Hotel sector in Asia-Pacific set to improve as tourists return, says CBRE

This article first appeared in City & Country, The Edge Malaysia Weekly, on May 9, 2022 - May 15, 2022.
Hotel sector in Asia-Pacific set to improve as tourists return, says CBRE
-A +A

The Asia-Pacific hotel market remained steady in the second half of 2021, with average occupancy rates ending the year at about 50% on the back of falling Covid-19 infection rates, sustained domestic travel demand and the launch in some markets of travel bubbles or special arrangements, such as Singapore’s Vaccinated Travel Lanes (VTL), says CBRE’s Asia Pacific Hotel Outlook: Trends to Watch in 2022 report released on March 31.

The emergence and rapid spread of the Omicron variant last December, however, led to the reintro­duction of travel restrictions, lockdowns and other containment measures. This ultimately caused hotel occupancy levels to decline once more and disrupted recovery.

The report indicates that most markets were able to weather the sharper increase in infections and relatively lower hospitalisation rates. Travel restrictions were eased in several Asia-Pacific markets in February, with some countries shortening quarantine periods and others offering fully vaccinated tourists quarantine-free entry.

Southeast Asian markets, in particular, have been aggressive in lifting restrictions, with Vietnam, Indonesia, Singapore and the Philippines now offering quarantine-free entry to vaccinated tourists. “As restrictions continue to be eased across the region, pent-up travel demand will be released. The launch of the VTL in Singapore in October last year has resulted in a steady increase in monthly outbound travellers,” the report says.

“Despite the gradual relaxation of restrictions, the recovery in air passenger traffic in Asia-Pacific will lag behind that in the US and Europe, primarily due to Mainland China’s strict border controls. Although many markets now offer quarantine-free entry, the additional administrative burden involved in planning overseas travel continues to deter many people from travelling. Many corporations also remain cautious towards business travel.”

Meanwhile, Mainland China, formerly the world’s largest outbound tourism market, continues to keep its borders largely closed to both inbound and outbound travel as it pursues a Zero-Covid policy. CBRE reckons that outbound tourism from Mainland China will remain limited in the near term, with tourists not anticipated to start travelling internationally until late-2022 or early-2023. Asia-Pacific markets that are heavily dependent on this source market will continue to face headwinds, with Hong Kong, South Korea and Vietnam being particularly vulnerable.

Hotel performance set to improve

Visitor arrivals and room occupancy will begin to increase in the second quarter of this year as many countries had started to relax border controls in February and March. “Meanwhile, the borders remained closed in Mainland China and Hong Kong, but the former will continue to be supported by domestic demand and the latter is expected to see occupancy hold up as hotels are used for quarantine,” the report says.

CBRE notes that pent-up leisure demand is expected to benefit Southeast Asia resort markets as they offer more spacious outdoor environments. In Maldives, for example, hotel occupancy and room rates have already recovered to pre-pandemic levels.

Despite the anticipated improvement in hotel performance this year, CBRE’s analysis of data in the US following major recessionary periods suggests that a recovery in gross operating profits typically lags behind the recovery in total operating revenue by around two years.

An increase in revenue followed by a pick-up in profitability this year is expected as borders reopen in the Asia-Pacific, but the delayed return of Mainland Chinese tourists is likely to hinder the momentum.

Meanwhile, CBRE notes that there will be a further evolution in consumer behaviour this year as people resume travelling to and from Asia-Pacific for business and pleasure after an absence of more than two years. Among the key themes include a flight to safety as consumers gravitate to brands that they know and trust because of the rigour in how they manage hygiene across their portfolios.

“While people, especially business travellers, may travel less frequently, they are likely to stay longer, leading to a net neutral impact on hotel demand. Apart from demanding more extensive use of technology such as self-check-in kiosks, touchless systems, smart elevators and applications to control in-room settings and access hotel services, consumers will also emphasise strongly on appearance.”

