Asia-Pacific hotel sector expected to improve as tourists return, CBRE says

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The Asia-Pacific hotel market remained stable in the second half of 2021, with average occupancy rates ending the year at around 50% due to lower Covid-19 infection rates, a sustained domestic travel demand and the launch of travel bubbles in some markets. or special arrangements, such as Singapore’s Vaccinated Traffic Lanes (VTL), says CBRE’s Asia Pacific Hotel Outlook: Trends to Watch in 2022 report released 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 led to a further decline in hotel occupancy and disrupted the recovery.

The report says most markets were able to weather the sharp rise in infections and relatively lower hospitalization 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 in the region, pent-up travel demand will be unleashed. The launch of VTL in Singapore in October last year has resulted in a steady increase in the number of monthly outbound travellers,” says the report.

“Despite the gradual easing of restrictions, the recovery of passenger air traffic in Asia-Pacific will lag behind that in the United States and Europe, mainly due to tight border controls in mainland China. Although many markets now offer quarantine-free entry, the added administrative burden of planning overseas travel continues to deter many people from travelling. Many companies also remain cautious about business travel.

Meanwhile, mainland China, once the world’s largest outbound tourism market, continues to keep its borders largely closed to inbound and outbound travel as it pursues a Zero-Covid policy. CBRE estimates that outbound tourism from mainland China will remain limited in the near term, with tourists not expected to begin traveling overseas until late 2022 or early 2023. Asia-Pacific markets, highly dependent on this source market, will continue to face headwinds, with Hong Kong, South Korea and Vietnam particularly vulnerable.

Hotel performance should improve

Visitor arrivals and room occupancy will begin to increase in the second quarter of this year as many countries began to ease border controls in February and March. “Meanwhile, borders remained closed in mainland China and Hong Kong, but the former will continue to be supported by domestic demand and the latter should see occupancy continue as hotels are used for quarantine,” indicates the report.

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

Despite the projected improvement in hotel performance this year, CBRE’s analysis of U.S. data after major recessionary periods suggests that a recovery in gross operating profits is generally about two years behind schedule. recovery of total operating income.

An increase in revenue followed by a recovery in profitability this year is expected with the reopening of borders in Asia-Pacific, but the late return of tourists from mainland China is likely to dampen momentum.

Meanwhile, CBRE notes there will be a further shift in consumer behavior this year as people begin to travel to and from Asia-Pacific again for business and pleasure after an absence of more than two years. Key themes include the flight to safety as consumers turn to brands they know and trust because of the rigor in hygiene management in their wallets.

“While people, especially business travelers, may travel less frequently, they are likely to stay longer, which has a net-neutral impact on hotel demand. such as self-check-in kiosks, contactless systems, smart elevators, and apps to control room settings and access hotel services, consumers will also place a heavy emphasis on appearance.

In this regard, hoteliers plan to modernize the facades, renovate the rooms and introduce more design elements or improve the catering offer to guarantee additional or diversified sources of income. “Nevertheless, the lag in the earnings recovery will force hoteliers to remain cautious on short-term capital spending. Environmental, social and governance (ESG) criteria, in particular corporate requirements, will also become more important” , says the report.

Increase in hotel investments

Asia-Pacific hotel investment volume rebounded strongly in 2021, growing 46% year-over-year to $12.1 billion.

The report says hotels will be among the sectors that will benefit as investor confidence strengthens and buyers seek assets offering attractive risk-adjusted returns. The weight of hotels seeking capital is now at an all-time high, with institutional investors eyeing market entry as well as growing interest from traditional investors, such as real estate investment trusts and private offices. Private equity groups are also fond of hotels because of the risk advantages the industry offers.

“With more hotels investing in capital expenditure to upgrade technology to complement the service element they offer, as well as undertaking renovations to improve the guest experience, hotels are aligned with the Growing investor focus on value-added strategies Asset repositioning is another value-added strategy in the hospitality industry, with investors in several markets having recently acquired hotel properties for conversion,” the report said.

According to CBRE, the entry of private equity investors into the hotel industry has been characterized by a strong focus on buying hotel assets to convert them to other uses. This is where hotel investment in South Korea last year was buoyed by acquisitions of hotel assets by investors seeking to convert them into offices or apartments.

“As investors seek to determine the highest and best use of hotel properties, more deals involving conversions are expected, with co-housing a popular option in Hong Kong and Singapore amid growing demand from end users looking for an alternative to expensive 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 buildings when leases expire. “As such, hotels are increasingly seen as a hedge against inflation or a way to generate additional revenue, as inflationary pressure is passed on to guests and outweighs increases in operating costs,” adds the report.

Contrary to high inflation in the United States and Europe, CBRE indicates that prices in Asia-Pacific are expected to see slight increases in 2022. Although inflation can have a negative impact on operating costs, demand pent-up tourism and technological efficiency will migrate the potential wage bill. increases to some extent, ultimately making hospitality an attractive sector in times of prolonged inflation.

While the pandemic has had a strong negative impact on the performance of the hotel trade over the past two years, material difficulties have still not been observed across the sector.

Although CBRE’s 2022 Asia-Pacific Investor Intentions Survey finds that 78% of investors still expect a hotel discount, this is down from the 99% who said the same in 2021. Given the virtual absence of distressed assets, investors are likely to reset their price forecasts accordingly in the coming months.

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

The report also notes that business travel is unlikely to experience a rapid recovery, with the main exception of short-haul travel by small and medium-sized businesses, as many companies adopt new technologies to facilitate online meetings. online and maintain a cost-conscious approach to business travel.

“In contrast, as the reopening of resort destinations attracts pent-up demand from tourists, there are mounting inquiries from investors keen to grab prime assets ahead of a full improvement in the market. occupancy and visitor arrivals. This is where this segment is expected to attract significant investment demand in the second half of this year.”

Additionally, the report indicates that lenders in some markets are now taking a more confident and optimistic view of hotels in the Asia-Pacific region, with traditional institutions in Australia and Japan being more willing to provide funding to experienced hotel investors.

Although banks are willing to lend to qualified buyers, loan-to-value ratios remain lower, with some recent cases involving interest coverage ratios applied to hotel debt and financing. “While senior lenders are still relatively conservative, alternative sources of debt, such as alternative lenders and private equity, are becoming increasingly popular, particularly for value-added and opportunistic strategies in markets like Australia and Japan,” says CBRE.

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