Over the past two years, there have been many major hotel transactions Thailand, with a combined value of more than 500 million baht. This reflects an increased availability of hotel assets for sale and strong investor interest.
What is motivating both buyers and sellers in this booming market? There are three major factors: fund exits, liquidation-related sales and strategic divestment.
In the first case an investment fund may have invested in property some years back, added value to the property and exited for a profit. Other sales involve a liquidator appointed to dispose of assets at the best possible price. Finally, many transactions are strategic divestments dictated by corporate strategy either to reduce holdings in Thailand or to raise cash to invest in new opportunities.
Investors are purchasing hotels across the major Thai hotel markets of Bangkok, Phuket and Samui for a variety of reasons. Purchasing an existing hotel presents a unique investment opportunity as many are being sold at below their current replacement costs _ the cost of purchasing the land and building a similar product to what they are buying. This presents a great opportunity to invest, refurbish and/or rebrand the hotel.
Investors are also drawn by the strong cash flows that successful hotels can provide _ their returns to investors can range from 6-9% in the major markets of Bangkok and Phuket, not including the capital appreciation that can accrue. Rates of return can be even higher in second-tier cities.
Finally, some investors are choosing to purchase hotels in prime beachfront or city centre locations as the market is keenly aware that such properties rarely come up for sale and vacant plots are becoming scarce.
For foreign buyers there is the added dimension that Thailand presents far superior value than many of their home markets which have experienced strong capital growth in recent years. As an example, four-star hotels in Bangkok are trading at approximately one-third of the value of similar assets in Singapore or Hong Kong.
Purchasers of hotel assets in Thailand have been public companies and institutional investors, as well as private investors. There has been an even mix of Thai and foreign investors. The foreign investors in these cases typically have a Thai platform to facilitate the transaction or are investing into a Type II or IV property fund set up at the turn of the millennium, which allows 100% foreign ownership.
Institutional investors (or liquidators of now-defunct institutional investors) and public companies, who are the current sellers of hotel assets in Thailand, have previously been drawn to four- and five-star properties and these are typically the assets we are seeing come onto the market.
Investors can expect immediate returns from performing assets of 7-9% in the major resort and Bangkok markets. Assets that are not performing but have turnaround potential may not present a positive yield right away. But the right investment may achieve a superior yield, albeit requiring the investor to take on refurbishment and repositioning which could take up to three years.
Two basic hotel selection criteria that can be overlooked include the historical and future capital expenditure requirements and an understanding the terms of the hotel management agreement. With many new hotels and resorts being developed, ageing assets need to be maintained to stay competitive, and investors should be aware of the extent of capital expenditure likely to be required.
Many hotels also have an existing management agreement with an operator, some more "owner-friendly" than others. It is important to have a balanced agreement in place whereby operators can effectively perform their roles while owners can ensure their investment is protected.
As mentioned previously, buying completed hotels tends to allow an investor to acquire assets at below their current replacement costs. Older assets also tend to be in demand due to lower cost and higher availability of land in the past, giving new owners more options when renovating the property. Older properties are also sometimes situated in landmark locations where it may be difficult to secure a site at present. It is easy to see that there would be significant difficulty trying to secure a site in a popular area such as Sukhumvit Soi 11. As an added benefit, such properties also take the headache of going through the construction and licensing process, taking usually three years, out of the equation for a potential investor.
Karan Khanijou is a vice-president of investment sales at Jones Lang LaSalle Hotels. For advice on hotel investments, readers can contact him on 02-624-6400 or visit www.joneslanglasallehotels.com.