Hotel investors still bullish despite short-term issues: Savills
Hotel investors still bullish despite short-term issues: Savills
28 February 2020
Hotel investors typically take a long-term view beyond the immediate short-term issues which are inevitably resolved, notes a recent hotel market update report from Savills.
The report notes, that over the past two decades, the tourism industry has proven to be both resilient and swift in rebounding to “business as usual”.
Previous anomalous events have consistently displayed a “V” curve rebound: 9/11 Terrorist Attacks & Ansett Airline Collapse (2001), Technology Bubble (2001), SARS (2003), Gulf War II (commencing 2003), Indian Ocean Boxing Day Tsunami (2004), Swine Influenza Virus (2009).
Fortunately beyond the constant barrage of news, property investors are sanguine and their capital appetite remains high for investment grade hotel stock.
According to Savills, the Australian hotel market experienced relatively higher levels of transaction volume and value during the 2014 and 2015 calendar years, peaking at a total transaction value of approximately A$3.5bn and 73 recorded transactions in 2015.
Since then, transaction volume and value has decreased considerably, despite an increasing domestic and global appetite for Australian hotels. In 2019 total hotel transaction value approximated A$2.1bn arising from 48 transactions (compared to A$1.6bn and 41 transactions in CY2018), albeit that some transactions counted in the 2019 total are yet to be completed.
The waning transaction volumes and values have occurred due to a number of significant properties being sold to and held by long term, intergenerational Asian investors who typically do not trade their assets. In addition, slowing volumes exacerbate the problem further creating adverse perceptions of availability of hotel stock to acquire. Investors holding hotels who may otherwise consider a sale are reluctant to sell an asset, for fear that they will not be able to replace it in the market with an alternative property.
Transaction volumes and values have not declined due to a lack of investor interest. Rather, the reduced volumes have resulted in a substantial amount of pent up capital seeking a smaller pool of available assets in a number of extremely tightly held markets around Australia, causing yield compression and “fear of missing out” among active investors.
Domestically, high net worth investors are actively investing in hotels due to the strength of the market and the favourable yields being achieved compared to other asset classes.
In addition domestic fund managers have raised both domestic and international capital to invest in Australian hotels. Similarly, international investors, including pension funds, fund managers and private equity, attracted to the stability and transparency of the Australian investment market, are seeking high yielding hotel assets.
There remain significant amounts of unsatisfied capital which are uninvested (other than being held in cash), which are not generating returns in a low-yield interest rate environment.
Domestic and international funds are mandated to chase yield, which in a low interest rate environment necessitates increased capital allocations to yield-generating assets, which includes real estate.
In terms of global asset allocations, the Blackrock 2019 Global Institutional Survey (which covered 230 institutional clients, representing over $7 trillion in investible assets) noted the following international trends which will continue the trend of investors seeking exposure to Australian hotels:
- Concern about the economic cycle is reflected in the fact that 51% of clients intend to decrease their allocation to equities.
- A significant portion of institutions intend to increase their exposure to private markets: real assets (+54%), private equity (+47%) and real estate (+40%).
- This continues a multi-year structural trend of clients reallocating risk in search of uncorrelated sources of return.
- Insurers continue to seek alternative sources of income by increasing allocations to illiquid assets and credit strategies; 66% intend to increase allocations to real assets.
More recently the Blackrock 2020 Global Investment Outlook reasserted that “Real estate looks compelling given the neutral outlook on interest rates and has historically offered resilience against inflation”.
In summary, Savills predicts that investor appetite for investment grade hotel assets will continue unabated, and they anticipate a strong “V-shaped” recovery from any downturn caused by the adverse fire and virus impacts of 2019 and 2020.