In this regard, hotel operators are planning to upgrade façades, refurbish rooms and introduce more design elements or upgrade food and beverage offering to secure additional or diversified revenue streams. “Nonetheless, the lag in profit recovery will force hotel operators to remain cautious on capital expenditure in the short term. Environmental, social and governance (ESG) criteria, particularly corporate requirements, will also become more prominent,” the report says.

Increase in hotel investments

Hotel investment volume in Asia-Pacific recovered strongly in 2021, growing 46% year on year to reach US$12.1 billion.

The report states that hotels will be among the sectors to benefit as investor confidence strengthens and buyers seek assets that offer attractive risk-adjusted returns. The weight of capital chasing hotels is now at an all-time high, with institutional investors eyeing market entry along with rising interests among traditional investors, such as real estate investment trusts and private offices. Private equity groups are also keen on hotels because of the risk rewards the sector offers.

“With more hotels investing in capital expenditure in upgrading technology to complement the service element they deliver, as well as undertaking renovations to increase customer experience, hotels are aligned with investors’ growing focus on value-add strategies. Asset repositioning is another value-add strategy in the hotel sector, with investors in several markets recently acquiring hotel properties for conversion,” the report says.

According to CBRE, the entry of private equity investors into the hotel sector has been characterised by a strong focus on purchasing hotel assets for conversion into other use. This is where hotel investment in South Korea last year was underpinned by acquisitions of hotel assets by investors seeking to convert them into offices or apartments.

“As investors look to ascertain the highest and best use for hotel properties, more deals involving conversions are expected, with co-living a popular option in Hong Kong and Singapore amid rising demand from end-users seeking an alternative to costly and inflexible rental markets.”

Hotels differ from other property types in that they are priced daily rather than annually, or often even longer in the case of office properties when leases expire. “As such, hotels are increasingly being seen as an inflation hedge or a means to capture additional revenue as inflationary pressure is passed on to customers and outstrips increases in operational costs,” the report adds.

In contrast to elevated inflation in the US and Europe, CBRE says prices in Asia-Pacific are expected to see mild increases in 2022. Although inflation may have a negative impact on operational costs, pent-up tourist demand and technology efficiencies will migrate potential payroll increases to some extent, ultimately making hotels an appealing sector during a period of prolonged inflation.

While the pandemic has had a strongly negative impact on hotel trading performance over the past two years, material distress has still not been observed across the sector.

Although CBRE’s Asia Pacific Investor Intentions Survey 2022 reveals that 78% of investors still expect a discount on hotels, this is a decrease from the 99% who stated the same in 2021. Given the near total absence of distressed assets, investors are likely to reset their pricing expectations correspondingly in the coming months.

As short-term impact is expected on hotel cash flows followed by a gradual recovery to pre-Covid-19 income levels, more investors are likely to expect no discounts when bidding for hotels, says CBRE in the Asia Pacific Hotel Outlook: Trends to Watch in 2022 report.

The report also notes that corporate travel is unlikely to witness a rapid recovery, aside from mostly short-haul travel by small and medium enterprises, as many companies are adopting new technologies to facilitate online meetings and retaining a cost-sensitive approach towards business trips.

“In contrast, as the reopening of resort destinations attracts pent-up demand from tourists, enquiries are growing from investors keen to snap up choice assets ahead of a full improvement in occupancy and visitor arrivals. This is where this segment is expected to attract substantial investment demand in the second half of this year.”

In addition, the report says lenders in some markets are now adopting a more confident and optimistic view towards hotels in the Asia-Pacific, with mainstream institutions in Australia and Japan more amenable to providing financing to experienced hotel investors.

Although banks are willing to lend to qualified buyers, the loan-to-value ratios remain lower, with some recent cases involving interest cover ratios being applied to debt and financing packages for hotels. “While senior lenders are still relatively conservative, alternative debt sources, such as non-traditional lenders and private equity, are becoming more popular, particularly for value-add and opportunistic strategies in markets like Australia and Japan,” says CBRE.