HONG KONG, MACAU, CHINA AND TAIWAN UPDATE

Transcription

1 2 ND QUARTER 212 THE HVS QUARTERLY HONG KONG, MACAU, CHINA AND TAIWAN UPDATE Cathy Luo Associate Daniel J Voellm Managing Director HVS Global Hospitality Services Level 21 The Center, 99 Queen s Road Central, Hong Kong

2 An HVS Quarterly Hotel Market Update Demand growth softened in the first quarter of 212 after a phenomenal 211, as global demand contracted amid the unresolved European debt crisis and the slowing of China s economy. HONG KONG HONG KONG VISITOR ARRIVALS Hong Kong welcomed more than 11.2 million visitors in the first quarter of 212, reflecting a 15.6% year-on-year (YOY) increase. Visitor arrivals % 3% from mainland China rose by 21.1% YOY and 1 25% remain the key driving factor behind robust growth. Total visitor arrivals from China set a new record by topping 7.89 million, driven by the % 15% 1% Chinese New Year holidays. In January 212, Hong 2 5% Kong implemented the e-channel service for eligible frequent mainland travellers at certain % 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 border control points, shortening border crossing times. Apart from China, regional countries also Others USA Taiwan Japan Mainland China South Korea YOY Change contributed to visitor arrival growth. Visitor Source: Hong Kong Tourism Board arrivals from South Korea grew by 17.2% YOY, driven by its strong economy and currency. Indonesia and the Philippines also recorded double-digit growth at 13.% and 17.9%, respectively. Japan recovered from the Tōhoku earthquake and grew by a modest 5.3% YOY. Taiwan, the secondlargest source market for Hong Kong, registered a 2.3% decline YOY, attributable to the presidential elections and a struggling economy that suppressed travel activities. The mature US market registered 1.7% growth YOY. The UK posted 1.1% growth YOY the strongest in the first quarter among long-haul markets. This increase is partially attributable to travel packages that featured the popular annual Rugby Sevens event. HONG KONG OVERNIGHT VISITOR ARRIVALS Visitor arrivals to Hong Kong showed no signs of 7 35% slowing in the first quarter of 212, despite the 6 28% slowdown in Hong Kong s economy (.4% GDP % 14% growth YOY). However, the lingering European debt crisis and the slowing of China s economy cast doubts on Hong Kong s tourism industry. To drive 3 7% visitor arrivals, the Hong Kong Tourism Board 2 % (HKTB) will continue to focus on the vibrant Chinese 1-7% -14% market. The HKTB plans to spend 3% of its HK$182 million marketing budget on the Chinese market in 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 Others USA Taiwan Japan Mainland China South Korea YOY Change Source: Hong Kong Tourism Board 212. The HKTB forecasts full-year visitor arrivals for 212 to reach 44 million, representing a modest 5.5% growth. Millions Millions In the first quarter of 212, 49.5% of visitors to Hong Kong stayed overnight a trend that is further declining as a result of increasing numbers of same-day visitor arrivals from China and a hotel market running at capacity. Notably, overnight visitor arrivals from China were at the lowest level in the first quarter, at 43.8% of total Chinese visitor arrivals (compared PAGE 2 An HVS Quarterly Hotel Market Update Hong Kong

