COVID-19 did not spare hotel transaction activity in Asia Pacific, where 2020 saw a precipitous drop-off in M&A activity. However, given the long-term interest in the region, experts expect a strong rebound as investors want to deploy more capital in the hotel space there.
In fact, JLL was forecasting approximately US$7 billion in transactions in 2021, representing an increase of 20% year-on-year, up from $5.8 billion in 2020.
To take the pulse of the M&A market in Asia Pacific, HOTELS reached out to Singapore to get insights from Robert Hecker, Horwath HTL’s Managing Director Pacific Asia, as well as Eric Levy, managing director, Tourism Solutions International.
HOTELS: Offer your general outlook for increased M&A in Asia Pacific, and what will drive it?
Eric Levy: We are already seeing transactions happen that I am confident would not have occurred but for the impacts of COVID. For example, look at Kintetsu, Glow Hotels and Resorts, CK Ow considering sale of the Oz portfolio and others.
There will be others: management groups weakened by poor cash flow; PE funds that want to resolve long positions that look like they will take years to approach underwriting; properties/portfolios that will be sold to improve liquidity/reflect a change in view towards hotel assets and REITS; listed players that bolster balance sheet by new issue or significant shareholders that liquidate positions for reasons mentioned above (an American PE firm recently engineered such a transaction in Japan [not the Blackstone deal]).
While some of these fit the general description of distress, excluding Oceania, Asia does not typically see then same volume of distress sales “encouraged” by lenders. They just do not have desire to work through to the asset. Part of this is due to historically strong relationship lending, and part of it is their history is limited with this type of?precedent. Add to it the strong government support of tourism players and relaxed policies of bank regulators, and you have a clear view as to why activity levels have not been high.
This cannot and will not continue indefinitely, thus a prolonged impact of COVID is bound to see this support of the industry diminish and as a result there will be more activity, albeit at a lower level relative to the United States.
We might we see more activity of banks selling debt to others that might be more aggressive in working their way to the asset? I think we will but will never approach levels we see in the U.S. or Australia due to what we often refer to as “local issues”.?
Outside of destressed or ‘stress-related’ activity, I do think we will see some opportunities arise where desired assets become available due to ownership realigning their portfolio for strategic reasons, or to improve liquidity.
Owners of desired assets/companies will certainly listen a lot more now, whereas before they would not even entertain a conversation. The more conversations that occur, the more we will see these opportunistic pathways to these cornerstone assets open up, and the higher the likelihood of more trades occurring. This applies not only to the real estate but to tourism-related service providers, including hotel companies.?
I have lived through other Asian crises and now viewing the start of the COVID financial crisis, the impact of this crisis on M&A will be greater than the others. Government supports will burn off and effects will be lingering and that suggest strongly we will see greater M&A activity.?
Robert Hecker: We expect to see increased M&A activity in Japan and Australia/New Zealand as these are traditionally the most active markets. The increase will be driven less by distress than by existing owners rethinking their asset holdings in the hospitality sector.
Elsewhere, it’s likely to be subdued activity as governments seek to protect and support existing owners and owners generally not sufficiently stressed to accept distressed sale pricing on their assets.
The relatively strong owner/lender banking relationships contribute to the lack of pressures to sell at distressed pricing. There may be a few weaker players forced to sell, but it’s likely their assets are not that desirable for the buyers in the market.
There may also be a few owners with prime assets that are similarly rethinking their asset holdings strategy and keen to sell, but not likely at the price most buyers are considering.
This will vary by individual market outlook on whether the buyer-seller price gap can be narrowed based on recovery views.
H: How will improving performance fundamentals impact M&A?
EL: Besides the obvious, I expect that improving fundamentals will increase instances of distress/stress related M&A activity in Asia… reason being governments cannot afford to continue supporting the industry (at least to same levels) indefinitely and bank regulators will also tighten up on banks. Banks will sort through loans and naturally form opinions on a case-by-case basis rather than the blanket “almost everyone” and get more aggressive with clients they view to be in more difficult positions…
Rebounds in markets like Maldives have totally changed the mindset of many an owner and many will be less serious need of a life ring, but still wanting to liquidate to realign a portfolio, improve liquidity or simply harvest an investment.
RH: Improving fundamentals/recovery outlooks will certainly help buyers increase their offers, but probably not enough to narrow most pricing gaps. As for the sellers, it will also embolden them to hold firm on their pricing. Will it make owners decide not to sell? I suspect most would still sell as long as it’s at or near their pricing. They are ready to pass on the residual and potential future trials and tribulations to others. ?
H: How will current pipeline expectations impact M&A?
EL: In markets that are going to see additions to supply continue despite the softening of demand, it should exacerbate the supply/demand imbalance and improve chances for increased activity in that specific market. It’s the possible prolonged ‘feeding of an asset’ that many owners today are concerned about, and that can only encourage them to divest/restructure.
RH: Where pipelines have decreased due to cancelled projects, it would feed into improving market outlooks/valuations mentioned above. Where pipelines have not declined, it will have the opposite effect with buyers less inclined to narrow the pricing gap. ?
H: Any further comments on issues like bid-ask spread, etc.?
EL: Good times and bad, the spread always exists. In bad times like the COVID era days, there may be more activity instigated by sellers (their stakeholders /lenders) and that means that despite their historical perception of value, they will be better listeners.
I really do feel there will be downward movement in hotel values. There has to be in the general consensus of recovery taking three to four or more years to reach 2019 levels. This assumes we do not enter into an inflationary period due to government policy. Asia is a big place and the hotel industry is very different from market to market – some with a dominant domestic component and others that need international travel to thrive. Obviously, not all markets will move in synch.
RH: The price gap in most of Asia is significant, but less so in the mentioned higher M&A activity markets like Australia and Japan, where the markets have traditionally performed at high occupancy/RevPARs and domestic demand components are large.