Asian Family Money to the Rescue.
By Yeoh Siew Hoon ~ thetransitcafe.com
Tuesday, 2nd June 2009
Investment analysts and investors are banking that Asian family funds will be replace the vacuum left by the implosion of foreign hedge funds from the Asia Pacific hospitality market. Yeoh Siew Hoon reports.

Expect a couple of major hotel transactions that will rewrite value across the region, and expect that they will be done with Asian family money, which will come in to fill the vacuum left by the flight of international funds from the Asia Pacific hospitality market.

These were some of the predictions made at the Hotel Investment Conference Asia Pacific (HICAP) Southeast Asia Update held in Singapore earlier this month.

Robert Hecker, managing director of Horwath HTL, said that there was a huge mountain of debt, thanks to the massive development in 2008, with most of the debt expiring between 2009 and 2012.

"There will be further pressure on asset values and there will be a limited buyer pool."

All tides turn, he said, and Asian owners with war chests will make their moves. "Some of these are already in play."

The good news? "There is light at the end of the tunnel and it's not a train coming" and Hecker urged owners "to buy early before all the choice pieces on the buffet have been taken".

Investors however were less bullish. Peter Meyer, managing director of Pacific Partners, said that even though current indicators showed signs of recovery, "we don't know the external factors".

"We therefore have to err on the side of caution."

Pacific Partners is eyeing opportunities in the mid-market sector in China which it believes is under-served but growing rapidly.

Suchad Chiaranussati of Real Estate Capital Asia Partners said that at the rate RevPAR was going down, it was a good time to make moves on transactions.

The challenge is getting buyer inflation protected across all deals. "There are some risks I don't understand," he said of the fluid market conditions.

The good news is, with the way costs have been pared down, he said all that was needed was a small recovery which would go directly to the bottomline. "So when recovery comes, it will be interesting," said Suchad.

Mark Batchelor, who leads hotel investments sales business for Jones LaSalles Hotels across the wider Asian region, said that creativity was needed in the current economic climate and that he was now seeing vendor-financed deals.

"The seller says this price because they are confident profits will not fall. The buyer says, put your money where your mouth is."

The challenges for owners/operators is predicting what the underlying cash flow will be. "With the drastic fall in profits, it's very challenging to make a realistic call on cash flow to set a price."

For Suchad's company, hospitality represents about 10% of its portfolio which he expects to increase to 40% in the future.

Pacific Partners is a dedicated hotel fund with Meyer saying, "It's the business we have chosen."

"Hotels are more complex. In economic downturns, it tends to be hit first and recovers the latest. Other asset classes are less volatile."

What's happening too is that hotels are now being traded on capital value unlike the trophy transactions of yesteryears although Eric Levy of Tourism Solutions International called it a good time for trophy acquisitions, citing hotels in Tokyo and the Raffles Hotel Singapore, as examples.

Allen Law, director of Park Hotel Group, said he would be looking at Japan and China and that he was "hungry" for Singapore. "We see a strong outlook for Singapore with the infrastructure and the two Integrated Resorts development."

Meyer said Thailand, despite its current problems, had good longterm fundamentals. "If it was my own fund, I'd be there."

Kevin Lum of LC Development said Singapore was most stable and that the company had been in Thailand for a long time and believes the political scenario will stabilise. It would also consider Vietnam, he said.

Like Hecker, the investors said the first wave of capital that will replace the vacuum left by funds such as Lehman Brothers would be Asian family money, followed by industry investors and private equity funds.

While capital will be hard to come by, less equity will be needed to get transactions going if assets are halved in value, noted Eric Levy of Tourism Solutions International.

Asked to predict what deals they foresaw in the near future, Suchad said he saw a family in Japan buying a Western brand portfolio while Lum cited deals in Singapore and Vietnam.

Meyer said he saw a major consolidation or restructuring of a group that would change the landscape.

From the conversation on the sidelines, it would appear that more people are prepared to bet on Meyer's prediction. Talking to analysts and investors, the money is on one of the major hotel groups such as Hilton International (owned by Blackstone) to be broken up or Starwood which, one said, "had more brands than they know what to do with".

Yeoh Siew Hoon, one of Asia's most respected travel editors and commentators, writes a regular column on news, trends and issues in the hospitality industry for 4Hoteliers.com.

Siew Hoon, who has covered the tourism industry in Asia/Pacific for the past 20 years, runs SHY Ventures Pte Ltd. Her other writings can be found at www.thetransitcafe.com

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