3 to 48.% in 211). Overnight visitor arrivals from South Korea and the Philippines registered the strongest YOY growth at 2.9% and 2.%, respectively, in the first quarter. China, Indonesia and the UK also recorded above 1.% YOY growth. Japan registered healthy growth of 6.5% YOY, while the US market remained resilient. HONG KONG HIGH-TARIFF A MARKET PERFORMANCE HK$ 3, 2,5 2, 1,5 1, 5 Mar-1 Apr-1 May-1 Jun-1 Jul-1 Aug-1 Sep-1 Oct-1 Nov-1 Dec-1 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Average Room Rate RevPAR Occupancy 1% 95% 9% 85% 8% 75% 7% 65% 6% 55% 5% 45% 4% Source: Hong Kong Tourism Board RevPAR performance of the high-end hotel market in Hong Kong reached HK$2,23 in the first quarter of 212, the best first-quarter RevPAR performance on record. The pricing strategies of high-end hotels in Hong Kong shifted from a relatively volume-focused strategy in 211 to a price-driven strategy in 212. Average occupancy for the first three months of 212 was 81%, dropping two percentage points YOY. However, a strong occupancy level above the 8% mark allowed hoteliers to adopt aggressive yield strategies to drive average rate. For each of the first three months of 212, the high-end hotel market achieved record-high average rates. March ended with a record-high average rate of HK$2,68, supported by the Rugby Sevens event that drew a large international crowd. Overall, the first-quarter average rate reached HK$2,487, a 13.6% increase YOY. In 212, an estimated 29 new hotels offering a total of 5,854 rooms are expected to enter the Hong Kong market. The outlook for occupancy levels remains positive, given the healthy demand from China. The slowing of China s economy and a soft global economy will prevent rapid expansion in corporate travel budgets. Reliant on market compression, average rate growth in 212 is anticipated to remain healthy but is likely to show resistance in the second quarter, when demand is generally softer, before regaining momentum during traditional peak seasons in the third and fourth quarters. MACAU Macau recorded more than 6.9 million visitor arrivals in the first quarter of 212, a 7.9% growth YOY. Approximately 61% (4.2 million) were mainland Chinese visitors. Strong visitor arrivals from mainland China were supported by increased capacity at gaming tables and the appreciation of the Renminbi. The mainland Chinese market is primarily driven by residents of Guangdong, Zhejiang and Fujian provinces. An HVS Quarterly Hotel Market Update Macau PAGE 3

4 MACAU VISITOR ARRIVALS Demand from Japan continued to rebound in the first quarter, posting 8.7% YOY growth. The South Korea market registered strong growth in the first quarter, benefiting from a strong Korean won. Korean visitor arrivals expanded by 18.% YOY. The Philippines also saw visitor arrivals increase by 15.7% YOY. Likewise, Indonesia and India saw healthy growth in visitor arrivals of 8.4% and 6.8%, respectively. However, travel demand from Singapore dropped 14.4% YOY and 47.% quarteron-quarter. This decline is attributable to favourable airfares from Singapore to other destinations such as Japan and Hong Kong, which lured Singapore visitors away from Macau. Millions 8 3% 7 25% 6 2% 5 15% 4 1% 3 5% 2 % 1-5% -1% 4Q9r 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 Taiwan Others Hong Kong Japan Mainland China South Korea YOY Change Source: Macau Government Tourism Office Macau s share of overnight visitor arrivals is relatively stable, ranging from 45% to 49%. In the first quarter of 212, more than 45% of visitors sought hotel accommodation. Total overnight visitor arrivals increased by 8.5% YOY. This increase was primarily driven by the mainland Chinese market, which contibuted to 6% of total MACAU OVERNIGHT VISITOR ARRIVALS overnight visitor arrivals. The Chinese market expanded by 14.2% YOY, topping 1.9 million % Japan recorded 12.2% overnight visitor arrival 3.5 3% growth as the market recovered from the % earthquake. Taiwan and South Korea also saw 2.5 2% double-digit growth in overnight demand, 2. 15% 1.5 1% driven by attractive package tours from the two 1. 5% destinations. Regional markets such as India,.5 % Indonesia and the Philippines also saw a. -5% healthy increase in overnight visitor arrivals. Millions 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 Others Hong Kong Taiwan Japan South Korea Mainland China YOY Change Source: Macau Government Tourism Office The Macau Government Tourism Office is confident that total visitor arrivals will increase by 1% in 212, fuelled by robust demand from China. Gaming revenue for Macau totalled MOP7.4 billion in the first quarter of 212, reflecting 26.8% growth YOY. While the first-quarter growth rate is significantly lower than 21 and 211 rates, the robust growth is nevertheless impressive, particularly as China s economy is showing signs of a slowdown. Some analysts remain cautious about the gaming industry s prospects, forecasting mere 1% growth in 212 amid concerns about cooling demand from China. However, some analysts have switched to a bullish outlook, estimating 2% to 25% growth in gaming revenue for 212. MACAU GAMING REVENUE UNSTOPPABLE Billions Q1 212 Q1 Revenue (MOP) Change Source: Macau Statistics and Census Service 72% 6% 48% 36% 24% 12% % PAGE 4 An HVS Quarterly Hotel Market Update Macau

