Dear readers,
Hotels in Tokyo are converting rooms into serviced rental apartments. Perks include lounge and pool access. There are no utility bills to worry about. Developers in Hong Kong have started permanently repurposing hotel buildings to apartments.
Asia’s developers are adapting to a new normal. The latest trends complicate a reopening trade for investors in related stocks.
In the US, optimism is high among investors in the hotel industry. Shares of US hotel group Marriott International have doubled in the past year. Blackstone and Starwood Capital’s recent $6bn deal to buy hotel chain Extended Stay America is another bet on a quick recovery as Covid-19 vaccination programmes are rolled out.
In Asia, the tone is downbeat. Hotels suffering record-low occupancy rates are seeking new revenue sources. In Japan, the 131-year-old Imperial Hotel Tokyo is one of the many local properties that converted blocks of guest rooms into rentals after occupancy rates languished at about 10 per cent.
The picture is even bleaker in Thailand. Once-popular destinations such as Phuket have suffered from travel restrictions, with 80 per cent of its hotels in resort cities remaining closed since last year. With many of them on the brink of collapse, the government has been working on a rescue plan. The industry is posing a systemic risk to local banks. The largest local lender, Siam Commercial Bank, does not expect about 90 per cent of its loans made to hotels to be repaid
In Hong Kong and South Korea, another trend is unfolding. Hotels in big cities are being converted to apartments as home prices soar. Hong Kong property group CK Asset is transforming two of its hotels into more than 5,700 apartments. The Le Méridien Seoul and Sheraton Palace Hotel are among many properties that have been shut for repurposing.
This is a worrying trend for the hotel industry. Converting hotels into rental apartments is easy. Changing them back is a lot harder. Developers are evidently betting on a slow recovery.
Hong Kong is highly reliant on tourist arrivals; these have fallen more than 90 per cent. Meanwhile, the city’s high-end residential market has been breaking records. CK Asset sold a five-bedroom apartment for a record $59m last month, at $17,512 per square foot.
That has been reflected in the stock of the developer, up 15 per cent this year. The shares of Hong Kong-based hotel group Mandarin Oriental have gone nowhere.
The region’s hospitality Reits — real estate investment trusts that own hotels and serviced residences — are especially exposed to the fallout. Some have suspended dividends. Others are poorly hedged. Singapore-listed Far East Hospitality Trust, for example, has all its hotels, serviced apartments and retail spaces located in the city-state.
There are still opportunities for local investors. Shares of Singapore-listed Ara US Hospitality Trust, for example, which has all its properties in America, have gained more than 80 per cent from a November low. The stock still trades below book value and at a small fraction of Marriott. Local peers such as Frasers Hospitality Trust also have a geographically hedged portfolio of hotels.
Indiscriminate sell-offs triggered by big trends always create opportunities for the more discerning investor.
Enjoy the rest of your week.
June Yoon Lex writer