Raymond Clement, Managing Director at Savills Hotels Investment & Advisory Services gives The Yield an overview of the APAC hotel investment market, and where the opportunities are to be found in SEA.
How is the APAC hotel investment market being affected by COVID-19?
APAC hotel investment market has experienced a record transactional year in 2019. Then COVID-19 hit, causing Q1 investment volumes to decline by 43% compared to the same period last year. The hotel market has been negatively affected by the pandemic, perhaps much more than other industries. With travel bans and cancelled events, hotel occupancy across all destinations has experienced a significant drop.
Both owners and investors are being more cautious despite continuing low-interest-rate environment. Although many investors with long-term vision are actively exploring different opportunities, some are adopting a wait-and-see approach and keeping their powder dry. We definitely anticipate a drop in hotel investment activity in the region this year.
Where do you see the opportunities in Southeast Asia (SEA)? Are there any distressed opportunities?
Over last five years, SEA tourism industry has experienced a boom resulting in many international hotel funds, private equity funds as well as High Net-Worth Individuals (HNWI) looking to gain exposure to popular tourist destinations. Prior to COVID-19, we were actively engaged with asset owners, running formal marketing campaigns as well as selling assets off-market. A few deals are being held off due to the current unfavorable market conditions.
There is a significant amount of interest in distressed assets in city-state location such as Singapore. We do not expect to see distressed assets, but rather “priced-to-market” opportunities in such prime urban locations. Most hotel owners in these markets are long-term players who have plenty of cash to carry them through this crisis.
We do anticipate distressed opportunities coming from non-core owners and family businesses in resort destinations in Thailand, Indonesia, and Malaysia. With international guests being the main source for such resorts, this segment is going to be the slowest to recover.
Where do you expect to see cross-border transactions?
Singapore and Hong Kong have seen the highest number of investors and active buyers with cross-border appetite. In Q1/2020, Singapore buyers have been active across the region acquiring assets in Australia, Indonesia and most recently in China. For the time being, it will be difficult to witness a robust scene of outbound investments due the current restriction on travel.
How is the lending market looking?
So far, the banks have been supportive in extending and waiving breaches in any covenants and showed flexibility in interests and capital repayments. However, as the pressure in the system continues to build, the arrangements may change for some of the less well-capitalised hotels. Banks themselves might start coming under pressure and that is when we expect to see a major shift in market sentiment. We believe that banks will be hesitant to continue lending on any major projects around the region and this includes Japan, Australia and China.
Good news is that compared to the GFC, the market is a lot more liquid; assets are not overly leveraged. The real hurdle will be how much dry power the buyers have and how much of a discount they are getting for that dry powder.
How do you anticipate the recovery from Covid-19?
We anticipate recovery to follow three key parts.
The first part will be underpinned by the domestic markets. The demand for domestic travel will be the key to short-term recovery as-long-as respective governments can ensure that travel within their countries is safe. Vietnam has been a good example, having already seen green shoots in domestic travel; 85 out of 103 million travelers in Vietnam being domestic. We expect to see a large proportion of local travelers exploring Vietnam. Local flights will also play an important role even if air travel might not be the first choice and will be perceived as risky. The big short-term winners will be the drive-by destinations, for example in Vietnam, being Vung Tau, Ho Tram, Mui Ne, Ha Long, Dalat and Sapa.
The second part of recovery will lie in the ability of governments to re-establish international routes starting with carefully selected countries. The choice will depend on their containment ability and proximity, with direct flights preferable. China and Korea seem to be potential sources of international guests, given their recent steep reduction in new cases. Some destinations such as Bali and Thailand have already expressed interest in welcoming back Chinese visitors and if proven successful, Vietnam may also consider similar polices.
The third part of the recovery is likely to take place once the pandemic is successfully halted and global tourism able to return to pre-COVID-19 levels. Once global travel restrictions are fully lifted, there are two potential impacts on hospitality worldwide: changes in traveler behaviors (if any) and the lingering effects of global economic slowdown.