HONG KONG—Despite pockets of resistance, the hotel industry’s path for global success remains relatively clear. Even as some economies in Asia struggle, hotel investors speaking on the “Investment outlook” panel at last month’s Hotel Investment Conference Asia Pacific remain bullish about prospects for the foreseeable future.
Mike Goodson, head of hospitality for Abu Dhabi Investment Authority, said ADIA is experiencing the good times that Jesper Palmqvist of STR Global outlined during a data-driven presentation at the event (free registration required). STR Global is the sister company of Hotel News Now.
“I would rate our experiences around the globe between good and great depending on where you are,” Goodson said. “We’re at a great point in the cycle right now.”
Kenneth Gaw, president and managing principal for Gaw Capital Partners, said a lot of the region’s hotel growth has come as a result of outbound Chinese travelers. But with what appears to be rising geopolitical disputes in the region, things for the hotel industry could change overnight, Gaw said.
Overnight uncertainty is what’s keeping Suchad Chiaranussati, managing director for SC Capital Partners, up at night. He said hotel investors can’t forget all of the money being created by governments to help stave off inflation. He estimated the amount at approximately $13 billion.
“One of the fears for us is we wake up one day and my capital got totally uncompetitive overnight,” Chiaranussati said. “We are an investment business, and the investment business requires discipline. When you lose discipline, you will get your head chopped off.”
Goodson said there’s one big uncertainty hanging out there that hoteliers everywhere are keeping their eyes on.
“As a global investor, the biggest concern is the global dynamic of what’s going to happen with interest rate policy and how it’s going to play out,” he said. “The only thing anybody knows is (interest rates) have to go up. The question is when and how quickly, and how the world is going to absorb that.”
“Interest rates will be a big factor for our industry,” Gaw said.
“When the interest rate is close to zero it is easy to buy things at a very low yield,” Chiaranussati added. “Hotels are a higher risk. … It is important not to get carried away with hotels. For us, everything is about the cost of capital.”
Geopolitical and terrorist risks also are major concerns for Gaw.
“Those things I can’t control but that can happen at any time,” Gaw said.
The investors spent most of the panel talking about key markets important to their businesses, including Japan, Australia, China and the United States.
Japan is booming
“Japan is the star performer in tourism in this region in the last 18 months,” said Gaw, whose company has acquired one hotel in the country.
Shunsuke Yamamoto, managing director of New York-based Fortress Investment Group, said the company is seeing a structural change in Japan.
“It is becoming a destination for leisure tourists,” he said.
Yamamoto said the country will attract 19 million visitors this year—well ahead of the pace the government anticipated when it set a goal of 20 million tourists visiting in 2020.
“We’re seeing this drive up (revenue per available room) in all the leisure markets,” Yamamoto said, noting that Tokyo is up 22% and Osaka’s limited-service segment is up 30% to 40%.
Yamamoto said supply is growing rapidly in Japan, but it could be faster if developers could find construction workers to employ on projects. That is what’s keeping him awake at night.
“Japan is not a free labor market—you just can’t source the people,” Yamamoto said. “There’s not enough people to clean the rooms or run a three-meals (per day) operation. Somehow Japan has to find ways to import labor.”
Room demand in Japan is growing 6.5%, according to Yamamoto.
“This is going to be driving RevPAR up and up and up in our opinion,” Yamamoto said.
SC Capital Partners has owned 42 hotels in Japan since it entered the country’s hotel industry in 2009, Chiaranussati said. Some of the company’s growth has come as a result of acquiring and merging with two real estate investment trusts. Other parts of its growth came after natural disasters gave it an opportunity to acquire and develop hotels in devastated areas.
Chiaranussati said the competitive acquisition market among REITs keeps SC from acquiring all of the hotels it would like to buy. Yamamoto concurred.
“We are finding it hard to find good deals—that’s why we’re finding development sites,” Yamamoto said, adding that his company buys hotels through its REIT and its core fund.
Goodson agreed.
“We’ve looked at a lot of things in Japan,” he said. “It’s been a tough market to break into. It’s one we keep an eye on.”
Australia still an acquisition target
Goodson said ADIA remains pleased with the portfolio of hotels in Australia it acquired nearly three years ago.
“The underlying performance is improving,” Goodson said, adding that commodity-driven areas in the country are the struggling markets. “We’re very happy there right now.”
“I like hospitality in Australia very, very much,” Chiaranussati said, adding that the biggest detriment to further acquisition or development there is the volatile movement of the Australian dollar.
Gaw said the currency situation is something to take advantage of.
“Hotels have a natural hedge against currency movement (because of adjustable room rates),” he said. “It’s a good time to look at it. For future investments, we will be looking at it.”
Singapore is on the radar
Singapore also is a country with a lot of potential for hotels, panelists said.
Chiaranussati called in “an amazing country with a lot of incredible things to do.”
“The only challenge they have is how to be more creative in the economy,” he said.
Gaw said there’s plenty more opportunities for prosperity in Singapore.
“The Singapore government has done an incredible job creating wealth,” Gaw said. “Singapore has the potential to be the biggest private banking hub in the world—certainly in Asia. We will be making some acquisitions there in hotels.”
The one downside of Singapore is that it’s surrounded by semi-hostile neighbors, according to Gaw.
The US makes a difference
Even at a conference focused on the Asia/Pacific region, the discussion touched on the United States because of its global effect. At the top of the list is the Big Apple.
“New York is a pretty tough market right now,” Goodson said.
Goodson cited oversupply and the effect of Airbnb on New York as primary reasons for the market’s struggles.
But regardless of that, ADIA is interested in acquiring or developing hotels in struggling markets such as New York and Brazil, Goodson said.
“To some extent I like to be a little bit contrarian,” Goodson said. “We think the opportunity is right to go in there and build now and bet on the recovery coming down the road.”
Other companies also are targeting the U.S. for expansion.
“One of the more interesting strategies we have is in the U.S.,” Gaw said. “We’re going into small college towns—towns dominated by universities. We’re buying hotels that are poorly run (and) turning them into lifestyle hotels.”
He cited markets such as Ann Arbor, Michigan; Tempe, Arizona; and Oxford, Mississippi, as examples.
Chiaranussati said college towns around the world are worth looking at because of the consistent demand generators in them.
China has its challenges
China stands by itself as an investment opportunity mainly because of the 6 billion domestic trips made by travelers in the country each year, Gaw said.
However, room rates are low and occupancy rates are in the 50s and 60s (percent) because most cities can’t support the 5-star hotels that are being built as part of master planning, Gaw said.
“A lot of them lose money,” he said. “There’s a product mismatched to the market. It’s going to take time for the structure to present good opportunities.”
Chiaranussati said rooms are being built in China for the wrong reasons.
“People make more money from the outbound Chinese traveler than going in and investing in China and getting stuck in third- and fourth-tier cities with rooms that shouldn’t be built,” he said.
Yamamoto agreed.
“Inefficient hotels are being built in China for the wrong reason,” Yamamoto said. “It’s similar to Japan in late 80s and early 90s.”
But there is hope for hoteliers in China, according to Gaw.
“China has a vibrant and competitive budget hotel segment,” Gaw said, adding that the average room size in that segment is 20 square meters and the daily rate is between 120 and 220 yuan ($18.84 and $34.54).