5 CHINA Momentum of total international visitor arrivals (excluding Hong Kong and Macau) to China picked up in the first quarter of 212, with visitor arrivals growing 7.3% YOY, the fastest growth rate since the fourth quarter of 21. Regional markets remain the main feeder markets to China. As Japan recovered from the 211 earthquake, Japanese visitor arrivals to China increased by 13.1% in the first quarter. Taiwan posted 6.4% visitor arrivals growth, amid friendly cross-strait relationships after the election in January. Other nations in the region, such as the Philippines and Indonesia, also recorded double-digit growth in the first quarter. Momentum continued for Kazakhstan as the nation posted 31.6% YOY growth, attributable to the increased collaboration CHINA VISITOR ARRIVALS* Millions Source: 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 Others Japan Taiwan Russia USA South Korea YOY Change China National Tourism Administration * Excluding Hong Kong and Macau with China in the oil and gas industry. Sri Lanka, Nepal, Pakistan and North Korea also saw robust visitor arrivals growth, all starting from a low base. The Russian market remained flat in the first quarter, due to the Chinese New Year holidays and the rising costs of travel to popular destinations such as Sanya. All European markets recorded positive YOY growth in the first quarter, driven primarily by Germany, the UK and France. The Oceania region posted 11.9% growth YOY, supported by the Australian market and strong business relations. Visitor arrivals growth from the USA remained stable, at 6.4% YOY. Long-haul travellers are likely to be mainly corporate travellers. Western nations are likely to take shorter leisure trips given the soft global economy. 3% 25% 2% 15% 1% 5% % -5% -1% -15% -2% TAIWAN TAIWAN VISITOR ARRIVALS Taiwan recorded the strongest visitor arrival 2. 35% % growth in the Greater China region, with 22.3% growth YOY in the first quarter of 212. Among % % the top five source markets for Taiwan, apart from % the USA, all posted double-digit growth rates YOY % Demand from mainland China surged by 5.2% YOY in the first quarter, driven by a simplified visa application process. Visitor arrivals from Hong Kong and Macau grew 21.5% YOY, facilitated by % 7% 3% -1%. -5% attractive package tours. Japan rebounded in the 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 first quarter with 17.7% growth YOY. Malaysia, a USA Others HK, Macau Malaysia Japan Mainland China YOY Ch an ge key trade partner of Taiwan, recorded 14.% growth YOY. The culture, nature and traditions of Source: Taiwan Tourism Bureau Taiwan are particularly appealing to the Malaysian-Chinese community. Efforts by the Taiwan Tourism Bureau to drive regional markets have paid off as regional markets posted strong visitor arrivals growth in the first quarter: Singapore, up by 19.%; the Philippines, up by 12.7%; and Indonesia, up by 5.7%. Trade and tourism collaborations with Southeast Asian countries are expected to continue to drive demand to Taiwan. Demand from Europe grew by a modest 2.7% in the first quarter, mainly driven by Germany, France and the UK. The US market remained soft, with.3% growth YOY. The Oceania market expanded by 13.8% YOY, starting from a low base. Millions Taiwan continues to drive demand from mainland China with a number of favourable policies. At the end of April, the daily quota for individual mainland Chinese travellers was increased from 5 to 1,. The individual traveller scheme was also expanded at the end of April, allowing residents of nine cities (previously three) to travel to Taiwan individually. The scheme An HVS Quarterly Hotel Market Update China PAGE 5

