Jones Lang LaSalle Hotels Releases The Hotel Ownership Pendulum in Motion Research Paper

According to Jones Lang LaSalle Hotels’ latest research, a wind of change is blowing across the hotel ownership landscape in Asia as improved operating performances and corporate restructuring drive hotel investment demand in the region. The firm’s recently released ‘Hotel Ownership Pendulum in Motion’ examines the current ownership profile of Asian and global hotel real estate, how this has changed over the last ten years and the emerging ownership trends.

“The Asian hotel investment market has been typified by a shortage of hotel assets for sale. Historically Asian hotel and resort real estate is largely held by family controlled public and private companies with some institutional and opportunity fund ownership. Over the last five years, however, international groups especially US investment funds have emerged as new owners of hotels in Asia, particularly in Japan and to some extent in Thailand. The increased liquidity is encouraging and testifies to the resilience of the region’s hotel market, particularly when we consider it in the  light of the chain of demand shocks over the past decade,” said Mr. Scott Hetherington, Managing Director of Jones Lang LaSalle Hotels in Asia.

What is driving this change in ownership profile in Asia? A key factor is the improvement in the region’s macroeconomic environment which has strengthened after a period of structural reforms and consolidation as well as improved trading performances following a strong revival in tourism trade. “The stronger economic and trading environment helped to support asset values, which gives owners an incentive to sell if the price is right. At the same time the rise of tourism as a key growth engine globally lends weight to the hotel sector as a viable asset class relative to retail, commercial and industrial assets,” said Mr. Hetherington.

Mr Hetherington pointed out that improved market transparency, greater availability of information about hotel trading and better understanding of the sector’s cyclical nature have collectively increased the appeal of hotel assets. “In the past the lack of transparency in the hotel investment market has restricted the amount of information available to the public so there is limited basis for financial forecasts and pricing. It is a virtuous cycle: better transparency helps investors to better understand the markets, which in turn leads to heightened interests in the sector and consequently greater transparency,” said Mr. Hetherington.

On the demand side of the equation, the sheer weight of capital seeking real estate globally in the current low-cost debt environment has been the key driving force behind the record levels of hotel transactions in 2005 which reached a record high of US$45 billion worldwide. “US-based investors have been scouring the world for alternative opportunities such as hotels as pricing for traditional asset classes become increasingly competitive. Middle Eastern investors are also looking for opportunities to buy. A lot of the transactional activities are driven out of the Americas but Asia and Europe too are witnessing a strong momentum,” added Mr Hetherington.

The change in ownership profile is particularly obvious in Japan which single-handedly accounted for more than two-thirds of the number of hotel transactions in Asia in 2005. The volume of transactions in Japan increased substantially over the past five years as assets are being released into the market driven by the sale of non-performing loans and corporations disposing of their non-core assets, resulting in a profound impact on hotel investment liquidity in the country. Domestic and US opportunity funds have surfaced as the new owners of Japanese hotel real estate which were previously dominated by Japanese private and public companies. Jones Lang LaSalle Hotels expect increased transactions compared to historical experience as opportunistic players typically hold assets for shorter periods.

Albeit an emerging hotel investment market, China has dominated news headlines. Be it development deals requiring foreign financing or hotels in need of renovation and refurbishment, there is significant room for capital appreciation for single assets in China.

“China offers significant upside potential with attractive GOP margins and expectations for RevPAR growth supported by a rapidly developing domestic economy. Regional players from Hong Kong and Singapore continue to be active in this market while new players Gross Operating Profit. including private equity and investment banks are entering the fray in China. These investors are expected over time to replace traditional owners such as state-owned enterprises, public and private hotel owners and developers,” Mr. Hetherington remarked.

“While we see continued divestment in China and Japan, the scarcity of assets across the region should provide support for more aggressive pricing and this may lead to a tightening of yields,” said Mr. Hetherington. He also pointed out that international opportunity funds are expected to continue to acquire assets alongside more traditional  investors including families related to major public and private companies, the latter with a tendency to be long-term holders of real estate  compared to opportunity funds.

The ‘Hotel Ownership Pendulum in Motion’ is part of Jones Lang LaSalle Hotels’ FocusOn series that take an  in-depth look into subjects of interest to the global, regional or local hotel investment market and industry.

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