There is no significant sign of distress as pricing remains firm and could rise as income recovers.
As investors eagerly anticipate a slew of distressed hotel assets to come on the market, there is a growing quiet realisation that the needle on pricing (and even fair value) has not really moved much.
With government support – and in some cases, a rise in domestic demand – hotels appear to have weathered the storm so far. As we see hotels still being traded at 2019 prices, it seems that discounted deals are nowhere in sight.
So, what is the outlook for value versus pricing, which matters most to those with year-end reporting commitments, as owners continue to hold their assets?
Deals have slowed but appetite for Asia Pacific hotels still “serious”
Transaction volumes for 2021 through the second half of the year remained at 2020 levels, as cross-border deals continue to be hampered. The continued disconnect in pricing between buyers and sellers has led to a relatively muted market, and there have not been significant signs of distress in the market to date.
"The continued disconnect in pricing between [hotel] buyers and sellers has led to a relatively muted market, and there have not been significant signs of distress in the market to date."
The deals that took place were mainly domestic, or by funds and institutions that had a local presence. Some examples include Blackstone’s acquisition of a portfolio of 8 hotels across Japan, as well as the recent GIC-Salter Brothers acquisition of 11 Travelodge hotels across Australia. These show that there is still a serious appetite for hotels across the Asia Pacific (APAC) region.
Markets with sizable domestic demand drove transactions in H1 2021, with Japan, South Korea, Australia and China leading the pack. Only 120 deals were completed in the period, which were almost 30% lower compared to H1 2020.
Asia Pacific hotel cap rates to rise slightly
As some markets in Asia are on the mend, underpinned by domestic and government-linked demand, and on the optimism of a restart of travel activity, yields have once again started to rise. Nevertheless, at an average cap rate of 4.9% in Q2 2021, this remains on par with H1 2020 levels, and slightly below the 5.0% witnessed at the end of 2019.
Going forward, we expect cap rates across APAC to increase slightly, as earnings recover and bond yields rise.
Risk premium, however, is likely to be tempered by a recovery and cash waiting to be pumped into deals, keeping cap rates largely in line with the recent trends.
APAC hotel cap rates could shift slightly upwards as earnings recover
Cap rates or yields are a function of value and earnings – as earnings remain low but pricing stays firm, this will invariably lead to a lower yield – and that is the case for now at least. As earnings recover, and pricing remains the same, then yields will of course see an uptick.
However, what we are seeing now are are unusual circumstances, and admittedly not one that I have come across – pricing remains relatively firm as earnings slow down.
"... With lower leverage, and given that banks, owners and operators are working together, we see that there will be a sharp recovery in hotel valuations, which will close the gap between fair value and pricing, as income recovers."
With deals still being inked at 2019 prices – probably driven by considerations of alternative uses in some cases – and in an environment where income is lower, cap rates or yields have been trending lower.
However, with lower leverage, and given that banks, owners and operators are working together, we see that there will be a sharp recovery in hotel valuations, which will close the gap between fair value (book market value) and pricing, as income recovers.
The question is "when", not "if" – and this will very much depend on borders re-opening.
As some positions start to unwind with the reopening of borders, some apparently distressed deals may emerge after all – but that remains to be seen.
More hotels acquired for alternative uses
Over the last three months, we note that there has been an increasing trend of hotels acquired for the purpose of conversion into alternative uses. Owing to that, prices paid for these deals may be more reflective of their intended alternative uses rather than their existing function.
Here’s a recap of some notable deals that took place in Q3 2021:
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