Recapturing investors' attention challenge for China's hotel investment market

China remains one of APAC’s biggest markets.

It has been observed that investment in the Asia Pacific region’s hotel sector will continue to be dominated by HNWIs, hospitality REITs, as well as Asian family companies, owner operators and opportunity funds in Japan. Intra-regional capital will remain active in 2014, although domestic capital is likely to dominate where real estate transparency remains opaque.

According to a research report from JLL, against this backdrop, investors are becoming more creative as they look to place capital across the region. Asia Pacific remains the global hotel development hotspot with supply increases projected to average 5.4% per annum across 23 major markets over the next two years although commencements have slowed in India, Southeast Asia and Mainland China.

Further, the composition of buyers is also changing with an increasing number of delegations visiting Australia to conduct preliminary investment research. Over the past year, JLL noted that it has seen Southeast Asian investors step aside with new capital sourced from Korea and the Middle East.

Also, the report noted that Mainland Chinese investors are prevalent, while not yet dominating recent sales. This will change as familiarity improves.

Notwithstanding, the challenge for Mainland China’s hotel investment market over the coming years will be recapturing the attention of investors with many becoming frustrated at the lack of liquidity, particularly as profitability has come under downward pressure.

The risks are increasing as investors are pushed further afield. It will therefore take a fundamental revaluing of assets or marked improvement in operating performance for investors to consider the market over the short to medium term.

Here’s more from JLL:

The Mainland remains one of the biggest investment markets in Asia Pacific, although activity is still almost exclusively domestic, with no cross-border capital flowing into the country.

At the same time, Chinese investors have already become one of the largest crossborder commercial property investors in the world and are increasingly seeking offshore hotel opportunities for diversification purposes, notably in gateway cities and strong secondary markets worldwide.

Many of the preconceptions over investing in hotels are based on their risk and relativity to the traditional core property asset classes. Common are hotels appearing more susceptible to supply shocks.

Hotels are also extremely sensitive to ‘one-off’ events impacting room demand, such as what we witnessed throughout Asia during SARS. Hotels are also typically more capital intensive, requiring regular maintenance and extensive refurbishment in later years.

Given hotels have provided sound volatility and adjusted returns leads one to ask if hotel investment risk relative to other property sectors has been mispriced? Are lenders charging too high a margin on hotel debt due to this misunderstanding of their inherent risk profile?

Institutional investors have been deterred from investing in hotels because of these long held misconceptions.