Investment Retuns and Opportunities for Hotels in Asia

Abstract

The outlook for the Asian lodging industry appears positive for the long term, although some management companies perceive the short-term outlook as somewhat negative due to overbuilding in gateway cities, the changing terms of management contracts, and increased competition for those contracts. Nevertheless, in this study of investors, developers, and management companies, hotels were perceived as favorable investments over other types of real estate. Hotel-management companies tend to use lower discount rates than other equity investors in most Asian markets. The findings suggest that mature markets like Singapore, Hong Kong, and parts of Indonesia benefit from a low perception of risk as indicated by debt-to-equity ratios that are higher than soft markets such as the Philippines and the People's Republic of China, where hotels' frequent inability to generate sufficient cash to meet debt payments lowers lenders' support for high leverage. Third-party financing appears to be the most popular method of financing hotel projects in Asia, with typical interest rates defined as cost of funds plus .75 percent to 2.5 percent. A notable exception is Indochina, where the interest rates are high to reflect the greater risk associated with those countries. The lenders surveyed were equally likely to provide project or construction financing and long-term debt. A majority of the respondents indicated that they are planning new hotel developments and reported that mid-market properties will provide the highest investment returns in the short term relative to other types of hotel development. Management companies and lenders showed more involvement in properties located in cities than did investors. Some stakeholders seek high returns in the emerging markets of Indonesia, PRC, and Vietnam, where the growth potential is tremendous. Other investors prefer the mature markets of Singapore and Hong Kong where large, stable markets reduce risk. Both lenders and investors indicate strong aversion to countries like Myanmar, Cambodia, and Laos, which tend to be characterized by political risk and lack of investment security.