The bi-annual “BHN Hotel Investment Survey” completed in July, coupled with input from industry experts, suggests that the hotel investment outlook climate in India continues to improve while the outlook in China is less optimistic and a bit mixed.
While China and India are by far the two most populous countries in the world, it is important to note that the size of the hotel industry and the resulting opportunities in each are quite different. According to STR, India has roughly 3,500 hotels with 231,000 rooms, while China has over 12,500 hotels with some 2,100,000 rooms. As a result, a slower rate of growth in China may still yield considerably more deals than in India. However, if the investment sentiment noted for each country is correct, it could be India’s time to shine, while China catches its breath after a prolonged period of rapid growth.
The outlook in India, which has barely scratched the surface on infrastructure, investment and manufacturing, has improved since the election of Prime Minister Narendra Modi as three-fourths of BHN survey respondents believe India’s economy will trend upward in 2016, which compares to only one-quarter believing the same for the Chinese economy.
“The biggest positive from this survey is the significant increase in participants who believe that the economy is trending upwards – which it is,” says Vijay Thacker, director, Horwath HTL – India. “That belief will foster a happier investment approach. The hotel sector outlook is yet somewhat mixed, as different markets work through demand-supply and rate challenges, and banks very gradually regain lost confidence in the sector.”
The survey indicated that India and China appear to be at opposite ends of the hotel investment cycle. Fully 56% of respondents believe India is in the early upturn stage, while 58% think China is in the early or late downturn stage.
A similar mood was expressed when nearly 80% of the BHN survey respondents were somewhat or very confident that the volume of hotel investment opportunities for India would be greater in the second half of 2016 compared with the first half. Meanwhile, 40% were not confident that the opportunities would be greater regarding China.
“For India there is continued, albeit, moderate increase of investments across the board fueled by slow improvements in policies and infrastructure, as well as growing domestic and international demand,” says Thorsten Kirschke, president, Asia Pacific, Carlson Rezidor Hotel Group.
Kirschke adds, “In China, we see an adjustment of investments and a rebalancing of the country’s economy following the continued efforts of political initiatives such as a crackdown on corruption, which has slowed decision making. There has been an oversupply of upper upscale segments and these investments are expecting downsizing with increased growth expected to come out of midscale segments.”
Similar to other emerging markets, most of the hotel investment capital in both India and China is deployed for the development of new hotels rather than acquisitions. As these markets mature, become more transparent and capital becomes more institutional in nature, deployment is expected to change.
JLL anticipates hotel transaction volume for the year 2016 in Asia Pacific to be US$8.5 billion. “Despite the perceived lack of confidence in the Chinese economy from respondents of the BHN survey, we remain optimistic regarding the investment market and believe that it will be an increasingly active space for us over the coming 12 months,” says Aaron Desange, executive vice president – investment sales, JLL Hotels & Hospitality Group. “Mainland China recorded US$252.6 million of hotel transaction volume in the first half of this year, more than double the amount transacted for the same period last year. Much like China, capital flow to India is likely to climb as tourism continues to grow and the market becomes more transparent.”
While positive growth is indicated by the JLL data, to keep this in perspective, the amount of transaction volume recorded in the first half of 2016 in China is less than the reported cost of one recent hotel sale in Hong Kong – the InterContinental Hotel sold for a reported US$938 million.
“The continued lack of transactions in China is due to the lack of debt financing for hotel projects, over development, and the scarcity of assets with good resale value,” says Savills’ Raymond Clement, managing director – hotels. “There is a mismatch between buyer and seller expectations, and owners are asking high prices for underperforming hotels. Major Chinese hotel investors are focusing their attention abroad.”
Robert Hecker, managing director – Pacific Asia, Horwath HTL, says the BHN survey results capture the increased negative sentiment stemming from economic slowdown, austerity measures and over-building, and the impact on trading conditions. “There is an increase in concerned sellers and bargain-seeking buyers, but the gap in price expectations has yet to be surmounted,” he says.
With development comprising the primary hotel investment activity in India and China, what is coming down the pipeline, according to the data?
For Q1 2016, J.P. Ford, president, Lodging Econometrics, says, China, the second-largest construction pipeline in the world, has 2,448 projects/549,222 rooms. However, it is down 8% by projects and 1% by rooms year-over-year (YOY). “This is the second consecutive quarter of YOY decline,” Ford adds. “India’s total pipeline is down 19% by projects and 20% by rooms YOY.”
Lodging Econometrics reports that India is expected to open 6,597 hotel rooms this year, up from 5,607 in 2015. For 2017, the number is expected to be 6,726. New room openings in China are decreasing each year from 193,873 in 2014 to 126,453 forecasted in 2017.
“We remain bullish” in both China and India, concludes Geoff Ballotti, president and CEO, Wyndham Hotel Group. “The regions’ growing middle classes are fueling the need for hotel investment in our sweet spot – economy and midscale hotels.”