Asia-based hotel investors remain bullish but watchful
Asia-based hotel investors remain bullish but watchful
31 OCTOBER 2018 8:13 AM

Outbound Chinese travelers represent big opportunities for hoteliers around the world as the hotel industry continues to experience solid performance, said senior leaders during the recent HICAP conference.

HONG KONG—Four global hotel investors based in Asia remain bullish about the industry’s long-term prognosis, but they do have some reservations as 2019 looms.

Speaking at the recent Hotel Investment Conference Asia Pacific, the executives said there are opportunities remaining as the global hotel-performance fundamentals remain fairly strong.

Many of those opportunities stem from the continued growth of outbound Chinese travelers, who will be a force around the globe, according to Peter Meyer, CEO of Lodgis Hospitality, a hotel investment platform formed through a Singapore-based joint venture between Warburg Pincus and Vinacapita.

From left on the “Investment Outlook” panel at HICAP: Moderator Mike Batchelor of JLL, Peter Meyer of Lodgis and Dillip Rajakarier of Minor Hotels. (Photo: Jeff Higley)

“It’s certainly what we are banking on trying to create value in our business,” he said. “We’re now looking beyond Vietnam because obviously there are other markets, Thailand, that have significant inbound benefit of Chinese. If you just look across the region where we’re focused right now, it’s a significant boom.”

Dillip Rajakarier, CEO of Bangkok-based Minor Hotels, said the global hotel industry will benefit as more Chinese obtain passports. Only 8% have passports now.

“They’re going to experience the key cities first like New York, London, all these other places—and that’s the reason we have ventured into the European market,” he said. “At the same time, you also have India, which is another big country. You have Brazil. You see them coming into Asia and Middle East and places like that. And I think the future will be Africa. So we get these waves of travel within the different geographic segments. But the thing is how quickly we need to adapt.”

China is indeed the driver of growth in the foreseeable future, speakers said.

Fei Ye, VP of strategic investment for Shanghai-based Huazhu Group (formerly called China Lodging Group), said commercial asset transactions are cooling in China because the government is clamping down on financial access. But that doesn’t mean it’s all bad news.

“In this tough market, especially with (cap rates) so low in China compared to other markets, in order to succeed in the market, it requires patience and also skill and how can you improve the performance of the asset after you buy it and prepare it and make a better use of the space,” Ye said. “That’s something we’re working on right now.”

Ye said Chinese customers are always looking for new brands, so the company is “looking for interesting brands to acquire, no matter if it’s in China and also overseas as well.”

Shunsuke Yamamoto (left) of Fortress Investment Group and Fei Ye of Huazhu Group during the “Investment Outlook” panel at HICAP. (Photo: Jeff Higley)

In the past couple of years, Huazhu has acquired the Crystal Orange and Blossom Hill brands in China to bring the number of brands represented in the portfolio to 19, she added.

“We are much more focused on tier one and tier two cities which accounts for 70% of our portfolio,” Ye said. “Tier one presents a lot of investment opportunity, especially when the management contract of the first batch of 5-star hotels, so it offers a lot of reflag opportunity for a new brand like us who can make the high efficiency of the operation and create higher GOP.

“Because China is so big and so fragmented, I think there will be a lot of opportunity in the next five years,” she added.

Lifestyle hotels keep gaining momentum
The growth of lifestyle hotels around the world will fuel additional opportunities in Asia, according to speakers. The use of existing full-service structures and yet-to-be-built limited-service hotels each have value in the lifestyle space.

“Certainly we are seeing hotel stock now that is obsolete, a lot of the bigger boxes with vacuous public areas and so forth and they need to be reutilized,” Meyer said, adding that the company is in the process of opening its first lifestyle hotel. “The reality is the market is constantly evolving.”

“From 2016 and 2020, 40% of new supply coming into Asian markets will be limited service,” said Shunsuke Yamamoto, head of hospitality investment for Fortress Investment Group. “Lifestyle hotels—obviously there’s an extra degree of CapEx/renovation money required to make some of these spectacular hotels. We can gain incremental revenue from such an investment.”

Smaller rooms are also becoming more popular among developers—something Fortress has bought into, Yamamoto said.

“I have a product now that is essentially a first-class cabin in an aircraft, tiny—all you get is the tiny pod and a place to put your luggage,” Yamamoto said. “It’s very nicely modern design, and the average rate for that is around $40. And there’s a lounge downstairs for the guests to socialize. Strangely, this product has made it very high on TripAdvisor.”

There needs to be more than 150 cabins for a project to be a financial success, he added.

Ye said the strong desire for new and interesting brands in China drives the lifestyle-hotel market there. That has helped large branding companies establish soft brands around the globe, she said.

Growing pains
The quest for bigger footprints has created some issues, according to Rajakarier, whose company owns hotels that fly Marriott, J.W. Marriott and Four Seasons flags, among others, and recently acquired a 94% stake in Spain-based NH Hotel Group.

“Consolidation is good, but to what extent?” Rajakarier said. “Some of the bigger mistakes some of the larger hotel companies are having is they are having a problem of indigestion—trying to digest 30 or 40 brands across each company.”

The bigger-is-better mentality can sometimes come at a cost, the Minor Hotels CEO said.

“In the old days, the companies were more focused about partnership, more focused about creating value for the owners, and more focused about working with owners and driving that partnership,” Rajakarier said. “I just don’t want to mention brands, but we have some challenging issues as a sophisticated operator because we also manage our hotels, and we benchmark our hotels … we do have some challenges in terms of performance, in terms of driving rates, and also competing within their own brands, which is becoming a bigger issue.”

The challenge for large global hotel companies is filling in the blank spaces in their portfolios, Yamamoto said.

“Most of the brands have not been successful in growing their footprint for limited service,” he said. “As an owner, I can see the major problem there is in terms of enforcing the brand standards that require a certain room type. This is more suited for European markets where land prices are cheaper.”

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