Hospitality’s ‘rags to riches’ story during and after Covid represents a key motivation for investing in the asset class, according to Kenneth Gaw, president and managing principal, Gaw Capital Partners, speaking at the inaugural IHIF Asia in Hong Kong.
“Hotels went from being the worst affected asset class at the beginning of Covid to the quickest to recover,” Gaw said, speaking on the CBRE Capital Talks panel addressing the appeal of hospitality in Asia. “We see that people still want to travel and will continue to do so, while interest rates are improving.”
Added Dr Sabine Schaffer, co-founder and CEO, Europe, Pro-invest Group: “Hospitality is an inflation hedge and a key consumer theme, thanks to the rise of the Asian middle class.” She said that this group’s “spending power” would see them “want to travel and discover” making it a good business for years to come.
Strong signs
Simon Manning, managing director of Nina Hospitality, part of Chinachem Group, praised hospitality’s income play. “At Chinachem, our hospitality portfolio is only about 12 percent of the group but we see it as steady income,” he remarked, adding that rises in room rates and improved margins were “strong signs” for the future of the industry in Hong Kong and beyond.
For Kieran Bestall, managing director, private equity, Ares Management Corporation, hotels form a key part of the firm’s value-add strategy, which also considers opportunities in healthcare and education. He identified myriad ways to improve each asset – “through capex, repositioning, business fixes” and echoed Schaffer’s views that being a “consumer business” added to its appeal, particularly thanks to the firm’s upper-upscale focus. “Even during downturns, the luxury customer still travels, so it’s not as affected by cycles,” he said.
Schaffer added that hospitality was “one of the hardest hit industries during Covid” but said that its operational dimension – with her group focusing on development and asset management – would continue to reward investors and “drive alpha”.
Both Schaffer and Gaw said that they were able to manage operational risk thanks to “in-house teams”. Gaw noted: “The best way to handle this challenge is to build your own platform. We also work with global operating companies, so we have a mix of expertise from both.” Schaffer said that her team – which had enabled Pro-invest to become one of the largest independent operators across Australasia with more than 6,000 keys – allowed the firm to “drive efficiencies and ask hard questions”. She added: “Having a development arm as well means we can tweak some physical aspects of an asset, such as turning meeting rooms into keys and vice versa, allowing us to maximise returns.”
Bestall said that he also preferred a “hands-on” approach. “It depends on the brand, but from an asset management perspective, we really get involved whether operators like it or not.”
Expansion plans
In terms of expansion, the panellists all shared geographical growth ambitions. While Nina Hospitality is extremely strong in Hong Kong, with some 3,000 hotel rooms and serviced apartments across the city, Manning said that the group still had further appetite to grow on its home turf. But it has also identified three key markets for external growth, namely London, Singapore and Sydney. “They have similar tax jurisdictions to Hong Kong and the risk is relatively low,” he suggested. “It’s important to go into markets where occupancies are 80+ percent and which are relatively safe, while providing long term yields for us to get our returns.”
Schaffer said that despite parts of the Asian market still looking “structurally challenged”, her firm remained bullish on Australia and New Zealand. “They have already started to cut rates in New Zealand last month and have indicated there will be further cuts going forward,” she noted. “Australia is the most labour-costly country in Asia; new builds are hard to deliver and the pipeline has dropped to nothing over the next three years.” She added: “Markets where demand is outstripping supply are a good place to be.”
Gaw confirmed that Gaw Capital “continues to like Japan”, which is the second biggest market in Asia Pacific after China. He added: “As a travel destination, it has the most diversified offerings – big cities, food, culture, shopping, sports like skiing… so many different kinds of destinations and of course, business travel.” This was all boosted by a cheap Yen, he said, and while there is the prospect of interest rate rises in Japan, he thought that they wouldn’t “rise too fast”.
Bestall said that Ares Managements’ resort-focus hadn’t proved over risky, and noted that “repositioning and adding value to these resorts” had created a “massive upside”. He concluded: “Half of the population of the world is here in Asia. Southeast Asia is still a growing market – it entails more risk, but we are able to find the value-add proposition in what we are doing.”