Hotel investment will be on the rise in 2015 but the industry — and investors — face an industry that may not be volatile but is in flux.
“Over the past several years, the millennial generation has increasingly impacted the lodging industry, calling into question products and offerings that have for decades been industry mainstays” states EY (Ernst & Young) in its Global Hospitality Insights for 2015. Millennials, the 21 to 35 demographic, as well as the new technology that practically defines it, are the new power consumer. Millennials and the middle class traveller out of China, India and the rapidly developing world also share a taste for a hotel experience distinct from previous generations.
The so-called lifestyle lodging that emerging travellers are demanding more and more, is “More cost-conscious and experience-focused than ever before, whether travelling for business or leisure,” according to EY, and investors and operators need to innovate. Many new hotel offerings in fact emerged from Asia, where more fluid standards, higher market fragmentation and diverse cultural demands fostered creativity. A few of the factors influencing those new offerings are revenue-generating common spaces, the rise of the low cost airline, widespread adoption of mobile technology and novel locations with strong transport connectivity. That’s fortuitous for investors, particularly in Asia-Pacific, where land prices, supply and high construction costs are pushing developers outside traditional city centres. While those may seem like fluid fads, when it comes to hotels, consumers have an impact on investors the same way office occupiers and residential end-users do.
CAPITAL INFLOWS
According to the United Nations World Tourism Organisation (UNWTO) travel to Asia-Pacific grew 5.3 percent in 2014, representing 263 million arrivals, underpinning a resilient hotel market even as overall investment transaction volumes declined. “The reality seems to be that 2014 was a bit slower than the year before. 2013 had been quite aggressive because Japan was opening up due to Abenomics and money started flowing into the property market. Suddenly there was capital and those who wished to sell were taking advantage of that,” begins Robert McIntosh, CBRE Hotels Asia-Pacific executive director. Japan was depressed after the tsunami, Singapore had been gaining steam before it started flattening out, there was instability in Thailand, China and Vietnam clashed and Malaysia dealt with two airline disasters. “Southeast Asia became a short term problem with a fall in visitor numbers,” says McIntosh.
Though the hotel market is still a long way off its 2007 peak, 2015 is nonetheless looking positive. Total investment globally into hotels in 2014 was approximately US$59 billion — of which $7.5 billion went into Asia-Pacific. “For 2015 we are expecting to see a small increase in hotel transaction volumes across Asia- Pacific,” agrees Scott Hetherington, chief executive officer, Asia with Jones Lang LaSalle Hotels & Hospitality Group. “The biggest challenge we have in this region is the actual amount of deal flow compared to the size of the economy and the investor demand. The demand for hotel investment is huge, but supply is limited.”
A great deal of increased investment will come from China, where relaxed overseas investment rules have Beijing actively encouraging activity abroad. Australia has already experienced a bump in Chinese investment; cap rates are relatively high and exchange rates are favourable to the Renminbi. Sydney dominated the second half of 2014’s investment activity, accounting for US$982 million worth of transactions. Along with rising tourist numbers, “The improving economy and investor confidence means more money is available for hotel investments, which increases demand from previously inactive funds in places such as Japan. Hotels are increasingly regarded as a good investment,” notes Savills Managing Director Hotels Asia Pacific Raymond Clement.
WORKING OUT THE NUMBERS
The Asia-Pacific hotel landscape is as diverse as the region itself, and indeed some locations perform better than others — for different reasons — and “poor” performance with regard to yields can even be acceptable. Hong Kong’s crucial Mainland visitor arrival numbers may be faltering, but that hasn’t stopped investment capital from flowing into the city — chiefly because it’s one of Asia’s trinity of safe haven markets, along with Singapore and Japan.
