Boom at the Thai inn
Potential for capital gains is motivating most hotel transactions in Thailand
Direct investment in Thailand's hotel real estate sector reached 11.2 billion baht in the first nine months of 2017, exceeding the full-year total of 9.6 billion recorded in 2016, and is likely to hit 14 billion by the end of the year. While buoyant investment activity reflects strong investor confidence in the long-term outlook for the country's hotel industry, a question arises: why do hotel owners choose to sell their assets?
While owners dispose of their hotel assets for various reasons, such as the need to raise funds for other business activities or pressure from lenders, JLL's observations of hotel sales transacted in the past five years show there are four main seller motivations:
• Realised gain: Realised gain is the top factor motivating sellers of hotel assets in Thailand. Some sellers were investors who bought an asset, held it for a certain period and sold it at a higher value than their initial purchase price. The recent sale of an unfinished 34-storey hotel development on Sukhumvit Road by Bangkok Management, a subsidiary of SET-listed Principal Capital, to Carlton Hotel Group of Singapore exemplifies the case.
Other transactions involved investors acquiring an investment property and enhancing its value before selling for a profit. The value-enhancement strategies vary but generally include renovation and/or repositioning. The Boathouse on Kata Beach in Phuket, which changed hands last year, was a legendary Phuket hotel that had recently been acquired, renovated and subsequently sold on.
Some sellers are pure-play hotel developers that develop hotels for sale rather than to hold for cash flow. These can not only include new hotel developments but also redevelopments or turnaround plays of existing properties. Many of these developers sell their newly developed or newly refurbished properties to investors looking for yielding assets or hotel operators who have experience in running hotels but not necessarily in building or renovating them.
• Strategic portfolio reorganisation: Some hotels in Thailand were sold as the owners were international investment firms that wanted to reduce their geographic exposure for a more balanced portfolio or to align with strategic initiatives.
On the block: Left and above, the Four Points by Sheraton Bangkok Sukhumvit and the Novotel Phuket Karon Beach Resort and Spa are among the properties currently being offered for sale in Thailand. Photos: SUPPLIED
For example, UK-based Whitbread Plc put up its Premier Inn portfolio in Thailand up for sale in late 2016. The portfolio included two hotels in Bangkok and Pattaya with a combined 388 rooms. Through an international tender process run by JLL's Hotels & Hospitality Group, the two hotels were sold in the middle of this year to Singapore-based Hotel 81. The sale of the two Premier Inn hotels in Thailand was part of Whitbread's strategic plan to pull out of Southeast Asia and India in order to focus on Europe and the Middle East.
• Exit decision by shareholders: A number of hotels in Thailand that were sold recently belonged to families or a group of shareholders who either needed capital to fund other projects or sought to end the investment and dissolve a partnership. JLL brokered the sale of two assets in 2016 that fit this profile.
• Financial pressure: There were very few cases where hotel owners decided to sell their assets because of financial pressure, particularly from lenders. However, no distressed sales at a deeply discounted price have been witnessed in recent years.
Strong investor interest: A few more hotels are currently being offered for sale in Thailand. These include the 268-room Four Points by Sheraton Bangkok Sukhumvit, managed by Marriott International, and the 224-room Novotel Phuket Karon Beach Resort and Spa, managed by AccorHotels.
No matter what the seller's motivations are, strong investor interest in Thai hotels counts for a lot when it comes to investment activity.
Thailand's tourism prospects continue to prosper. The number of international arrivals to the country hit a new high of 32.5 million in 2016 and is expected to rise to 35 million this year, supported by the country's growing reputation as one of the world's most popular holiday destinations, well-developed infrastructure and increased air connectivity.
CHANGING TIMES: The sale of two Premier Inn hotels in Thailand, including the Pattaya property, right, was part of Whitbread's strategic plan to pull out of Southeast Asia and India in order to focus on Europe and the Middle East.
Equally important, Thailand's hotel market offers relatively more affordable investment opportunities and higher yield returns than many other more developed markets in Asia, Europe or the Americas.
Investors look at a number of factors in assessing investment opportunities. Primarily, hotel investments are a function of purchase price versus existing or potential cash flow that can be generated from the hotel's operations. For more passive investors, a certain yield expectation is applied to stabilised cash flows being generated by the target property, whether it is between 5.5% and 6% in Bangkok or slightly higher in key resort markets.
In addition, many investors can also expect a decent capital again upon exit in the long term, based on positive prospects for Thailand's tourism industry and experience from many previous hotel investment transactions.
While Thai property ownership laws generally prevent foreign companies from owning hotel real estate outright, an investment promotion incentive from the Board of Investment does allow hotel ownership for foreign investors in some circumstances.
For 2018, the hotel investment outlook remains positive. Interest from both domestic and regional investors is expected to remain strong, buoyed by healthy trading performance and returns. On the supply side, there are likely to be some hotel owners disposing of their assets to take advantage of this demand. These also include private equity firms with hotel assets looking to exit after their fund life nears end.
Having said that, sellers' rising expectations for prices in response to strong demand from buyers, particularly for investment-grade assets, could become a more apparent challenge in 2018. n
Karan Khanijou is senior vice-president for investment sales with JLL Hotels and Hospitality Group. For more insights, readers can connect with him on https://www.linkedin.com/in/karankhanijou/, or visit www.jll.co.th