DUBAI, United Arab Emirates—Three global investors who represent the Middle East, North America and Europe said hoteliers shouldn’t panic but a level of caution greater than what has been seen in recent years is likely to take hold for the rest of 2016.
In a panel titled “Transactions: What to buy, when and where?” at the April Arabian Hotel Investment Conference, panelists said they have started to see income and dividends increasing in importance, which they added is often an indication that the industry has reached its peak.
That is not to say capital will stop searching for new homes, sources said.
“Choose carefully and then bet on it for the long term,” said Roger Blackall, executive director of real estate asset management at Bahrain-based investment firm Premier Group WLL.
Blackall said in North America cash flow remains solid and the market has room for compression.
“We may have peaked in terms of value, but North America has a couple of more years of growth,” Blackall said.
Blackall noted capitalization rates will likely increase as investors look to exit more.
Mark Wynne Smith, global CEO of hotels and hospitality at Jones Lang LaSalle’s Hotels & Hospitality Group, said the Middle East has no reason to panic.
“Yes, supply is growing much faster than demand, but whereas between 2010 and 2015 supply in the region has increased by 40%, demand has increased by a staggering 51%,” Wynne Smith said while moderating the panel.
Wynne Smith said 2015 RevPAR in the Middle East averaged $130, which was 50% higher than the global average, according to JLL numbers.
But in the first quarter of 2016, transaction volumes fell 40% compared to the same period in 2015. Wynne Smith said that might indicate 2015 was the global hotel industry’s peak.
Cautiously optimistic
Despite those numbers, panelists say there is no need to panic over the Middle East’s capital. They said they would continue to look for investment opportunities around the world, albeit more cautiously.
“We could be buyers, and my preference would be for North America,” Blackall said. “We will be more focused on dividends and higher yields.”
Blackall also mentioned that he was interested in secondary cities in the U.S., especially those in Texas and on the West Coast.
“Even Houston, which has been battered but retains good fundamentals,” Blackall said.
Jerome Gatipon-Bachette, global co-head of structured real estate finance at Societe Generale Corporate & Investment Banking, and Gordon Drake, CFO and head of mergers and acquisitions at Dubai-based Kingdom Hotel Investments, said they would not look too far from home and concentrate on markets they knew best.
“In Europe, 2015 was a good year in terms of liquidity,” Gatipon-Bachette said.
“We will be investing in ourselves, in (capital expenditure), providing liquidity to our partners and also paying down debt,” Drake said.
Drake believes investors should keep an eye on supply, changes to urban planning regulations and the quality of their partners before expanding their real estate interests.
Panelists reiterated that cautious investments with true-and-tested methods and partners are highly recommended. Gatipon-Bachette said that might mean investing in secondary cities in Germany for the same reasons Blackall said he would invest in projects in the U.S.
“Choose strong domestic markets such as Germany, which might not be the most attractive in terms of capital gains but provide steady, solid growth,” Gatipon-Bachette said.
Wynne Smith said the 15 top global gateway markets saw the highest volumes on record in 2015, “but hotel transaction volumes are far more volatile than transaction values.”
Consolidation
Consolidation has been one obvious way that capital can share in scale, especially at this point of the cycle, panelists said.
“I will not be surprised if we see more (consolidation),” Drake said. “The Starwood-Marriott and AccorHotels-FRHI deals set the benchmark and left others behind … but I believe it all is more of a reaction to the pricing power of (online travel agencies) than it is about Airbnb.”
Overall, panelists seemed optimistic about consolidation.
“For the general owner, consolidation is beneficial,” Drake said. “Margins will improve, and most (added revenue) will fall on the bottom line.”
“Everything about consolidation will push towards efficiency,” Gatipon-Bachette said.
Blackall said consolidation will inevitably see fewer entities battling it out.
“Brands do bring something,” Blackall said. “It is a crowded space, and the chains are trying to reinvent, though in my opinion consolidation is not that great for owners, as it will have a negative impact on management contracts and negotiated fees. Competition is the name of the game to keep fees low.”