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Eyeing up investment opportunities in hospitality

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Eyeing up investment opportunities in hospitality

The severe reduction in personal and business travel as a result of the COVID-19 pandemic has imposed significant pressure on the hospitality industry. But there are growing opportunities to invest as the world emerges from lockdown. Jay Moghe looks at the road ahead for the sector as he pulls together the main points to emerge from our webinar on the hospitality investment landscape.

Challenging though the past year has been for the hospitality industry – which has probably suffered more than any other – the outlook is encouraging. But investors of whatever nature, whether private or institutional or sovereign, need to navigate opportunities rigorously. That was the main conclusion to emerge from a highly informative webinar run on 29 April 2021 by Ocorian, called “Hospitality, Hotels and Holidays in the post-COVID world”, in which I was joined by noted hospitality investment experts.

Perhaps surprisingly, and counterintuitively given that people travelled less (tourism dollars were down 42 per cent in 2020), the impact of COVID on the hotel sector has not been as severe as it was in previous crises. There has been not been the wave of distress that followed the global financial crisis, notes Corey Hamabata, Senior Vice-President, Hotels and Hospitality Group, Jones Lang LaSalle (JLL). The reasons for this are that there is less leverage in the system and the existence of government support for badly affected businesses.

However, even with the expected rollout of the vaccination programme, the likelihood is that it will take up to three years for the hospitality sector to regain anywhere near 2019 levels, says Rakesh Patel, CEO & Founder, ALTA Capital Real Estate.

Both Hamabata and Patel agree that travel and tourism are bound to look somewhat different then and it will not be a return to the way it was before. On the corporate side, the pandemic has accelerated the trend for remote working and virtual meetings, reducing the need for international travel. The leisure market is also evolving with changing consumer demand, which places greater importance on wellbeing and life-enhancing existential breaks.

Do your due diligence

There are no short cuts for investors. “It is definitely not a case of build it and they will come,” states Hamabata. “Investors should target hotels that offer potential in the value-add space, working with partners who can help execute the business plan and develop the right investment structures.

Patel concurs. ALTA Capital Real Estate, which has recently launched the US$50m ALTA Hospitality Fund Asia, examined the potential for investment in 300 assets in the Asia-Pacific region, of which 80 per cent were deemed not to be investment-worthy.

Irrespective of the post-pandemic situation, the hotels sector raises interesting challenges for investors, borne of buyers’ and sellers’ differing perspectives. As Hamabata puts it, while buyers are primarily driven by the income producing potential of properties looking forward, sellers’ pricing expectations are mostly anchored by their perception of asset values pre-COVID. That can create significant gaps.

A further challenge is that many hotels in Asia are privately or family-owned who are more resistant to sell. Against that, potential buyers are lining up, supported by access to a weight of capital – both equity and debt – that has put them in a strong position to invest. Nevertheless, says Patel, there is a growing convergence between buyers and sellers. “People are being more realistic in achieving price equilibrium, and this is a trend that will continue,” he notes.

Hamabata says that the disparate, “super-fragmented” nature of the hotels sector in Asia actually offers great scope for consolidation.

ESG integral to future plans

Environmental, social and governance (ESG) considerations are now fully integrated into hotels’ operations. As Patel points out, this extends beyond hotels reducing emissions and being environmentally responsible into what he calls “community connectivity”. Hotels are increasingly sourcing materials locally, as well as employing locals, and supporting education and community activities. That plays well with customers and therefore for business. “It is a win-win,” adds Hamabata. “Business can do well while doing the right thing.”

The trend for people to look for hotels or resorts providing wellness existential breaks existed before 2019, but this is likely to accelerate, post-pandemic.

“Hospitality asset prices are dislocated due to the pandemic, which provides an interesting point in the cycle to invest,” Patel explains, “plus, we’re predicting accelerated growth in wellness in the future, because people have become increasingly conscious of their physical and mental wellbeing.” The wellness tourism market is projected to achieve a compound annual growth rate of nearly 7% between 2020 and 2025, reaching USD 1.1bn  in revenues by 2025.

So, where are the opportunities to invest? Patel says the ALTA fund is particularly focused on opportunities in Thailand, Indonesia and Japan, while Hamabata has marked Japan and the Hong Kong boutique ultra-luxury space as being promising, as well as the promising South Korean market.

Each market needs to be examined in its own right. From a commercial perspective, there are multiple dynamics in play, while, operationally, domestic regulations need to be taken into account. “It is not one-size fits all,” says Hamabata, to which Patel adds, however, that it has become easier over the past five to 10 years to acquire assets. “Executing trades is definitely possible, but you need the right partners and the right advice,” he concludes.

Watch our webinar ‘Hotels, Hospitality and Holidays in the post-COVID era’ on-demand here.

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