.

Millennium & Copthorne

Stocks in the company continue to underperform following recent heavy transactions in the Singapore market of shares in City Developments, which holds a 52% stake in Millennium & Copthorne.

HVS International (HQ)
http://www.hvsinternational.com/

HFTP, AH&LA and EI to Produce the 10th Edition of the Uniform System of Accounts for the Lodging Industry

HFTP®, the American Hotel & Lodging Association (AH&LA) and AH&LA's Educational Institute are collaborating to produce the 10th edition of the Uniform System of Accounts for the Lodging Industry. This important reference book for financial professionals in the lodging industry debuted in 1925 and the most current edition, the ninth edition, was published in 1995.

Revisions of the long-awaited update will start over the summer. The updates will be overseen by the co-chairmen of AH&LA's Financial Management Committee, Peter Temling, CPA, executive vice president and CFO for Continental Hospitality Holdings and former director for HFTP and Clyde Cruise, vice president/controller of hotel operations for Starwood Hotels and Resorts Worldwide and current director of HFTP.

"2002 marks the 50th anniversary of HFTP, and since the association's beginning, the publication of this book has been a major part of HFTP's roots," said Frank I. Wolfe, HFTP's executive vice president and CEO. "The association has been an integral figure in the book's evolution, and I see the sponsorship of this book as a perfect way to start off the association's next 50 years."

Sydney Conference to Examine State of the Hotel Investment Markets Post September 11

The 2nd Annual Australia & New Zealand Hotel Investment Conference will be held on 28 August 2002 at the ANA Harbour Grand Hotel, Sydney. The Conference has been jointly convened by real estate investment bank, Sonnenblick-Goldman, hotel consultants, Horwath Asia Pacific and lawyers, Blake Dawson Waldron.

Following the highly successful inaugural Conference, which was held just prior to September 11 last year, this year’s Conference will focus on how the markets have responded since then, and what the outlook is for the year ahead.

Industry experts from Australia, New Zealand, South East Asia and the USA will provide in-depth insight into:

* Revenue, Profits & Trends (including a feature session on the Sydney market)
* State of the Hotel Investment Markets and Outlook
* Who is Still Investing in Hotels & On What Terms
* Financing Hotels (including a feature session on mezzanine debt)
* Investor and Lender Sentiment (using Sonnenblick Goldman’s latest Survey findings)
* Current Industry “Hot Buttons” (including sessions on backpacker hotels, boutiques and spa resorts)
* Key Predictions for 2002/03

A session sure to be lively is a debate titled “Selling Hotels to Australian Institutions – It Can Be Done!”.

Over 250 delegates attended the 2001 Conference, and an even larger number is expected for the 2002 Conference.

Sonnenblick-Goldman Managing Director, Mr John Smith, commented “With 50 speakers and panelists, covering 14 sessions in eight hours of presentations, this year’s Conference promises to provide delegates with fast paced, key information on what is going on at the money end of this business”.

Enquiries in relation to attendance at the Conference should be directed to Carolyn Piercy on (612) 9372 0740.

Home Advantage? The 2002 World Cup And the Impact on the Hotel Markets of Host Nations

Jones Lang LaSalle, the world’s largest real estate services and investment management firm, has released a research report that examines the impact of the 2002 World Cup on the real estate markets of the host nations. The report also looks beyond 2002 and draws out the implications of the experiences of previous hosts.

On May 31, 2002, the 17th FIFA World Cup football (soccer) tournament begins. The tournament in South Korea and Japan is the first World Cup to be held in Asia and the first to be jointly hosted.

Ben Sanderson, Associate Director, Asia Pacific Research, and the lead author of the report said, “The 2002 World Cup represents the largest capital investment ever in a football (soccer) tournament and is unlikely to be matched in the foreseeable future.” He continued, “Total investment in new stadiums and refurbished facilities, including additional infrastructure, is estimated to be US$5 billion for Japan. James Tyrrell, Director, Investor Services, based in Seoul, said, “In South Korea 10 new stadiums have been built at a total cost of US$2.5 billion.”

