LIFT Reviews Key Themes and Trends from HICAP Update 2012

HICAP Update 2012 was held this week in Singapore, bringing together leading hotel investors and operators from across Asia Pacific. At LIFT, we were energized by the two-day event and noted the following themes and trends.

1.   Mixed use developments continue to play a crucial role.

2.   Sri Lanka generates significant enthusiasm amongst investors and operators.

3.   Strong performance of Singapore market expected to continue.

4.   Asia continues to be a hotbed for hospitality brand innovation

5.   Debt markets have tightened

1. Mixed Use Developments Continue to Play a Crucial Role.

Key takeaways include:

·      Francis Killory of the Jumeirah Group sees renewed interest in mega mixed-use developments in Asia, and highlights Singapore as a preferred market for such undertakings.

·      SilverNeedle Hospitality continues to view residential components as essential elements of their developments.

·      In China, Allen Matis of SilverNeedle notes that planning permission granted to residential developers often requires a hospitality component, but that general commoditization of the residential segment in China leaves Beijing and Shanghai as the only potentially viable markets for true “branded residential”.

·      James Simmonds of New World Hospitality suggests their Rosewood brand will be extended to “select” residential components of mixed-use developments in Asia. Like several other leaders in this space, their key is to position a Rosewood-branded residential offering as a lifestyle product and to avoid projects where investment returns will be implied or guaranteed.

2. Sri Lanka Generates Significant Enthusiasm Amongst Investors and Operators.

Key takeaways include:

·      Benefits of “peace dividend” continue to be felt in a market that offers cultural diversity, natural attractions, health and wellness.

·      5-star ADR has doubled since 2008 to USD $125.

·      While most offshore investors are entering Sri Lanka via JV’s with local partners, 100% foreign ownership is permissible.

·      100% repatriation of profits is also possible.

·      Foreign investment regulations are therefore supportive of mixed-used developments with residential components as it enables residential units to be acquired on a freehold basis by a local corporate entity. A foreign national or offshore company may own 100% of associated shares, and rental income can be repatriated.

·      Currently the market is polarized with entry-level backpacker accommodations at one end of spectrum and limited supply of ultra luxury at the other.

·      The Sri Lankan government looks to increase tourist arrivals from a modest 0.85M per annum in 2011 to 2.5M in 5 years*.

·      To achieve this, it is estimated an additional 50,000 hotel rooms will be required*.

·      SilverNeedle Hospitality has recently acquired land in Sri Lanka, while Minor International has opened an Avani Kalutara Resort and is about to break ground on a project which will carry its flagship Anantara brand.

·      Institutional capital seems to be taking a “wait and see” approach, while private capital takes the lead.

·      Regional operators like Hirin Cooray’s Jetwing currently dominate the market, while Starwood and other international groups are taking steps to strengthen their position.

* Source: SLTDA Annual Report, HVS.

3. Strong Performance of Singapore Market Expected to Continue.

Key takeaways include:

·      Extremely limited supply of hotel rooms in outlying commercial centres – as Paul Logan of IHG commented “there is demand for accommodation outside of the city centre” which is currently unmet.

·      Unmatched combination of urban/master planning, infrastructure, amenities and attractions, as well as Singapore’s status as a centre of wealth management.

·      Greenfield projects are likely to serve as the preferred strategy for new entrants and investors looking for more exposure to Singapore, as acquisition costs currently exceed replacement costs.

4. Asia Continues to be a Hotbed for Hospitality Brand Innovation.

Key takeaways include:

·      industry veteran Marc Dardenne used HICAP Update, in his capacity as CEO of Patina Hotels and Resorts, to help launch the exciting new Singapore-based luxury brand.

·      Patina Hotels and Resorts strategy focuses on development opportunities in Asia Pacific and Europe, and Dardenne identifies an intriguing “window of opportunity” in the United States (based on current valuations).

5. Debt Markets have Tightened.

Key takeaways include:

·      General sentiment was that debt markets have tightened substantively.

·      Allen Matis noted that a non-recourse loan requires “an act of god” at present.

·      Surya Jhunjhnuwala of the Hind Group of Companies generally concurred with observations regarding availability of senior debt, noting that project funding in Hong Kong has dropped from a 70% ratio to 40%. 

Strong Performance in Dubai Luxury Beachfront Hotel Segment Suggests Opportunity for Investors

We spend a lot of time speaking to hospitality investors about Dubai. For many, the Emirate is still seen through the lens of 2008. It is now more than three years since Dubai made international headlines for all the wrong reasons – a residential market collapse and sovereign debt issues. For those who have not been following the market closely, a review of current conditions is timely. Not only has the situation evolved significantly in three years – the hotel sector and in particular the luxury beach segment – has continued to thrive.

Certainly the residential market remains challenging. Supply from the construction boom continues to be an issue with Jones Lang Lasalle estimating another 18,000 residential units came on-line in the second half of 2011. Positively, constrained consumer lending conditions began to loosen in 2011 with financing surfacing for quality villa products in sought after communities. 

Another promising sign is anecdotal evidence suggesting multi-unit (bulk) residential transactions are being completed, as investors begin positioning themselves for a recovery. For those looking for signs that stability has returned, Nakheel, a Member of Dubai World, has reached agreement with 98% of its creditors and has announced the continuation of a couple of significant projects that were put on hold in 2008.

It is in travel and hospitality sectors where we see the most strength and continued strong underlying fundamentals. Despite the negative headlines that dominated 2008 and 2009, traffic through the Dubai International Airport experienced a compound annual growth rate (CAGR) of 13.3% from 2006 through 2010. Tourist arrivals increased by 10% in 2010 and likely advanced a further 17% in 2011 to exceed 8 million, according to Jones Lang Lasalle.

Not surprisingly, these trends are reflected in the recent performance of Dubai luxury beach hotels.  Occupancy in the segment grew from 71.8% in 2010 to 76.2% in 2011, according to STR Global. Average rate in 2011 increased to $403.92 USD in 2011 and REVPAR reached $307.71 USD.

There are a couple of important points to make here. Obviously, beachfront hotel performance is robust and and growth story remains intact.  While the segment has certainly benefitted from the safe haven status that Dubai has enjoyed as a result of the Arab Spring, strong underlying fundamentals continue to be an important part of the story. Beachfront hotel supply is surprisingly constrained in Dubai and a number of leading global luxury brands remain relegated to in-land locations.  It is not surprising then that remaining “tier 1” hotel development locations on the Crescent of Palm Jumeirah are once again attracting attention.

We see opportunities for investors on the Crescent where several mixed-use developments have been slowed down or stalled by the residential market correction. By injecting much needed capital into projects, investors can secure equity positions in very attractive hotel assets. The key is to find a project that is not saddled with excessive debt. While debt is an issue for many projects, there are some interesting exceptions.