The Asian hotel sector is the strongest it’s been in five years, sparking a boom of investment in countries such as Singapore, Japan, Thailand and the Maldives.
GLOBAL REPORT—Economic growth, better airline connectivity and a growing middle class are contributing to an investment boom in Asia, which shows no sign of slowing during the next 12 to 18 months.
Confirmed hotel transaction volumes in Asia reached $1.3 billion during the first half of 2013, up 85% on the same period last year, making this the strongest half year the region has seen since 2008, according to a recent report by Jones Lang LaSalle’s Hotels & Hospitality Group.
Heavy investments into the established tourist markets of Singapore, Hong Kong and Tokyo, coupled with opportunistic deals in emerging markets such as Thailand and the Maldives, made up the bulk of this activity, the “Asia Hotel Investment (H12013)” report revealed. By the end of the year, hotel transaction volumes are projected to record an additional $2 billion to $2.5 billion in Asia, taking total 2013 sales to $5 billion.
“Most of the parties that are attracted to this part of the world are chasing that economic growth story. They’re investing where we have that rise in the middle class and where there are genuine opportunities for the hotel sector, where new hotels are needed,” said Mike Batchelor, managing director, investment sales, hotels & hospitality, Jones Lang LaSalle.
Singapore, Japan and Hong Kong: the safe bets
Singapore accounted for 15% of regional transactions during the first half of the year, largely due to the $238-million sale of Park Hotel Clarke Quay to Singapore-based Ascendas Hospitality Trust, or A-HTRUST.
“We wanted to capitalize on the opportunities arising from the continued growth of Singapore’s tourism and related industry,” said Tan Juay Hiang, CEO of A-HTRUST. “Moreover, the Singapore investment minimizes currency risks as both income and debt are in (Singapore dollars), helping to mitigate large (exchange rate) movements in our basket of currencies.”
The master lease contract also gives A-HTRUST a stable high fixed income, which will help to stabilize the firm’s portfolio revenue stream and provide downside protection, Tan added.
Batchelor shared a similar sentiment, saying that investing in Singapore’s hospitality sector is something of a safe bet. “It doesn’t have the huge highs and lows that some of the emerging markets have,” he explained. “Investors might not get huge capital growth or huge returns, but over time they will have steady, continued growth in a politically very safe environment.”
In Hong Kong, it’s a similar story.
“There are a number of people who are quite happy to invest in Hong Kong because of its transparency, but they will also benefit from the China wave,” Batchelor said.
Japan, too, has attracted significant interest in its hotel sector this year, receiving 30% of regional investment, largely because investors believe—with the 2011 earthquake firmly behind it and economic reform potentially around the corner—the country, which is already one of the world’s economic powerhouses, can expect better times ahead.
“We’re in a very low interest rate environment in Japan, so there are very strong positive spread between the cost of debt and the returns that can be achieved,” Batchelor said.
Tan, who is currently looking for investments in Japan, said, “A weaker (Japanese yen) means affordability for inbound travelers, which will create more demand for hotel accommodation.”
More risk, more reward: Thailand and the Maldives
Despite a somewhat unpredictable investment environment, Thailand, which saw double-digit growth in terms of visitor arrivals during 2013 over 2012, also has maintained its position as one of the region’s top investment hotspots, with resort destinations such as Phuket, Pattaya and Koh Samui proving particularly popular.
“What’s driving a lot of these destinations is the budget airlines that are now flying in,” Batchelor said. “As these destinations open up, there is a perception that demand is increasing, therefore room rates are going to increase, and so there are opportunities for capital growth.”
Thailand’s resort destinations also offer excellent value for investors, in comparison with markets like Singapore.
“Of course emerging economies always carry risk, but when there’s such a disparity between Singapore and Thailand, for example, there are many people that are prepared to take that punt,” Batchelor said.
The Maldives, which also has seen a rapid increase in sales activity in recent months, is really the one to watch for the next year or so, he added. “It’s a market in transition, and it’s somewhere we’re going to see a lot more activity over the next 12 to 18 months.”
Why? Operators can demand extremely high room rates, and there’s a sudden increase in hotel assets coming to market.
“It’s a premium destination—average room rates go up to $900 per night, as opposed to around $150 to $200 in Thailand or Bali—and I think investors have realized they can get returns of 8% or 9%,” Batchelor said. “We are also starting to see some distressed stock, as well as established products, coming to market.”
And it’s not just the Maldives that will continue to see growth over the coming months and years.
“If Asian economies continue to stay positive, hotel investments will remain attractive,” Tan concluded. “We will continue to look out for opportunities and explore new markets in Asia where Ascendas has a presence. We believe the more liquid markets will be Japan and possibly Singapore.”