Rising interest rates and prolonged economic uncertainty have dimmed investor enthusiasm for hospitality assets in Asia Pacific with investment in the sector projected to drop by 14 percent to $10.1 billion this year, according to a recent report by JLL.
Despite recovering revenues from hotel operations, valuations have also declined as assets have traded at an average price of $291,600 per key so far this year, which was down 21 percent from the $368,900 level a year ago.
With investment activity having stayed quiet this year, JLL expects the market to remain muted in 2024 as heightened macro uncertainties keep investors on the sidelines, although the consultancy expressed confidence that revenues will continue to recover as they now close in on pre-pandemic levels in the region.
Japan Draws Foreign Capital
Reaching even 86 percent of 2022’s level of investment in hospitality assets will require a dramatic finish to this year with trades of hotels across Asia Pacific having plunged 40 percent to $5.9 billion across 130 transactions in the 10 months through October, the agency’s data shows, compared to the 168 deals worth $9.8 billion in the same period last year.
A consortium of Singapore’s SC Capital Partners, Goldman Sachs Asset Management and the Abu Dhabi Investment Authority made Asia Pacific’s biggest hospitality acquisition so far this year when it acquired a $900 million portfolio of Japanese resort hotels from Daiwa House Industry in July.
Japan was the busiest in the region with $2.2 billion in hotel transactions in the first 10 months of the year, with foreign investors playing a major role.
In March KKR and Gaw Capital Partners agreed to acquire the Hyatt Regency Shinjuku in Tokyo for around $500 million with that deal coming after BentallGreenOak purchased the Rihga Royal Osaka hotel in January for $385 million.
Bargain Hunting in China
China has been the second busiest hotel market in the region this year with $1.3 billion worth of transactions as of end-October, which was down by nearly 25 percent compared to a year earlier.
JLL noted that 70 percent of China hotel transactions involved sales of distressed assets in second tier cities while institutional investors are showing interest in acquiring hotel properties in the mainland’s largest urban hubs for conversion into rental apartments.
The third largest hotel deal across Asia Pacific this year was China Tourism Group purchasing the 546-key Kimberley Hotel in Tsim Sha Tsui for HK$3.4 billion ($433 million) from China Cinda Asset Management.
From January through September, the average revenue per available room (RevPAR) – a key top line metric in the industry – reached 95 percent of 2019 levels across the region, with some markets, including Japan and Singapore, already outpacing pre-pandemic levels.
Average daily rates (ADR) for hotels in the region have also bounced back, particularly in Japan, where luxury properties this year have exceeded 2019 pricing by around 30 to 40 percent.
Despite that performance, JLL expects investment activity in hotels across the region will grow by just 3 percent next year to reach $10.4 billion.
Japan will likely remain the hottest investment destination in the region, with hotel transactions in the country projected to climb to $3 billion in 2024. China is pegged to finish second next year with investment activity at around $2.1 billion, followed by Australia and South Korea where hotel deals are estimated to cross the $1 billion mark in each market.
In the long term, Ercan expects hotels in Asia Pacific to maintain their appeal with investors due to strong performance in the sector and robust travel demand in the region.
“While ongoing macroeconomic volatility has suppressed short-term hotel investment volumes, fundamental performance continues to accelerate,” he said. “Looking to the balance of 2023 and 2024 ahead, there are more tailwinds than headwinds including a levelling of interest rates, high amounts of impending debt maturity and substantial levels of dry powder capital, which will influence investment decisions.”