Although the volume of transaction activity in Asia Pacific for the rest of 2017 and potentially 2018 appears to be pretty much in line with recent history, the place to watch is China where distress may/may not create a huge opportunity to invest. Ultimately, across the entire region, investors need to be opportunistic, as there are relatively limited opportunities to buy hotel assets in Asia Pacific when compared to the United States and Europe.
When the industry gathers in October for HICAP in Hong Kong, what will Asia Pacific’s hotel investment climate look like? Where are the best opportunities? Where is the deal flow the most robust? How about the best geographical areas for return on investment (ROI)? To get a sense of what has been seen thus far this year, and what is on the horizon for Asia Pacific, BHN talked with industry leaders who will participate in ‘The Investment Outlook’ session at the HICAP. Moderated by Scott Hetherington, CEO, Asia, JLL, session participants include:
- Suchad Chiaranussati, founder and managing director, SC Capital Partners Group, Singapore
- Kenneth Gaw, president and managing principal, Gaw Capital Partners, Hong Kong
- Peter Meyer, CEO, Lodgis Hospitality, Singapore
- Richard Weissmann, partner, KSL Capital Partners, Denver
According to JLL, during the first half of 2017, hotel investment in the Asia Pacific region reached US$2.9 billion once investors began focusing on key gateway cities like Hong Kong and Sydney. Furthermore, JLL’s Hotel Investment Highlights Asia Pacific H1 report indicated that six of the top 10 biggest hotel asset transactions from January to June 2017 were completed in Hong Kong and Australia, and the remaining four took place in Bangkok, Shanghai and Seoul – 28 hotel deals across six countries and over 5,000 keys traded across Asia Pacific. JLL is forecasting US$8.5 billion in hotel transactions for Asia Pacific in 2017, which is the same final amount for 2016.
“When we look at the transaction volumes in Asia Pacific, the total number is small when compared to EMEA (JLL is forecasting US$22.5 billion for 2017) and North America (JLL is forecasting US$30 billion for 2017),” says JLL’s Hetherington. “The numbers can be distorted by a collection of larger sales. This has certainly been the case in Japan, Hong Kong and Australia over the past couple of years.”
Hetherington elaborated on deal flow by saying, “The challenge always in Asia and increasingly the Pacific is the lack of assets for sale, large Asian family owned and/or controlled companies take a generational view to assets and hence we see very few sales. Over the past 10 to 15 years the exception has been Japan where we have witnessed many hotel transactions, and this has occurred because major corporate firms have sold non-core assets and in many cases these assets were acquired by opportunity funds, which over time have resold assets after they refurbished and enhanced the profitability through active asset management. Today the purchasers of hotel assets in Japan have mainly been Japanese REITs and corporate firms looking to launch REITs. In Australia, we have witnessed domestic groups selling assets and, in most cases, they are being acquired by SE Asian family controlled companies. Hence, we are unlikely to see too many significant hotel sales in the near future.”
In terms of where investors see the best return on investment (ROI), Gaw says that in Asia Pacific, Japan has had the best returns the last two years. “But Hong Kong has also been very good due to asset price increase and buyers’ plans to convert from hotels to other uses,” he says. “Vietnam has also provided very strong returns, but it is a small market without a lot of deal flow.”
Carrying on the ROI discussion, Chiaranussati adds, “We do not use ROI as a return calculation, but instead internal rate of return (IRR). On a four-year hold we need to clear 20% levered after tax. The best opportunities remain in Japan, Maldives, and part of Australia and New Zealand, and we are active in all of these countries.”
In terms of ROI (e.g. stabilized cap rate), Meyer says Lodgis is targeting investments that can deliver mid- to upper-teens, depending on whether it is an existing operating asset or a development project. “Our main focus is on acquiring regional existing operating and development platforms with an aim to build a scalable enterprise,” he says. “This strategy is distinct from most other private equity fund investors, who are focused on individual asset plays. We are actively exploring development opportunities in Vietnam, particularly Ho Chi Minh City and Hanoi, as well as in the principal beach destinations.”
For the years ahead, what countries/cities are expected to realize accelerated activity? Chiaranussati and Meyer say distress in China is the big wild card. “Distress in China will be the largest this planet has ever seen, but it may not be investable,” Chiaranussati says. Following the same thread, Meyer says, “China is the place to watch for potentially stratospheric distress, though whether there is a way to ultimately participate in that market remains to be seen.”
The market Hetherington and JLL are watching and expect to see activity is Sri Lanka – both in resorts and Colombo. “The country has everything – beaches, wildlife, tea plantations, wonderful people – and they grow every fruit and vegetable imaginable,” he says. “The country should become the organic fruit and vegetable garden for Asia. We are also watching China and have positioned ourselves for transactional activity. A significant numbers of hotel rooms have been built throughout the country and over time we expect many transactions to occur as companies focus on core businesses and dispose of assets. We like the resort markets in the region as they cater not only to the increasing number of Chinese guests, but Europeans seeking their winter sunshine and, of course. the Japanese and Koreans. This provides demand year round. Vietnam is receiving significant investor interest whether city center or resort. Again, the challenge we all face is the lack of product for sale.”
Gaw adds that within Asia, keep an eye on Indonesia and India. “They are big markets with growth, but I don’t have coverage on those markets yet, so I’m not very familiar,” he says.
Contributed by BHN