The immediate future is expected to be tough for Asia’s hotel industry as expenses grow and financing remains hard to come by, but there is an upside for hoteliers who put in the effort.
HONG KONG—Hoteliers focused on operations and innovations to meet new demand will seize the day when COVID-19 is behind us, sources said at the Hotel Investment Conference Asia Pacific.
With few assets currently being put on the market, owners have time to dwell on strategy and new approaches that might pay off in the long term.
In addition to demand problems, other barriers include new supply, expense growth and market-capitalization rates, according to speakers on a HICAP panel titled “Views from the boardroom, round two.”
Kevin Colket, founder and CEO of hotel investment firm GHIG, said the crisis has forced hoteliers to conduct more aggressive asset management.
“Brands do serve a huge purpose, not just from a distribution but also an operational standpoint, and they need to be our partners, but there are alignment issues, and they need to be managed. In Asia, owners have not done a good job managing those alignment issues and maximizing performance,” Colket said. “I think they have pretty much handed over the keys to operators, and the reason for that is that you have a lot of developers and non-institutional owners.
“The stressful times are causing more owners to get involved in the business and partner with the operators.”
Overall, Colket said, brands have done a good job, unlike U.S. unions, which he said have not met in the spirit of partnership.
Michael Issenberg, CEO for the Asia/Pacific region at Accor, said collaboration has also been lacking from online travel agencies, although the crisis has swung the direct booking-OTA pendulum back toward owners and operators.
“Brands will remain important, notably in the short term, as guests look for safety and security, and then there will be a huge boost to lifestyle and experiential when demand returns. In the short term, you will see people trading down, as there is value; but over the long term, choosing specific brands for specific reasons will come back,” he said.
Kenneth Gaw, president and managing principal at Gaw Capital Partners, said government policy often complicates matters.
He added it is not currently a sellers’ market, even though distress likely is coming.
“This is probably the worst time to put any hotel on the market, but in terms of investments, we will be interested. Historically, we have bought hotels during distressed times, whether it was SARS or the real estate depression in the U.S. in the early 1990s,” he said.
“Because of all the monetary easing, all the money creation around the world by all the governments, we are really not seeing any distressed pricing yet. I think in the first half of next year we will see some movements as you will see valuations coming in and banks looking at long covenants. So there might be pressure on some owners,” Gaw said.
Panelists said there is almost no debt appetite for new acquisitions.
“For early acquisitions you have to look at all equity, but if there are good deals there will always be investors interested. (Currently), pricing hasn’t reflected how distressed the situation is,” Gaw said.
Colket said the trajectory of the Chinese hotel industry’s recovery bodes well for the rest of Asia.
“The situation in China is good news for all of us. If we hadn’t seen China recover in the way it has, that would not have been a good thing for the global hotel industry,” he said. “In China, (average daily rate) still has not recovered, but it is within 10%, where other markets have only 20% of the revenue they had last year. … Right now demand is really all we can focus on.”
For much of the industry, difficult times still lie ahead, panelists said.
“Asia could take a little longer as it is not institutionally held,” Colket said. “People (there) will not want to sell at all costs; for families it is a sign of bad faith. (Meanwhile) in the U.S., private-equity firms already have started to hand the keys back to lenders. There will be more distress and upside in the U.S. first.”
Shiromal Cooray, chairman of Sri Lanka’s Jetwing Hotels, said her firm must concentrate on consolidation in Colombo, a market already hit hard by the 2019 Easter bombings, which included attacks on four hotels.
“The government is unfortunately able to help, so it is the banks having to bear the burden. No one is wanting to sell, and somehow they will survive,” she said.
Gaw said the picture will change again when valuations start to change.
“Hotels as an asset class … the cap rate will change as the short-term nature of demand has been exposed by COVID-19. … With office and retail with long leases, when COVID hits, your cash flow is not hit right away, but with hotels it is, so when you saw pre-COVID cap rates of hotels shrunk to, let’s say, within 50 basis points of office buildings, that will not happen anymore,” he said.
“When there is some debt available, I still see cap rates widening by probably at least 150 basis points,” he added.
Colket said many assets in Asia are overpriced.
“They were not looking at the underlying risk of hospitality … and a strong supply story will destroy any demand story,” he said. “Hospitality is a volatile asset class. In a place like Japan, if you are at 4 cap, and that 4 cap goes to a 5 cap, oh, you say, that’s only 100 basis points, but that is wiping out equity in probably 50% of the deals, depending on what leverage is. Japan does have positive leverage, but a lot of markets do not.”
Visions of 2021
Operators are picturing a better 2021.
Jetwing Hotels is “looking at perhaps 70% of our 2019 (performance levels) in the next year,” Cooray said.
“We are hopeful by the middle of 2021 things will stabilize and we will get 50% of what we might get in a good year. We have completely written off 2020,” she said.
Issenberg said Accor is looking at the future quarter by quarter.
“We think (the first quarter) will resemble (the fourth quarter of 2020), which is obviously not very good, and taking the assumption, and it is a big assumption, that midyear there will be a vaccine available, then Q4 will look like Q1, which is not typically a great quarter, especially in the Northern Hemisphere, a bit better in Asia-Pacific. Q2 and Q3 will be better than Q1 just because of fatigue from everyone not being able to travel. … If you put all that together, then somewhere between 40% and 50% of 2019 (levels),” he said.
He added that “a lot of cost savings this year … will continue into next year.”
Issenberg also poured a little cold water over expectations in China.
“We’re up to over 70% occupancy, but (average daily rate) is not back and with international business and still somewhat limited (meetings, incentives, conventions and expositions) business it’s really hard to drive rate as you will not have those constrained days. You’ll still be missing some crew business, still missing a number of segments. … When some say (China’s 2020) might be better than 2019 that’s a bit of a stretch—some cities maybe, but overall, no, especially in luxury,” he said.
Issenberg added he is hopeful Australia will soon open its internal borders, benefiting from strong domestic demand, and he expects markets such as Japan to improve, certainly in comparison with markets such as Thailand and Vietnam that usually have strong international business.
Gaw, whose firm operates as well as manages and invests in hotels, said his properties are running at between 30% to 40% occupancy.
“We do not see that substantially changing in the first half of next year, but (expect) 60% to 70% in the second half, so (overall) somewhere around 40% to 50% compared to pre-COVID,” he said.
He added staffing can be difficult when occupancy at weekends might be 90%, falling to 20% on weekdays.