Hotel conversions pick up pace as investors tap into rental apartment demand

Investors are acquiring hotels for conversion into apartments to meet a growing demand for residential rental properties in China’s tier 1 cities, says a new report from JLL. In August, China's home prices accelerated at their fastest pace in nearly two years, according to China’s National Bureau of Statistics, and many young professionals are choosing to rent rather than buy. By converting hotels into apartments, investors are able to get supply into the market more quickly than by building from scratch.

“Housing prices in China have risen rapidly due to a convergence of strong fundamentals: economic growth, a growing urban population and higher disposable income. While the government has imposed cooling measures, these fundamentals continue to exert an upward pressure on price. Recent government policies are now skewed toward boosting the rental housing market in China, spurring investors to acquire underperforming hotel assets in tier 1 cities for rental apartment conversion,” says Nihat Ercan, Managing Director, Head of Investment Sales, Asia, JLL Hotels & Hospitality.

China delivered more than 25 per cent of hotel transaction volumes in Asia for the year to September 2018. The sale of Ariva Beijing West Hotel & Serviced Apartments was the biggest transaction for the first nine months of the year, at US$242 million or US$765,000 per key.

Another notable transaction involved the sale of the Novotel & ibis Beijing Sanyuan by Ascendas Hospitality Trust (A-HTRUST) to a joint venture between Huazhu Hotels and TPG Capital, amounting to US$186 million. The purchase price was a 100 per cent premium over its latest valuation and was more than 1.5 times higher than the purchase price in 2012. In this case, however, the hotel is expected to be converted into an office.

“Aside from a booming residential market, there is also high demand for office space in China as the economy continues to expand. Office rents are among the highest in the region in Beijing, Shanghai and Guangzhou, and investors are keen to acquire hotels in these cities to convert into offices for a steady return on investment,” explains Mr Ercan. “While the investment market in China has cooled because of the government’s measures to control financial risk, and domestic investor interest has dampened slightly, foreign investors continue to keep a keen eye on assets that are ripe for conversion.”

Regional dynamics

Asia Pacific hotel transaction volumes reached US$5.2 billion for the first three quarters of 2018, down 28 per cent year-on-year. Rising interest rates affected investor sentiment, resulting in smaller deal sizes despite more hotel properties changing hands compared to the same period last year.

 

Across Asia Pacific, private equity firms and property companies were the biggest investors in hotels at US$1.6 billion and US$1.5 billion respectively for the year to September. Seven out of 10 hotel properties sold in the region were located in China, Japan and South Korea.

The hotel industry continues to boom in Japan, with the number of international visitors reaching a new high. The government has doubled its inbound tourism target to reach 40 million by 2020, when the Summer Olympic Games takes place in Tokyo. Transactions in Japan consisted of mainly limited-service hotels located in Sapporo, Tokyo, Osaka and Fukuoka. Japan REITs were relatively active in 2018, accounting for almost 20 per cent of hotel transactions.

“Existing hotel owners in Japan are generally adopting a wait-and-see approach in light of the upcoming 2019 Rugby World Cup and the 2020 Tokyo Olympic Games. We expect transactions of full-service hotels to be limited in the next two years, with mid-sized developments of leased limited-service hotels located in Tokyo, Kyoto and Osaka likely to be available upon completion. Japanese investors are also setting their sights on emerging markets such as Vietnam, Maldives and the Philippines,” says Mr Ercan.

In South Korea, foreign investor interest is expected to continue despite the decline in Chinese visitors last year as a result of geopolitical tensions.

Mr Ercan adds: “South Korea’s tourism market has remained resilient despite the decline in Chinese visitors. The shortfall has been filled by a growth in visitors from secondary source markets in Southeast Asia. Chinese tourists have started returning to South Korea since March and we expect to see a strong rebound across all hotel segments this year.”

For more information, please download “Hotel Investment Highlights Asia Pacific: YTD September 2018” here.