While capital flows into Asian hospitality have been affected by shocks including Covid, war in Europe, and higher interest rates, there are good signs that the situation is improving, according to Suchad Chiaranussati, chairman & founder, SC Capital Partners.
Speaking at the inaugural IHIF Asia, private equity real estate fund manager Chiaranussati said: “Over the past five years, Covid was the major force affecting Asian hospitality, followed by global rises in interest rates. Before the industry could recover from the pandemic, it was hit by a war and higher inflation.” He added: “Some markets, like Korea, Australia and Hong Kong were badly affected by high interest rates. Ongoing geopolitical factors means that Chinese travellers have reduced; it hasn’t been a great operating environment.”
Despite all that, hospitality’s fundamentals meant that the sector had remained something of a beacon for capital, with Chiaranussati seeing healthy demand for hospitality-backed funds. A specialised investment trust sponsored by the firm, dubbed Japan Hotel REIT, struck big last year with a $900 million deal for 27 Japanese resort hotels in joint venture with Goldman Sachs Asset Management and the Abu Dhabi Investment Authority. Chiaranussati added: “Everyone thinks that Japan is very efficient, but in real estate there are inefficiencies that you can exploit with value-add deals. On seven or eight occasions we have bought single assets and restructured them.”
Interest rate factors
Corey Hamabata, managing director Rockpool Capital Limited & TREC Hospitality Investment, said that he had also been analysing “supply and demand from investment capital” and had identified “a slow draining of capital from the system over time” due to market interruptions. “That will be counteracted by interest rates coming down,” he said. “From an investor point of view, it seems to me that there is a lot of capital for ‘middle of the fairway’ strategies, and much less capital for things on the fringes, and that’s how we’re looking at the market and where we are looking for value.”
Gary Kwok, CEO and managing partner, Axe Management Partners, said that he had been cheered by “tourism markets”. He said: “Currently demand is very strong, and rising middle classes create lots of prospects. Capital flows have experienced many different shocks, but long to medium term, I still believe there are a lot of opportunities for the tourism operator.”
For Eric Siegel, head of APAC hospitality, EQT Exeter, ongoing geopolitical issues would have to be monitored. “As a big private equity firm, we are always sensitive to geopolitical risks, but I think that things are pretty good here. Despite issues like the significant rise in construction costs, we are seeing increasing liquidity with the global decrease in interest rates.”
Japan appeal
Like Chiaranussati, other panellists highlighted Japan’s appeal, and not just for its history of divergence in monetary policy. “Japan is really compelling,” said Siegel. “We’re not really concerned about the rise in interest rates in the grand scheme of things. We have been bidding on a number of properties there.”
Added Hamabata: “We talk a lot about Japan – the country’s fundamental are very strong. A lot of people talk about the market overheating, but overheating only happens when demand doesn’t match supply. Currently, demand is very strong, with factors like the Yen and low interest rates helping. But Japan is essentially about high-quality products – it’s one of the top destinations worldwide.”
Those aspects, however, were increasing competition for product. “In Japan, it’s the ‘middle of the fairway’ stuff that has become quite competitive,” he noted. “We’re trying to leverage our expertise to move to the sides, and look at conversions, some ground up development, ultimately building product that the ‘middle of the fairway’ investors will want to buy.”
Beyond Japan, plenty of other markets looked like promising destinations for capital, Siegel said, even if pickings were slim. “We like Sydney – it’s a great market with high liquidity and considerable barriers to entry. Singapore is similar – in both those markets, owners hold on to their assets. We are also hoping to get to Thailand for hospitality investments, where we are currently active in private equity and infrastructure.”
Noted Hamabata: “When we started TREC Hospitality Investment, it was always meant to be a pan-Asian investor – it’s important for us to explore different markets. But capital markets in Asia are very fragmented. That means with a market like Thailand, we see it more from a private capital basis rather than institutional capital. So we’re looking at larger scale, repositioning opportunities in Thailand, select resort markets and Bangkok.”
Added Chiaranussati: “Beyond Japan, we are currently preparing to launch a non-Japan, Asian hospitality fund. Australia is interesting – we haven’t got much in Sydney; Singapore is interesting, but not cheap. Thailand is a huge tourism market.” He said that Korea was of interest too, particularly in the light of the Korean Wave inspiring tourism, but with a caveat: “We wouldn’t do full-service hotels there, but limited service hotels, as the labour unions can be pretty powerful.”