After recently opening an office in Singapore, KFS Hotel Capital is actively pursuing hotel investments and acquisition opportunities in Southeast Asia, Japan and Korea.
Three Australian hotel industry veterans — CEO Phil Kasselis, chief financial officer Ed Faraguna and chief investment officer Luke Sullivan — lead the firm, with a combined experience of more than 80 years in funds and assets management, deal execution and hotel operations and development.
Singapore’s reputation as a prominent financial center and a home for regional and corporate headquarters of major hotel investors and management firms was behind KFS' move to make the city-state its Asian base.
“Also, Singapore has a strong, transparent economy and a very attractive tax system which encourages investment and foreign ownership. There is also a strong pool of local talent experienced in our sector,” Kasselis said.
Institutional investors, high-net-worth individuals and family offices have shown “a high level of interest” with a “strong appetite for direct investment in single or multiple assets through separately managed account structures or investing through co-mingled funds,” Kasselis said.
Focusing on the higher end of the upscale to luxury hotel sector, KFS Hotel Capital’s focus is on acquiring hotels and resorts with the potential for renovation, rebranding or repositioning.
The company's strategy is to deploy capital to transform hotels to be "more competitive, market-relevant, sustainable and more profitable in a post-COVID 19 market recovery,” Kasselis said.
Kasselis said the pandemic has resulted in many hotels becoming outdated and less appealing to guests due to insufficient or poor upkeep.
This, he said, has serious commercial repercussions in a highly competitive marketplace.
“Many owners run the risk of having their hotels becoming uncompetitive, or at worse, eventually becoming obsolete,” he said.
Kasselis said before the pandemic turned everything upside down, the hotel-investment market “could best be described as 'frothy' due to the low cost of debt, sheer weight of capital searching for yield and hotels increasingly being recognized as an appealing alternative asset class, providing attractive risk-adjusted total returns and supportive long-term demand fundamentals.”
Now, Kasselis said, trading in some Asian markets “will be negatively impacted for several years.”
“Despite this, experienced investors such as Blackstone, GIC, Brookfield, Partners Group, KSL and [high-net-worth individuals] have been active purchasers in 2021 and [the first quarter of] 2022, with significant interest shown in large hotel portfolios and single assets located in gateway cities,” he said.
Asia-Pacific hotel transactions “remain at relatively low levels due to large gaps in buyer/seller expectations,” which Kasselis said is a reflection of the long-term strategy of hotel owners and investors to hold onto their assets, an accommodating environment for existing borrowers and an attractive medium- to long-term outlook for the region’s hospitality markets.
He added markets such as Japan, Thailand, Malaysia and Indonesia “are showing signs of increased liquidity, with some owners either rebalancing their investment portfolios, recycling capital out of hospitality assets or seeking to exit non-core or non-strategic investments in response to changing market conditions or addressing the prospects of increased interest rates.”
Kasselis said he is confident “the opportunities presented by the current weak trading environment in some markets and the plethora of unbranded, undercapitalized and underperforming, inefficient hotels … provide opportunities for investors to capitalize on pent-up travel demand and changing consumer trends once the travel and tourism industry recovers post-pandemic, combined with implementation of active asset management strategies and ESG initiatives.”
Asia-Pacific Potential
Notwithstanding varying investor preferences and other factors, established markets such as Singapore, Japan and Korea remain attractive destinations for large institutional investors, Kasselis said.
Other destinations such as the Maldives, Thailand, Indonesia and Vietnam also have attracted local and international institutional capital, despite most interest in these markets deriving from high-net-worth individuals and local Asian-based investors.
“Ultimately, the attractiveness of an investment market will depend on the availability of quality hotels for sale, pricing, availability of debt, demand/supply fundamentals and liquidity on exit,” he said.
Recovery in terms of revenue per available room will be patchy, driven by the Asia-Pacific region’s diversity and individual market demands and dependency on international tourism versus domestic tourism, he added.
Kasselis said prior to the invasion of Ukraine, the Asia-Pacific region, excluding China, was forecast to approach 80% RevPAR recovery by the first quarter of 2023.
“Given the significant uncertainty posed by [the Ukraine invasion], one can only think that any recovery will be prolonged,” he said.
But despite these concerns, Singapore is well-positioned for a quicker recovery compared to some other markets due to its “prominence as an attractive stopover destination for long-haul travelers and [being] a major intra-regional hub for business and leisure travelers."
“[It] is within a seven-hour flight radius of 4 billion people and is perceived as a relatively safe destination,” Kasselis said.
He added relaxed quarantine measures in source markets will help to enhance mobility and economic recovery, too.
“Like many other hotel markets, the availability of labor, wage inflation and increased utility costs pose immediate challenges to Singaporean hoteliers and hotel owners, placing increased pressure on guest-service standards and hotel-operating margins,” he said.