The host nations are hoping for a significant economic boost from the tournament equal to 2.2% of GDP in South Korea and 0.6% in Japan. However, Jones Lang LaSalle suspects that these forecasts are likely to prove overly optimistic.

“It is important to try to separate the World Cup effect from normal cyclical economic movements and to take account of the 'crowding out' effect on spending in other parts of the economy. We suspect that the World Cup will probably have little or no statistically significant impact on the host nations’ GDP,” said Sanderson.

But The World Cup Will Have A Real Estate Impact.

The effects will not be evenly distributed across the real estate sectors. Melinda McKay, Senior Vice President-Research of Jones Lang LaSalle Hotels, based in Chicago, said, “Hotel operators will benefit the most and can expect a significant short-term boost from the World Cup. We estimate that hotel operators could boost their average daily rates by 20%, revenues by 30%, and that occupancy could rise approximately 9% during the month of June.”

The report suggests that the impact is likely to be concentrated. “Hotels in Tokyo and Seoul will gain the most and visitors will use these 'gateway cities' as a base to travel to and from games and between the two host countries,” continued McKay.

Retailers will also feel the benefit driven by boosts in domestic and international spending. “The World Cup will have a positive short-term effect on the retail sector through increases in retail sales and rises in domestic consumer confidence. Our research suggests that this may be connected to the performance of the Japanese and Korean national teams. The host nations do not have to win, but providing that they perform above expectations, it is likely that the positive effects will be greater,” said Tyrrell.

Potentially the most significant impact on real estate is the long-term legacy of the stadiums themselves. Sanderson explained, “For the first time, the organizers hope to use the World Cup as a catalyst for urban regeneration. Seventeen new stadiums have been built in 20 host cities. This is the largest number of World Cup venues ever used.” Jones Lang LaSalle’s research suggests that it is difficult for sports stadiums to generate economic benefits in their own right as they often compete with other higher-value, best-use options. Sanderson continued, “Stadiums need a viable and sustainable business plan to be useful after the tournament is over.”

Tyrrell said, “Unlike the Olympics, the World Cup does not have a concentrated impact on any one city; therefore, the possibility of successfully leveraging urban regeneration benefits from the tournament is reduced. Many of the new stadiums for 2002 do not appear to have the necessary mechanisms in place to leverage the regeneration benefits they are hoping for.”

Jones Lang LaSalle’s analysis of previous host cities presents a series of important lessons for its 2006 German hosts. Sanderson explained, “Future hosts need to consider the number and location of host cities. Hosts have a choice between a smaller number of host cities with a more concentrated real estate impact or a greater number of host cities with more diffuse real estate benefits.”

However, Jones Lang LaSalle’s report concluded that despite the significant potential impact of the World Cup on real estate markets, there is additional appeal to being a host. According to Sanderson, “The current host nations (or an immediate neighbor) have won nine of the 16 previous tournaments. Serving as host increases the chances of playing well in the tournament. Although it might be too much to expect a Korea-Japan final, the host nations are typically among the more likely candidates to outperform their global ranking. 'Home advantage' will likely prove significant in 2002.”

Jones Lang LaSalle (NYSE: JLL) is the world’s leading real estate services and investment management firm, operating across more than 100 markets on five continents. The company provides comprehensive integrated expertise, including management services, transaction services and investment management services on a local, regional and global level to owners, occupiers and investors. Jones Lang LaSalle is also the industry leader in property and corporate facility management services, with a portfolio of approximately 725 million square feet (67 million square meters) under management worldwide. For more information, visit www.joneslanglasalle.com.

Australia means business in Asia

Australia is stepping up its business tourism activity in Asia with both the Australian Tourist Commission (ATC) and the Sydney Convention and Visitors Bureau (SCVB) pouring more marketing dollars into the region.

