Cheap debt, low interest rates fueling Asia hotel boom
Cheap debt, low interest rates fueling Asia hotel boom
28 OCTOBER 2019 7:54 AM

Cheap debt and green investors have buoyed Asian hotel owners, making opportunities in the region appear for those with investment savvy, recycled capital and proven records.

HONG KONG—Buyers and sellers are getting deals done in the Asia/Pacific region.

JLL projects $70 billion in global hotel transactions in 2019, with investments in Asia/Pacific contributing 23% more to that total than in 2018. Meanwhile, in the Americas, spending is forecast to be down 16%.

APAC transaction volume has increased noticeably since 2013, with its peak in 2017, and a lot of all of this capital is going into Asia.

Speaking at a panel titled “The investment outlook: APAC” at the Hotel Investment Conference Asia-Pacific, Kenneth Gaw, president and managing principal of Gaw Capital, said he was surprised by the amount of capital flowing into the region, even though he realized that large cash figure represents total capital flowing in and out of all markets.

“It surprises me that Asia went up,” Gaw said. “From where I sit, it has been a little more difficult to invest there than in other markets. I am also seeing a lot of support from the central banks around the world, rather than seeing corrections.”

Gaw added he had his eye on what he terms good capital values and cash flows in Portugal and Spain.

“In Asia, the risk-to-reward gap is larger,” Gaw said.

Kevin Colket, founder and CEO of Global Hospitality Investment Group, said he isn’t surprised capital is seeking out Asia.

“The recession was a great time for buying hotels,” he said. “Assets were all buys discounted to replacement costs, and cheap debt generated 10% cash on cash. No one had to do anything in the U.S. and Europe, and a lot of people made a lot of money, but that party in the U.S. is coming to an end.

“In Europe, there is more stability but probably not the opportunistic returns. Mid-teen (returns on investment) are unlikely to be achieved, so Asia is where the demand is growing.”

Such ebullience is underpinned by the continued flow and increase of travelers from Asia, China and India, with 500 million more travelers from the region projected in the next 10 years.

“The future will be about demand and supply and labor costs, and it is about who will win,” Colket said. “There will be more losers than winners, but we will emerge with a better market. Those without the necessary hospitality experience will get hurt badly.”

Winnie Chiu, president and executive director of Dorsett Hospitality International, and Suchad Chiaranussati, chairman of SC Capital Partners Group, said the industry will soon see a new wave of assets come to market and thus the imminent arrival of a new swath of buyers.

“Interest rates are very attractive in many Asian markets. Family offices will develop, own and hold, and it will develop more types of buyers,” Chiu said.

“It is about riding the wave of the cycle. The key thing is to have a very disciplined approach,” Chiaranussati said. “The cost of all this debt is less than 1%.”

Dry powder
Moderator Mike Batchelor, CEO of Asia at JLL, said $2 trillion in capital raised by private equity is waiting to be deployed in all asset classes, which is the highest level since the global financial crisis.

“I look at this and say, oh, my God,” Chiaranussati said. “More players might be coming into hotels as office becomes harder to buy, and I see (real estate investment trust) growth to explode exponentially.”

Chiaranussati said he sees space for others, too.

“Oyo (Homes & Hotels) could have 5 million hotels as there are that many around the world that are badly managed,” he said.

Colket said one reason U.S. private equity might not be playing so much in Asia is that it did not like development, and development has to be part of investment in Asia. He added it pays to be cautious.

“All these 5-star hotels being built with no demand,” he said. “Where is the profitability? But I get excited because that gives private equity opportunity, working with those who understand real estate but not hotels.

“There is mature Asia where there is a lot of transaction volume, and then there is developing Asia where there are legal challenges, corruption, and I do not see any of the dry powder we mentioned going into those markets.”

Choose a country
Panelists mentioned Japan a great deal, and not just because it is showcasing itself currently to the backdrop of a major rugby tournament.

“It still has a long way to go. The Rugby World Cup has showcased the destination,” Chiaranussati said.

Tokyo will host the 2020 Olympic Games.

“We have invested a lot there, 12 hotels in Japan, and the reason is that money is cheap, and you can offset that on future earnings,” Chiu said. “It is as though your construction is paid for.”

She added she favors acquiring older hotels and adding rooms.

“The market is 70% domestic, but the rugby will help,” Chiu said, who added Japan is favorable in its greater spread between debt and ROI.

“Australia is attractive in this, too,” she said.

Gaw said China’s difficulty is that it possesses a lot of hotels that in his opinion should not have been built as hotels. He added some hotels have even been converted into offices as recently as four months ago.

“Local governments want a hotel, and a 5-star one and of a certain size … as once a year they need to meet there,” he said. “A Howard Johnson is a 5-star, everything is a 5-star.”

Chiu said Singapore remains attractive, but not cheap. Other panelists said they liked where the city-state was in terms of the cycle, with rates now beginning to catch up with occupancy after demand had absorbed the spurt of supply seen in recent years.

“We get a cap rate between 3% and 4%, and cheap debt, too, but it still requires a value-add,” Chiu said.

Land values are tempting in South Korea, but dealing with unions is not, Chiaranussati said, who added he favors traditionally strong APAC markets such as Hong Kong, Singapore and Australia.

As far as emerging destinations, Gaw highlighted Vietnam, but mostly for office and industrial.

“Mainly due to the macro; but its (revenue per available room) has dropped due to supply,” Gaw said.

“Australia is doing a great job positioning itself for future Chinese growth,” Colket said.

Portfolios across the region are preferred to single assets, panelists said.

“It has to be a platform to control operation, and you also need a great relationship with operators,” Colket said. “I cannot see single-asset deals to do anything more than mid-single-digit returns.”

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