Investment activity is a bright spot in 2013 with established markets bouncing back and emerging markets becoming more stabilized.
DUBAI, United Arab Emirates—Taking the next step into hotel investment is a taxing decision to make but can have exponential benefits if done right, experts said during the Arabian Hotel Investment Conference.
According to Jones Lang LaSalle’s Hotel & Hospitality Division, the hotel investment outlook for 2013 is bright.
JLL recommends buying in Vancouver, British Columbia; Seattle; Hawaii; Boston and Istanbul. Meanwhile, investors should look at building new hotels in Bali, Indonesia; Sao Paulo; Rio de Janeiro; New Delhi; and Mumbai, India.
Countries where hoteliers may see the maximum returns in the future include Riyadh, Saudi Arabia; Budapest, Hungary; Dallas; Orlando, Florida; and Sao Paulo. Markets where the time is right to sell are Cairo; Lisbon, Portugal; resorts in Spain; Birmingham, U.K.; and Jeddah, Saudi Arabia.
Arthur W. de Haast of Jones Lang LaSalle and Sarmad Zok of Kingdom Hotel Investments discuss the investment outlook for 2013.
“There is a great demand for resorts in Hawaii and Fiji, and Dublin is back on its feet,” said Arthur W. de Haast, chairman of the hotels and hospitality group. Markets where fundamentals are back and there is limited supply include San Francisco, Munich and Sydney, he added.
“There are differing investment strategy preferences,” he said. “The buy-mode (strategists) are those which after holding due to the unstable world economy now have started trading again. But there are still relatively few around which are in build mode.”
Istanbul, in particular, offers good long-term prospects, while Bali is booming again. India promises good returns, although it remains challenging to get things done, and Rio de Janeiro is enjoying the benefits that come with holding the Summer Olympics, according to de Haast.
“Markets hit badly by the downturn are those where investors should hold on, but places where large investments are being made into infrastructure, such as Riyadh and Sao Paulo, means it is time to make deals with long-term prospects,” he said.
Kingdom Hotel Investments holds a large real estate portfolio with properties including Fairmont Hotels & Resorts, Raffles, Mövenpick Hotels & Resorts, Four Seasons Hotels and Resorts, and InterContinental Hotels Group hotels. The company has built $3.5 billion of assets itself, and used $13 billion to $15 billion of recycled capital in and out of its trading portfolio.
“We see growth in the emerging (Brazil, Russia, India and China markets) except Latin America, mainly (Middle East and Africa) and Asia,” said Sarmad Zok, chairman and CEO of Kingdom Hotel Investments. “We acquired properties in places like Africa, where supply was nonexistent and today again Africa is making it to the boardroom. Investors are talking about capital allocation, which will manifest in a couple of years time.”
Higher-risk emerging markets represent good opportunities for return, but the type of government in place can make or break the investment, he said. The countries where government is stable and trade efforts are being made have the most potential.
“Africa remains the mother of resources for the world. We see gaps there, and we like gaps, those are our hot spots,” Zok said. However, government behavior needs to change because “corruption is an issue. It can become an obstacle, and then we have to make the hard call to pull the plug,” he said.
Mature markets have the upper hand, as demonstrated by the global capital flow last year, he said.
“Globally, we have seen $32 billion of transactions last year,” de Haast said. “The market in America has bounced back and is performing robustly this year with $16 billion to $17 billion of transactions, 80% of them are taking place in the U.S.; all of the investment is into existing hotels not new builds.”
Europe has had a good start to this year, he added, which was driven by three large portfolio investments.
Other markets, such as Asia/Pacific, remain rather illiquid, with the exception being China and India, de Haast said.
“Around $1 billion plus has gone into Europe, and Australia is an important market for (real estate investment trusts). REITs in Malaysia, for example, see the country as safe haven conducting large acquisitions there. A small amount of this money is also going into the U.S., which may be surprising considering that America is on the up, but Asians don’t invest there as much,” he said.
Private equity and global wealth funds in the Middle East also are eyeing opportunities abroad.
“The Middle East is focusing on Europe, exporting $3 billion, two-thirds of it has gone to Europe, Abu Dhabi (United Arab Emirates) and Qatar representing 75% of that investing into France particularly,” de Haast said.
De Haast said private equity is leading the pack.
“Investment funds and private equity are the big movers in the hotel market,” he said. “They are keen to be active, adding value to assets in a relatively short term, and hotels offer this daily business driven by superior returns in a relatively short time.
“The focus is especially on the limited-service sector in America,” he continued. “Others like Starwood Capital (Group) invest in Europe, buying branded assets.”
REITS are “raising money in the capital markets and buying hotels for the same reasons, mainly in the U.S. but also Singapore and Hong Kong and a couple in Europe,” de Haast added.
According to JLL, investors are looking for a leveraged internal rate of return for new acquisition at around 17% to achieve a capitalization rate initial yield for new acquisitions at around 7.6% globally. The highest yield achievable is 8.1% in the Asia/Pacific region.
The greatest yield compression in the Americas is expected in Hawaii, San Francisco, Miami, Los Angeles and Boston. In Europe, Middle East and Africa, it’s Stockholm, Munich, Dublin and Budapest, Hungary, as well as Istanbul. In Asia/Pacific, it is Fiji, Sydney, Auckland, New Zealand, Tokyo and Melbourne, Australia, according to JLL’s research.
De Haast said 7.5% is a pretty good return, considering it is difficult to make money elsewhere these days, adding that JLL expects transactions volumes to recover by 2017—2020 at the latest—to $20 billion to $25 billion.
“Contrary to market perception that everyone is going asset light, 16% of hotel operators still invest in their own properties, but in general those are local and smaller operators still in the process of building their brands. The larger operators will still buy assets when they are launching a new brand,” he said.
Zok said Kingdom values managements companies as masters in distribution, but the company’s strategy keeps them at arm’s length in terms of operation to avoid conflict.
“Only 20% of global hotel rooms are currently operator managed,” he said. “However, even if you own and manage a hotel yourself you need to be part of the distribution channels, and the operators are, so to succeed you somehow have to link into that to stay competitive.”
He calls on operators to think a little more like the owners in terms of returns rather than their own revenue, and said he believes Kingdom may start investing more into the partnership to be more competitive in the market.
“Sometimes it is hard for operators to break their global mould and try to think local like the owners do, so they need to do that more than they traditionally have,” he said.