According to the JLL’s March 2015 Hotel Destinations report, 2014 saw US$7.5 billion in 146 transactions across the region, a figure projected to flirt with $8 billion in 2015. Though the safe havens dominate, investment is scattered across APAC. Key investment destinations include emerging spots like Yangon, Jakarta, Hanoi, Ho Chi Minh City and Sri Lanka. Also tops among mature markets are Phuket, Bangkok, Taipei and Mumbai. Somewhere in between are first-tier China (Shanghai, Beijing), Seoul and Osaka. Hong Kong and Singapore each added roughly 1,700 luxury sector rooms last year, and now average daily rates (ADR) sit at US$476 and US$323, with revenue per available room (RevPAR) at just under US$373 and US$259. Tokyo added only 248 rooms — but they were impressive rooms at AMAN and Andaz (a boutique Hyatt brand). Tokyo’s ADR and RevPAR sat at $432 and $357 but the city’s hotel landscape could look much different soon if the government’s initiative to attract international visitors — and bump the total numbers to 20 million by 2020 — bears fruit.
In Macau 2014 was subdued, with no new rooms. Beyond 2015, however, the other SAR will welcome a JW Marriott, St Regis, Hollywood Roosevelt, Ritz-Carlton and the Ascott as just a few. Macau did top occupancy rates across the region at 90.6 percent. At the other end of the spectrum, Manila (2,650 new rooms) Bali (3,800) and Jakarta (2,450) made enormous supply leaps, as tourist arrivals increased in all three. Business and MICE travel underpinned Jakarta’s growth, and spikes in source market (China, Singapore, Australia) arrivals contributed to Bali’s expansion. If all the projects JLL projects for Bali are completed, the island could see over 12,000 new rooms by 2018. Similarly, major international brands entering Manila should account for 6,000 new rooms by the same time.
While it appears that Southeast Asia is experiencing another growth cycle, the numbers can be misleading. “It depends what you mean by growing,” theorises Savills’ Clement. Growth indicators can include ADR and RevPAR — which don’t necessarily have to be complementary — and simple occupancy rates. “Some areas are experiencing high growth in hotel numbers but by other metrics they may not be growing due to over-supply, resulting in a boom and bust. Even if tourist arrivals are growing rapidly, if too many hotels are built ADR decreases, making the destination less desirable for investors.”
Despite statistics that can be subject to interpretation, there are locations hotel investors are bullish on. CBRE’s McIntosh points to low-base Myanmar as generating a lot of interest, the resurgence of perennial hotspot Thailand following some political tumult and continued growth in Indonesia. JLL’s Hetherington agrees on Myanmar and adds Vietnam to the list while urging caution due to both countries’ complex investment regulations. Clement echoes them. “The highest growth country in Asia-Pacific is most definitely Myanmar, whose travel and tourism sectors’ contribution to GDP growth should be the highest in the world for the next decade.”
Beyond Luxury
Hotels are bought and built to be used and generate revenue. But the very nature of the hotel is changing, and investors are adapting and being more creative in product choices. CBRE expects a bump in capital heading towards business and limited feature hotels this year. Boutique properties and hip, tech-friendly facilities and serviced apartments are also gaining traction. The age of the luxury hotel isn’t over, but it’s facing stiffer competition. “In most locations, the return you get per square metre from a budget hotel is higher than for a luxury product, particularly given construction costs for the luxury hotels. You don’t spend much on creating the room and you don’t provide many other facilities. It’s a very efficient use of the space,” argues CBRE’s McIntosh, referring to grand lobbies, conference rooms and spas that are non-earning spaces. “It’s less viable to build luxury. There are many older buildings that are suitable for simple conversion. To create a luxury product with long-term value is a major task.” That thinking extends to locations within markets and the rise of the non-core asset.
“The line between traditional hotel classes is blurring. With travel being so accessible, a MICE traveller may also see relatives or fit in leisure travel,” says Clement. Thin land supply makes pricey land plots the domain of high-end brands and the relative ease of limited service properties keep them popular with investors. But, “Limited supply of hotel properties skews the type of hotel segment that is likely to come onto the market.”
JLL’s Hetherington agrees on the supply crunch, remarking that the shift to outlying districts is also the result of a lack of suitable assets in traditional centres. A recent portfolio sold by JLL included properties in Akasaka, Ikebukuro and other districts within greater Tokyo, an indication investors are willing to look beyond CBDs. More than any one type of hotel though, “affordable” has become the key buzzword. “The real growth is in quality well-priced hotels, where you know it’s clean and safe … Not cheap, but good value,” sums up McIntosh.
