Gaw, SMTB See Resilient Returns Boosting Luxury Hotels in Japan, Thailand

Asia Pacific hospitality investors continue to favour Japan and Thailand amid a post-pandemic tourism rebound in those markets, with assets in the upscale segment seen as better positioned to generate high returns, according to executives from Gaw Capital Partners and Sumitomo Mitsui Trust Bank who spoke at Mingtiandi’s Singapore Forum on Tuesday. Watch the full recording>>

With consumers showing increasing preference for luxury travel experiences, investors tapping the high-end segment have more flexibility to adjust room rates and boost asset performance, according to Nantachatr Yampandh, investment director at GCP Hospitality, Gaw’s hospitality investment and asset management unit.

“I do agree that there is a shift in growing demand for the upscale segment and consumer preference for exclusive travel experiences,” said Yampandh. “Luxury and upscale have really grown by quite a lot over the past years…from an operational point of view, upscale is beneficial. You’re able to increase rates with certain degrees of flexibility, compared to economy segments that have more limitations. From an investor perspective, this is appealing because of the strong performance and less sensitivity to downturns as we’ve seen during Covid.”

Yampandh was joined in the panel discussion on hospitality investment in Asia Pacific by Kazuya Wakimoto, general manager of global real estate business planning and promotion department for Sumitomo Mitsui Trust Bank at the forum sponsored by Yardi. The panel was moderated by Su Lin Wee, an executive director who heads up asset management for Southeast Asia, Hong Kong and China at PGIM Real Estate.

Japan, Thailand in Favour

With tourism in Japan having exceeded pre-pandemic levels with a record 17.8 million foreign visitors in the first half of the year according to the Japan National Tourism Organisation, domestic and global investors are continuing to favour the hospitality segment, wth the the country’s lower cost of capital, weak currency, and high liquidity also boosting the market’s appeal.

Despite rising costs of construction, labour, food, and materials, strong occupancy has enabled owners of upscale hotels to raise room rates to offset higher expenses without sacrificing margins, according to Yampandh. That view was echoed by Wakimoto, who sees local asset owners seeking luxury foreign hospitality operators.

“Japanese investors like developers, railroad companies, and infrastructure companies who own good properties in good locations, their strategy is to attract luxury foreign hotel brands,” said Wakimoto. “(These luxury hotels) can charge higher prices, so that’s their strategy to offset high construction costs.”

Outside of Japan, both Wakimoto and Yampandh see opportunities in Thailand on the back of strong tourism demand, with Wakimoto pointing to the Southeast Asian nation as being the second most preferred market for Japanese investors after their home country. Yampandh also highlighted potential distressed opportunities in Australian cities like Melbourne, while Wakimoto sees Japanese investors also targeting Korea.

Both executives remain cautious on mainland China and Hong Kong, with valuations of hospitality assets in those markets having yet to decline to distressed levels despite a sluggish recovery.

“We’re looking in Hong Kong as well, but the challenge there is that performance is not back yet, and operations are not back to the same level as it was (before Covid)” said Yampandh. “And the opportunities that we’ve seen in the market haven’t shown enough distressed pricing compared to where the asset is operating today. So to invest in Hong Kong, you need to have the view that recovery is coming sooner rather than later.”

Bridging Pricing Expectations

Despite improving operating metrics on the back of strong tourism demand, hospitality investment in the region is still hobbled by gaps in valuation expectations between buyer and seller, with cap rates and exit liquidity remaining key considerations in negotiations.

“Cap rate discussion is still a key point,” said Yampandh. “In the past year we’ve seen a disconnect between strong tourism demand and buyer’s access to capital and macroeconomic challenges. That has led to a huge gap between sellers’ expectations and what the buyer is willing to pay. So for sure, cap rate is a big discussion, as well as the liquidity of the market itself – what would be the prospect of exiting this asset in the next three to five years?”

Gaw, which focuses on value add and opportunistic plays within its hospitality portfolio, sees property refurbishments and operational improvements as key levers for enhancing asset values.

For Japanese investors, outbound opportunities remain attractive despite recent shifts in monetary policy amid the re-emergence of inflation in Japan. Interest rates are expected to remain relatively low over the next few years, which will continue to motivate domestic investors to pursue investments abroad amid limited opportunities at home, according to Wakimoto, who brokers cross-border deals between Japanese and foreign investors.

“Many Japanese investors believe this interest rate environment will continue for the next several years,” said Wakimoto. “The limited investment opportunities for many Japanese investors means they are looking for overseas investment opportunities.”

A Panel in Pictures