What’s whetting investors’ appetite for hotels?

A string of marquee hotel sales across Asia Pacific are raising hopes of a rebound in investor appetite.

After macroeconomic challenges and rising debt costs battered deal activity in the first half of 2023, July saw a series of major deals, including Singapore’s largest-ever single-asset hotel sale.

Singapore property developer UOL Group sold the 542-room PARKROYAL Kitchener Road hotel to Midtown Properties, a unit of Worldwide Hotels Group, in a deal worth S$525 million ($388 million).

This was quickly followed a week later by the first hotel transaction in the Maldives this year — the sale of Amari Havodda Maldives by Crystal Plaza Resorts to Thai hospitality conglomerate Minor International and Abu Dhabi Fund for Development.

The pick-up in deals comes amid a strong operational performance for hotels globally in the first half of the year, according to JLL research. This was largely down to an increase in travel and an expectation around a more stable interest rate environment.

“Many investors are increasingly confident that the pent-up travel demand seen in the growth of trading can be sustained for the long term,” says Calvin Li, Head of Transaction Advisory, JLL Hotels & Hospitality Group. “With rate cycles close to stabilizing and inflation abating in most developed markets, investors who have been waiting on the sidelines are now becoming more risk-on and willing to take the plunge.”

Where investors are biting

Activity this year has been strongest in Japan and Australia, which look set to “take back its rightful seats” as the most active markets before the pandemic, according to Li, albeit for different reasons.

“Deal activity in Japan continues to be supported by favorable interest rates and deep capital markets,” says Li. “Meanwhile, the high interest rates in Australia could pressure owners into selling their assets to release capital to reduce their leverage.”

In the first half of 2023, both markets outperformed the rest of Asia Pacific, with Japan and Australia/New Zealand recording $1.54 billion and $820 million in deals respectively, JLL data shows.

“Trading performance of the sector remains strong,” says Nihat Ercan, Chief Executive Officer, Asia Pacific, JLL Hotels & Hospitality Group. “Fundamentals including tourism arrivals and high occupancy rates give us full confidence that the current investment environment is externally based, rather than industry-specific.”

The main factors driving investors’ appetite are the strong demand for leisure travel and the recovery of business travel in the region, Li adds.

Hotel investors will be paying particularly close attention to tourism arrivals from China, which reopened its borders early this year. A forecast by UK consultancy Oxford Economics suggests Chinese outbound travel could reach up to 48% of 2019 levels by this year.

The impact of its reopening was evident in the recovery in revenue per available room (RevPAR) across Asia Pacific in the first five months of 2023, which now stands at only 6.8% below 2019 levels, according to JLL. Meanwhile, RevPAR in other regions has rebounded to pre-pandemic levels, led by the Middle East.

Hotels recovery imminent

The recovery — and emergence — of certain segments could further buoy trading performance in the hotels sector. Among the bright spots are assets in the luxury, resorts, and co-living segments, all of which have proven resilient since the pandemic, says Li.

“For instance, resort destinations have traditionally been a niche product, but its strong yield and growth performance are especially appealing to investors now,” Li says.

A prime example is Phuket, where average room rates in January surged 50% relative to 2019 levels to reach THB 9,000 ($264), according to JLL.

“We expect to see more specific opportunities emerge in some destinations across Asia Pacific, where prices have been adjusted downwards, enabling interested parties to reconsider,” says Ercan.

“Investors remain very committed to the Asia Pacific hospitality sector and we see ongoing appetite among buyers to invest in key markets and strategic assets, with the ability to deploy capital.”