Traditionally, owner-operators have dominated the hotel industry in Asia, but this is changing. With private equity and institutional investors pouring billions of dollars into the region, an increasing number of hotels are changing hands, with the previous owner staying on to run the operation in what is now someone else’s building.
“In the last year, we’ve seen quite a change in Asia, where investors are increasingly happy to acquire hotels with management contracts in place,” said Scott Hetherington, managing director for Asia at Jones Lang LaSalle Hotels. “This phenomenon has been occurring for the past three to four-years in the United States, Europe and Australia.”
In 2003, InterContinental Hotels Group was among those starting the trend and now has sold about UK pound 3 billion, or US$6.03 billion, worth of assets, representing about 170 hotels. The move has allowed the group to focus on brand and performance rather than the investment side of the business. Others have followed suit, including Hilton Hotels and Marriott.
Now it is Asia’s turn. In the past year, the InterContinental Hotel building in Singapore was sold for US$159 million to TCC Holdings, with InterContinental retaining management for 10 years. The Swissotel Merchant Court in Singapore was sold for an undisclosed amount to LaSalle Investment Management, and the Four Seasons Hotel in Sydney was sold to Eureka Funds Management for 225 million Australian dollars, or US$192 million, a hotel record in Australia.
Hilton, which is being acquired by Blackstone Group, now fully owns only one hotel in Asia, the Hilton Sydney, the largest convention hotel in Australia. It bought the building four-years ago, renovated it and reopened in 2005. “Once it is well-established in the market, it’s not unlikely that we will sell it too,” Koos Klein, the Asia-Pacific regional president for Hilton.
Hotel transactions in the Asia-Pacific region totalled US$5.9 billion in 2006, more than double that of 2005, and Jones Lang LaSalle Hotels recently predicted that it could reach a record US$8 billion this year as investors put money into Japan, China and India as well as emerging markets like Vietnam.
The largest deal in Asia so far – Japanese yen 281.3 billion, or about US$2.36 billion -involved the April sale of 13 hotels by All Nippon Airways to the Morgan Stanley Real Estate Fund. The deal did not affect the long-term management contract that IHG ANA Hotels Group, a joint venture between All Nippon and InterContinental, had secured four months earlier.
Underpinning the current record levels of investment has been the region’s strong economic environment, with some markets seeing record levels of growth in revenue per room. “In a rising market, hotels are a particularly attractive asset class to invest into because room rates can be increased rapidly,” Hetherington said.
Opportunity funds like Morgan Stanley, Goldman Sachs, Ishin Hotels Group and Lone Star Funds have been active in Japan, although they have been stifled somewhat by the limited availability of assets, funds like Eureka and Abacus Fund Management have made some significant investments in the Pacific. Chad Pike, senior managing director of Blackstone, which also has invested in Accor and Hyatt hotels, recently told a conference that his group was “ready to come to Asia” and planning to open an office in Hong Kong.
But not all of the hotels being sold in Asia have the new model in mind. When Kingdom Hotel Investments bought the Crowne Plaza Karon Beach in Phuket, Thailand, for about US$103 million last May, it shifted the hotel to Kingdom’s Mövenpick brand.
The ownership trend does not influence new construction because that is based on investment decisions and market fundamentals, said Craig Collins, managing director of Investment Sales for Asia at Jones Lang LaSalle Hotels. “Funds typically, however, given their shorter investment horison and holding period, prefer to buy trading assets rather than build new ones,” he said.
But for investment funds, the attractions of retaining an operator, especially a well-known brand, are obvious. “We’re not in the brand-building business, and I don’t see us ever competing with these brands,” Sean Williams, managing director at Morgan Stanley Japan Securities, recently told a conference audience. “Our expertise is in being great at investment.”