Asia capital confident amid trade war, Hong Kong strife
Asia capital confident amid trade war, Hong Kong strife
21 NOVEMBER 2019 9:23 AM

Much talk around Asian hotel firms is their muscle around cheap debt and favorable currency exchange, but executives who spoke at HICAP discussed just how bullish that cash is.

HONG KONG—Investors and operators in Greater China and other Asia/Pacific markets need to stay nimble and reposition themselves in relation to their performance despite continuing political friction and trade wars.

This is critical as Asian hotel demand remains strong and the impact of the U.S.-China trade war and demonstrations in Hong Kong have not fully materialized, according to two lead executives of Singapore-based hotels firms with mostly pan-Asian hotel portfolios.

Speaking at the Hotel Investment Conference Asia/Pacific, Pan Pacific Hotels Group CEO Choe Peng Sum said Chinese travelers’ reluctance to visit Hong Kong means other markets will benefit.

“The shift of Chinese guests is to Europe and other parts of Asia, and that is an opportunity,” said Choe, who became CEO of his company in July. “We are investing in this outbound journey. We will soon see an adjustment.”

Choe said the China-U.S. trade war is not a concern in itself, while Allen Law, CEO of Park Hotel Group, said crisis management of the region’s top issues remains at the top of the agenda.

“Hong Kong is trading half of what it should be doing, and the region has many other uncertainties,” Law said. “So, how do we as an organization be resilient?”

But enduring geopolitical stress extends beyond Asia, Choe said.

“If you add all the geopolitical concerns—Brexit, Hong Kong—it is a troubling time,” he said. “We want to make sure we are not over-leveraged. During the Asian financial crisis (1997-1999), we were doing scenario planning every day, and the interest rate was going up to 6%, 7% … if it had gone to 9%, a lot of companies in Singapore would have folded.”

Law said being nimble is key. Like Pan Pacific Hotels Group, Park Hotel Group has a majority of owner-operated properties.

“We are building an internal ability to be able to react fast,” Law said.

The world is large and green
Law said opportunity in Asia remains good due to positive, growing trends.

“Underlying demand remains good, and supply is not a concern,” Law said, who added his company realized between 3% and 4% growth in revenue per available room.

Choe said his company has increased RevPAR by 2% this year.

Performance is looked at “from an owner-operator mold, at the interplay of real estate and operations, analyzing what would provide us the best yield,” Choe said. “And we also look at how we would reach the same yield if we put capital into something else. When we look at what we have, it is amazing to see what is possible to unlock.”

Choe and Law said hotel operations in Asia are now not only location-based but market-focused. Sustainability has also had a significant impact on operations.

“We are looking at lifestyle hotels, and sustainability, not just reducing bottles and straws, but rethinking the whole building from water to construction to solar panels,” Choe said. “This is just what is needed now.”

Investing in sustainable hotels and amenities also yield returns, both executives agreed.

“Sustainability across the system, and to work with like-minded partners,” Law said. “Hoteliers have to take the hard line.”

“(Sustainability) is going to cost a lot of money, but I think this is what is needed,” Choe said. “We can do this within specific brands, and then work through the system.”

Law said sustainability will add to the P&L, not take away from it.

“Payback is five years, so your annual return is 20%, and tell me where you could get that elsewhere.” Law said. “And if you do not (become sustainable), will your customer follow you? If you are going to lose customers, you’d better think twice.”

Law and Choe said success will derive from how much effort hotel companies put in to getting the right mathematics between sustainability, customer retention and financial savings.

Setting the target high
Both CEOs said they see now as the ideal time in which to grow their portfolios.

Choe said Pan Pacific is very scalable, with good brand clarity and the goal of putting customers out front in regards to any strategic decisions. His portfolio’s assets are 70% owned by the firm, a percentage he intends to increase.

“We definitely need to acquire, and we are looking at this very seriously,” Choe said. “We need to grow in the U.K. and Europe, as Asia is highly compressed. However, we’d bust our balance sheet if (the portfolio) was all owned, so (hotel management agreement) growth is the second avenue.”

Working with other owners is also an option, Choe said.

“When we get to a certain ownership, we’ll look at a (real estate investment trust) and recycle that capital,” he said. “I think a good balance is 60%-40% owned, but in China with its 40-year-long commercial leases, it is a little tough.”

Portfolio growth is still on the table for Park, Law said.

“Park is looking at options over the next five years to double its portfolio,” Law said, who also mentioned the necessity of investing in people.

Law said the right deals exists, and sometimes that means looking beyond Asia.

“The test is getting the right call on acquisitions and finding debt,” Law said, who added he remained big on the Maldives.

“We have one (asset) there, and a second property in development,” Law continued. “Our investment strategy will also aid our management strategy, with management growing faster than our investment side. Asia/Pacific is the target, but we’d also like one project in the United Kingdom.”

Choe said his company is circling deals in the Americas, too.

“We are in the U.S., in Seattle, (and in) Vancouver, and we see the real estate cycle coming down, and that leads to opportunity,” he said. “We’ll be looking at mergers, too.”

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