Distress in the hotel and wellness property segments is likely to be more pronounced next year as the coronavirus pandemic continues to devastate the travel and tourism industry, according to the founder of a newly-launched private equity fund.
With a likely 20 to 30 per cent discount in prices of hotels and resorts that have seen their cash flow restricted by border closures aimed at stemming the spread of the deadly disease, Hong Kong-based Alta Capital Real Estate hopes to scoop up five properties in Asia-Pacific, rebrand them and sell them as an income-earning portfolio in six years’ time.
Alta Hospitality Fund Asia is seeking to raise US$50 million from global investors, promising to deliver a return of between 15 and 25 per cent over the six years. The fund aims to raise all the capital in October next year, with the first round closing in January.
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“We know cash flows are very difficult for hotels in general, with nine months of very modest cash flows [but] the distress is just beginning to start as banks have been quite accommodative. That’s why we are thinking that 2021, [after] another three to six months of very poor cash flow is when you’ll see most distress happening,” said Rakesh Patel, CEO and founder of Alta. Patel is the former head of equities for Asia-Pacific at HSBC.
Given the large disparity in price expectations between owners and investors, few transactions have taken place in the last nine months. Banks are unlikely to remain accommodative for long.
“I expect that you should be able to generate discounts of 20 to 30 per cent if you have another six or nine months of very limited cash flow. I think the offer price of hotels will come down and I think somewhere around 20 per cent-plus will be where the market moves,” he said.
Alta is negotiating the purchase of a prime hilltop greenfield development with views of the Galle Fort Unesco heritage site and the Indian Ocean in Sri Lanka, and a 2.5-star, 90-room hotel in Bali, Indonesia, but has not made a commitment to buy the properties.
The fund is also looking to acquire hospitality assets in other locations in Asia-Pacific such as Thailand, Vietnam, Malaysia, Korea and Japan.
To achieve attractive returns, the assets will be developed or retrofitted with sustainability and wellness elements to position them for the “slightly higher end” of the market, a segment that caters to tourists whose average spend of US$1,528 per trip is 53 per cent more than the typical international tourist, according to the US-based Global Wellness Institute.
“We’re looking for global travel to recover two to three years from now. My view is that international travel will take a while to come back, and this is a six-year fund so we’re actually OK for that,” Patel said.
Transaction volumes for hotels across Asia-Pacific were down by half, including sales that were finalised in 2019 but carried over into 2020, according to property consultancy JLL. It expects US$6 billion in hospitality transactions this year, down from US$14 billion in 2019.
“Despite the much-publicised disruption in global travel and the pullback in demand, there is limited to no evidence of properties being sold at significant discounts in Asia-Pacific as of yet,” said Corey Hamabata, senior president of JLL’s hotel and hospitality group. “This is not to say that we do not expect this to happen eventually.”
Given the tough business environment, “investors would need to be compensated for the uncertainty which lies ahead surrounding the recovery of travel in a post-Covid-19 world,” he added.
Demand for travel is likely to remain constrained next year, but 2022 “should be a year of good growth.”
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