The ATC has launched a global brand advertising campaign focusing on Asia, UK, Europe and the US. TV advertisements will include vox pops from Asian business leaders to be screened on CNBC.

ATC managing director Ken Boundy said the campaign targets key decision makers in business and government organisations and features endorsements from companies who have previously held a business event in Australia.

The SCVB, meanwhile, is targeting meeting and incentive planners in Asia with the launch of a new business development strategy.

The bureau has appointed a business development manager to conduct sales drives in the region, participate at Asian tourism trade shows and develop stronger ties with major operators and corporations.

SCVB managing director Jon Hutchison said Asia had always been a priority market for Sydney, but in previous years activities in Europe and the US had “soaked up the lion’s share” of resources.

Corporate travel boom in China

TravelWeeklyEast.com  -  Global travel companies have long been aware of the importance of being on the ground in China, and most major ones have already been there well ahead of China’s entry into the World Trade Organisation (WTO) last year.

But only this year have global businesses started to make some headway toward processing actual business transactions and solidifying key local partnerships in step with corporate business travel accelerating into and out of China.

American Express and Rosenbluth have chosen not to wait until the end of next year when the China National Tourism Administration (CNTA) officially allows overseas companies a larger equity share in joint-venture (JV) partnerships with Chinese companies, or even until 2005, when 100 percent ownership is allowed for overseas travel companies.

Instead, AMEX and Rosenbluth have actively pursued and partnered with major local travel companies, CITS and China Comfort, respectively.

Carlson Wagonlit, who appointed China Air Services as their China affiliate in 1995, is also expected to announce their future development plans soon.

Joining the fray, is SYNERGI Global Travel Management. In the late 1990s, SYNERGI appointed Sunshine Express International (Sunshine) as its sole affiliate and last month, hosted a regional meeting in Beijing with more than 20 of its Asia/Pacific affiliates. The meeting covered multinational client requirements; business development plans; a China travel industry overview; pricing methodology training; the importance of offering services beyond just ticketing and more.

Greg O’Neil, SYNERGI president says now is the time to be in China as multinationals pour into the market. “With so many multinational companies now entering China, this gives us a much greater opportunity to allow our worldwide members to expand their businesses,” he said.

Sunshine general manager, Harry Huang, says his eight-year-old company was the first to bring in-house, corporate travel services ranging from hotel, airline and car rental booking to the China market. Some of its biggest clients include Motorola, Philips, Siemens and Novartis.

Annual corporate travel expenditure is estimated at more than US$4.2 billion according to CNTA, and is growing at an average rate of 20 percent per year. In terms of China’s air travel, corporate clients account for 65 percent of the market, according to the Civil Aviation Administration of China (CAAC).

Greater market demand has resulted in increased competition. A group of domestic travel agents and travel websites such as www.elong.com are pumping up promotions of their business travel services.

Currently, JV travel agents are not allowed to operate the far more profitable outbound tours, and therefore most of the existing 11 JV agents in China are likely to shift their focus toward the more lucrative business travel sector.

However, lukewarm market response to the all-inclusive corporate service packages presents an even bigger challenge than simply industry competition.

“Most Chinese companies are not accustomed to entrusting their travel arrangements to a travel agent for fear that it might bring additional costs,” said Huang. At present, many firms limit their use of travel agents to just booking tickets.

“Chinese customers have not been conditioned to pay for travel services, and a majority of travel agents here have no experience to comprehensively support their clients’ travels,” O’Neil said.

Technical reasons also impede foreign players from introducing their mature corporate travel management services. China Comfort’s deputy general manager, Guo Dongjie, says global companies have trouble working with the current domestic airline booking system – Travelsky.

But O’Neil is confident such hurdles can and will be overcome. “People in China will find that it saves them both time and money to entrust their travel needs to a mature service provider like our member firms,” he said.

He added that greater consumer awareness would be necessary to realise this goal, and increased competition in the corporate travel sector could also boost consumer interest.

China Comfort is also upbeat as it moves towards offering more specialised corporate travel services, Guo said.