Dearth of available grade hotels sees downturn in investment

A new report has revealed there has been a downturn in hotel investment in the first half of this year.

Hotel investment in Asia Pacific totaled only US$2.9 billion in the first half of 2017 with a little more than 5,000 rooms, across six countries, being traded in 28 hotel deals, according to a report released by JLL Hotels & Hospitality Group.

Developers have acquired several hotels in Hong Kong and Bangkok to use in a residential capacity, but overall there has been a dearth of investment grade hotels available on the market.

Asian buyers in particular are focusing on Australia, New Zealand, Japan and Singapore, because of long-term positive tourism fundamentals.

Hotel owners, meanwhile, remain typically unmotivated to dispose of strong performing assets for fear of what to do with their capital returns after they sell.

The introduction of outbound capital restrictions within China in late 2016 has impacted the hotel investment market within Asia Pacific, and globally, during the first six months of this year.

Regionally, Hong Kong and Australia have been the stronger performers in terms of inbound investment with robust tourism growth and solid trading performance driving the focus for Australia.

In Hong Kong, there were eight individual deals where almost 2,000 rooms were sold for a combined total of HK$ 8.6 billion (US$1.1 billion).

Australia was again active in a number of key transactions across Sydney and Melbourne. After a strong 2016, New Zealand investment activity was limited with just a couple of smaller transactions in locations outside of the nation’s major cities.

With the exception of the InterContinental Sydney Double Bay, the majority of deals in Australia have transpired in Melbourne.

The recently opened International Convention Center will provide a further boost to Sydney's hotel trading performance and the MICE industry. The limited new room supply entering the market over the coming years is welcome as citywide occupancy is running at close to 90 percent.

Given the low interest rate environment, sound economic growth outlook and the weaker Australian dollar, transaction activity is expected to continue throughout the year, according to JLL's forecast.

In South Korea there are only a couple of arms-length transactions each year, since many hotels are owned and operated by local South Korean conglomerates. The rapid expansion of limited service hotels across Seoul, driven by Chinese inbound tourism growth over recent years, has helped generate deals of midscale category properties. A recent transaction includes the Nine Tree Premier Hotel Myeongdong II.

In Japan, cap rates are at their lowest in almost a decade reflecting strong investor demand and the nation's zero interest rate policy. Tourism fundamentals remain strong although trading performance is flat given the yen appreciation against other currencies. Airbnb and other alternative accommodation operators are impacting larger cities. A positive for the accommodation industry is the legislative bill passed by the National Diet of Japan in June that outlaws illegal operators from 2018.

For the first time since 2013, no Japanese transactions have made into the “Top 10” list although above 26 billion Japanese Yen (US$240 million) worth of deals had been recorded between January and June. One of the largest was Ken Real Estate Lease Ltd's acquisition of the Rihga Royal Gran Okinawa from Morgan Stanley.

Overall, given the lack of opportunities in gateway cities, hotel investors remain committed to identifying emerging tourism markets, where long-term fundamentals for growth is strong and the supply and demand balance is not heavily outweighed by new hotels.