Hong Kong: Asia’s Grande Dame
As what is arguably Asia’s most sophisticated hotel market — it’s been open, transparent and cosmopolitan the longest, and boasts Asia-Pacific’s strongest visitor arrival numbers — Hong Kong exemplifies many of the industry’s talking points, that will define the estimated 59 new hotels coming online by 2019. Research by the Hong Kong Tourism Board stated leisure and business traveller arrivals were up 12 percent over 2013 despite political unrest. More than 2,500 new rooms are expected in 2015 and approximately 11,000 by 2019 in 303 hotels (the figures rise when guesthouses are included). “Mainland Chinese demand has diversified, shifting away from midscale and budget tour groups towards more high-end leisure and corporate travellers. Performance outlook is expected to remain stable, with marginal improvements to ADR and occupancy supported by demand from leisure, corporate, and MICE as well as the return of tour groups,” said JLL’s Hotel Destinations Asia Pacific 2015. Holiday Inn Express Mongkok, iClub in To Kwa Wan, two iHotels, Tuve, Emperor, another Shangri-La and two properties at Ocean Park are just some of the recognisable brands scheduled to open between now and 2019.
The majority of those new facilities will be boutique hotels, which are traditionally kept to roughly 100 rooms; they’re not just stylish. Only a handful of Hong Kong’s forthcoming properties are expected to house 500 rooms or more: Long Kinetic Limited’s North Point hotel, Incheri Limited’s Sha Tin property, the Ronald Lu & Partners-designed Rosewood in TST, the Shangri-la and Cheung Kong subsidiary Ocean Century Investment Limited’s North Point facility.
With 60 million visitors in 2014, not surprisingly no one hotel class dominates Hong Kong. “All segments perform well but mid-range does slightly better than all others. This is because of the market mix and dominance of short haul markets led by China,” explains Hong Kong Hotels Association Executive Director James Lu. Lu points out the city has been in a growth cycle for two decades, much of that stemming from its status as a safe investment, and as a mature market, limited supply has left several international brands on the outside looking in. However, with so much new supply in the pipeline, it’s clear there is indeed land or acquirable assets available. “Half of the new hotels have fewer than 100 rooms and there is a good supply of them coming from conversions from office, residential and industrial to commercial use for building hotels,” reasons Lu. “While a good number of them are not in prime business districts, the ease of transport in Hong Kong allows them to achieve good occupancy.”
Lu also concurs with JLL and Hetherington on increasing brand consolidation in key markets like Hong Kong. The Intercontinental has HUALUXE for Chinese travellers, Hilton has Curio and so on, all of which are responding to shifting market dynamics.
“As Asian markets mature, lifestyle hotel brands that are already well-established in Europe and America are fine-tuning their brand offering and expanding into Asia,” notes Hetherington. Lu theorises global operators are also consolidating to achieve better representation in the SAR. “Hong Kong also has many local brands that operate internationally (Shangri-La, Mandarin Oriental, Peninsula, Langham) and these Hong Kong-based brands … are taking their brands abroad.”
The Future is Now
Attractive and varied as they may be, hotels will not be without their challenges in the coming years. Among the concerns for operators and investors alike are political instability, environmental demands, over-supply and visa agreements. But the most immediate test is physical supply. “The biggest challenge for investors is the scarcity of available hotel assets on the market. This scarcity of stock is forcing investors to become more creative as they look to place capital across the region,” stresses Hetherington. Fluctuations in currency can also be a concern, but that is a cyclical element. A dearth of assets is constant.
Also pressing: human capital. “Our biggest challenge is manpower and the shortage of more talented people with the experience and attitude to uphold our high service standards,” says Lu of Hong Kong’s hurdles, noting attitudes are not always in sync with guest experience. “Retention is also an issue, because hotel jobs are not easy to do well and one has to always go the extra mile to excel,” he finishes.
