Hospitality & Tourism Investment: Forces for the Future
Lauro Ferroni. Senior Vice President, Research and Strategic Advisory, JLL
The travel and tourism sector generates nearly 10% of economic output and supports 1 in 11 jobs in the global economy, making it a critical global industry. JLL examines several sweeping global trends, and how they stand to impact the future of hotel investment.
Role of Chinese capital in the global hospitality industry
Having only made large outbound investments starting in 2012, Chinese investors have quickly become a major force to reckon with in the global hospitality industry. The increase in outbound travel spend of Chinese travellers has been closely correlated with Chinese investors’ purchase of assets in the sector. Mainland Chinese’ investments in hotel real estate and hospitality companies outside of China grew by a compound annual growth rate of 130% from 2012 to 2016. Last year, Chinese outbound investment in hotel real estate was the largest spend on hotel transaction stemming from any one country other than the United States.
Moreover, the Chinese investors’ strategy has evolved notably during this short timeframe. They started off by targeting one-off hotel acquisitions, a strategy which quickly turned to trophy hotels such as Anbang Insurance Group’s purchase of the Waldorf Astoria New York and Sunshine Insurance Group’s acquisition of the Baccarat Hotel & Residences New York.
This quickly-evolving outbound capital source did not stop here. Since 2014, Chinese buyers set their sights on corporate entities and brand/operating platforms, such as Shanghai Jin Jiang International Hotels Group Co.’s purchase of Louvre Hotels Group and HNA Tourism Group Co. Ltd’s purchase of Carlson Hotels.
The market has also seen Chinese groups investing in travel companies such as Fosun International’s stake purchased in Thomas Cook Group. Investors are targeting vertical integration, seeking to own portions of the entire spectrum, from booking to travel to hotel stay.
In 2016, the focus shifted to large-scale portfolios of hotel assets led by Anbang Insurance Group’s purchase of Strategic Hotels & Resorts. In addition, Chinese developers are funding multi-hundred-million-dollar mixed-used, hotel-anchored developments in Los Angeles, Chicago, and London.
But after reaching a staggering $11.7 billion in 2016, the amount deployed by mainland Chinese companies in the global hospitality sector will likely reset in 2017 as Chinese regulators look to cool capital outflows amid a weakening currency. China is now taking a more cautious stance on outflows, introducing curbs on purchases that are not part of a company’s core business.
While there will be short-term slowdown and delays, few long-term structural changes are expected. Even at low leverage, Chinese investors are often able to realize returns of 15% in the U.S. and Europe, which can exceed those at home. This, coupled with the investors’ long-term hold continue to make offshore investments a favorable prospect.
The trend of Chinese capital ‘going out’ for real estate won’t stop. If anything, it is going to gather momentum due to the country’s enormous capital base. The strong projections for the movement of people will lead to the ongoing desire to move capital around the globe.
Evolving physical spaces changing how people travel
The globe’s approximately 16.5 million hotel rooms have been joined by several million home sharing listings. At the same time, hotel occupied room nights are at all-time highs, suggesting that the home sharing model is leading to new, induced demand.
Impact from home rental sites and alternative accommodations remains relatively small in the grand scheme of the global hotel sector. The alternative accommodations market is estimated at approximately 10% of hotel room bookings in gateways such as New York, London, and Paris.
Alternative accommodations have notable runway for growth in secondary and tertiary markets, but research suggests that the number of home sharing room nights accommodated is plateauing in urban gateway cities; due in part to new regulations and the number of willing hosts reaching a structural ceiling.
Alternative accommodations primarily tend to take share from lower-tier hotels, but a significant portion of the demand, often as much as 30% to 50%, is induced, meaning that those visitors may not have made the trip had it not been for what is often a lower-priced option.
The lines between traditional hotels, serviced apartments, and home sharing will continue to blur. Hotel companies are yearning to become fully integrated accommodations providers. Also blurring are the lines between business and leisure travel, which has its own implications for the sector. The trend is for more localised experiences, and in many cases for smaller and unique rooms.
Endurance against the odds amid a new world order
With headlines about travel restrictions abounding and the world making sense of resurging populist movements, the hotel investment community asks itself where we will go from here. But travel is here to stay; mature economies will continue to spend increasing amounts on travel and emerging powerhouses — despite renewed political pressures and slowing economic growth — cannot keep a lid on double-digit growth in outbound travellers. These forces stand to underpin tourism and travel markets, and as goes the flow of people, so do investors’ capital flows.
This article was contributed by a WTTC Industry Partner and published in March 2017 as part of the annual update to the Economic Impact Research from WTTC. The full report can be found here.