Finally, technology is already playing a bigger part in the hotel experience. Detailed check-in via mobile and use of smartphones as room keys is already a reality for some properties as a way to improve productivity and efficiency with scarce staff. “Personnel and training,” are real trouble spots agrees McIntosh, adding, “I suspect the potential for disruptive technologies will emerge over the next few years, like Airbnb,” he finishes. “That’s not there yet but those kinds of things can be game changers. They might challenge the way [hotels] do their marketing but then again they may become a major supplier of hotel rooms.”
Boutique Appeal
Hotel Madera, Hong Kong
Though by definition a boutique hotel is one with fewer than 100 rooms, the concept has come to be associated with style and creativity as well. With so many hotels in Hong Kong boutique size due to space and land constraints, the city is finding itself at the heart of a boutique renaissance. Located just off Nathan Road in Jordan, with 88 rooms the Madera fits the size profile and has put a great deal of effort into giving itself a distinct personality in a competitive market. Beyond simply moving developer Hip Shing Hong into the hospitality sector, the hotel brought the developer enhanced services and new marketing capabilities. “Any hotel must provide outstanding service, there is little tolerance for error,” explains HSH Managing Director David MH Fong of the group’s decision to expand. “And I think branching into hotels brings a lot of benefits — the culture of the hotel — to our portfolio.”
Fong knows the Madera’s location is “not ideal,” but could see the non-core trend building when HSH began acquiring the Cheong Lok Street properties near one of its existing serviced apartments almost 10 years ago. With common space at a premium in the Madera, the focus is on contemporary travel demands. “We’ve maintained approximately 90 per cent occupancy,” notes Fong. Carefully selected facilities include an art gallery highlighting contemporary history and rooftop lounge. Perhaps most notable is the games room with a 100-inch 3D screen, Xbox One and PlayStation 4 consoles and full sound system, the US$25 billion gaming industry a major draw for crucial millennials.
Reinvention and Rebranding
Hotel Jen Orchardgateway, Singapore
By the time Shangri-La’s Traders all but shuttered last year, “The Traders brand [had] had a 25-year history of success in generating solid business, carving out a niche amidst a highly competitive industry and building a steady base of loyal customers,” explains Mellisa Gillies, director of communications for the rebranded Hotel Jen. “However, we are now looking to the future in identifying and responding to the global trends and particular needs of the ‘Millennial-mindset’ business and leisure traveller.” Launching in September 2014, Hotel Jen — now with properties in Beijing, Hong Kong, Manila, Brisbane and five other cities in Asia-Pacific — isn’t so much as the opposite of its more traditional parent as it is a complement to it. Designed for the “young and young at heart,” on business or travelling for leisure,
Jen is an example of hotel groups refocusing their efforts on freshly emergent travellers. Many of these newly powerful demographics, like millennials, are active, curious and most of all, tech savvy. The 502-room Hotel Jen Orchardgateway was the first property to open after the rebranding and its mandate is to provide intuitive, relaxed service and allow guests to exploit their adventurous sides in key gateway cities in Asia and eventually around the world.
Five-star Rejuvenation
The Shilla, Seoul
While South Korea is now best known for its considerable consumer electronics prowess, it was relatively recently that the county became a major design and technology player. That showed in its relative dearth — in an economic engine of nearly 13 million — of five-star hotels. Leisure mainland Chinese, medical tourism, MICE and business traveller arrivals are expected to remain on an upward trajectory that will drive hotel demand. The industry in Seoul has some catching up to do. In 2013, the venerable Shilla underwent a comprehensive redesign, by Peter M Remedios, the first since it opened in 1973. With the Four Seasons the only major international five-star brand entering the market any time soon, the time seemed right for an overhaul, though Alex Wontai Kim, The Shilla’s director of sales, comments, “We have always maintained a reputation as Seoul’s premium hotel. The renovations only confirmed our position.”
Sure enough, The Shilla has stepped up its game, both from a design and service perspective. In line with international luxury standards, the property has taken on a lifestyle retreat vibe — clean lines, neutral colours, natural materials — while maintaining its conference credentials. The Shilla accepts an equal number of business and leisure guests, Kim admits meetings “Are very important. We have the best events and conventions facilities in Korea. Approximately 30 percent of our room occupancy is from MICE.”