6 is expected to include an additional four cities by the end of 212. The outlook for Taiwan s tourism industry is positive; favourable travel policies and arrangements, tourism promotional campaigns and increasing interest in Taiwan are expected to support strong visitor arrival growth. HOTEL MARKET PERFORMANCE Hong Kong, Macau and Taiwan All five markets tracked in the area started positive in 212. Hong Kong, Taichung and Macau recorded double-digit RevPAR growth YOY in the first quarter, benefiting from the Chinese source market. MOMENTUM IN HONG KONG, MACAU AND TAIPEI SLOWED; KAOSHIUNG, TAICHUNG ACCELERATED Market 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 Hong Kong Occupancy (%) Average Room Rate (HK$) 937 1,12 1,18 1,16 1,91 1,36 1,32 1,286 1,281 1,558 1,483 RevPar (HK$) ,246 1,143 1,127 1,147 1,432 1,295 RevPAR YOY Change (%) Macau Occupancy (%) Average Room Rate (MOP) 1,6 1,91 1,129 1,12 1,168 1,276 1,34 1,291 1,336 1,516 1,472 RevPar (MOP) ,114 1,11 1,131 1,22 1,377 1,285 RevPAR YOY Change (%) Taipei Occupancy (%) Average Rate (TW$) 3,41 3,517 3,515 3,76 3,441 3,662 3,683 3,932 3,684 3,964 3,975 RevPAR (TW$) 2,391 2,731 2,544 2,813 2,395 3,42 2,794 2,794 2,616 3,34 3,3 RevPAR YOY Change (%) Kaoshiung Occupancy (%) Average Rate (TW$) 2,38 2,194 2,56 2,17 2,276 2,226 2,497 2,37 2,487 2,328 2,721 RevPAR (TW$) 1,437 1,478 1,579 1,531 1,516 1,639 1,52 1,515 1,69 1,738 1,669 RevPAR YOY Change (%) Taichung Occupancy (%) Average Rate (TW$) 2,22 2,173 2,39 2,178 2,24 2,249 2,423 2,269 2,354 2,46 2,63 RevPAR (TW$) 1,268 1,497 1,54 1,59 1,59 1,79 1,633 1,641 1,555 1,942 1,871 RevPAR YOY Change (%) Source: HKTB, MOT, MGOT SEASONALITY CHALLENGE IN TAIPEI Taipei is and will remain the top destination in 4,5 9% Taiwan, particularly for first-time visitors. Shopping, Taipei 11 and Shilin Night Market are 4, 3,5 3, 2,5 2, 1,5 1, 5 8% 7% 6% 5% 4% 3% 2% 1% % the must-do attractions in Taiwan. However, seasonality remains to be a challenge for Taipei, where Leisure demand dominates. Occupancy level in the first quarter was flat YOY, while average rate grew by 7.9% to reach TW$3,95. The opening of a number of quality hotels in Taipei, including the W Taipei, Radium- Kagaya and Grand View Resort in Beitou, facilitated average rate growth. Beitou, a suburb of Taipei, is 2Q9 3Q9 4Q9 1Q1 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 one of the most well-known hot spring Average Rate RevPAR Occupancy destinations in Taiwan. Its proximity to Taipei city Source: Taiwan Tourism Bureau centre attracts increasing FIT demand from regional markets such as Japan, Hong Kong and Malaysia. The Mandarin Oriental Taipei is slated to open by the end of 212 and is expected to support average growth in the market. Other international branded hotels coming online include the Okura Taipei (212) and Indigo (214). TW$ PAGE 6 An HVS Quarterly Hotel Market Update Hotel Market Performance

7 China The first quarter is typically a slow demand season TOP 1 HOTEL MARKETS Q1 212 for the China hotel market, as it coincides with the 1, 1% holiday season in Western nations and the Chinese 9 9% New Year, which brings business activities to a 8 8% 7 7% standstill. However, this period is traditionally a peak 6 6% season for Sanya, and the destination again topped the overall hotel market table in the first quarter of 5 4 5% 4% 212. Occupancy level slipped by 1.9 percentage 3 3% 2 2% point YOY, with additional new supply entering the market and the airport operating at capacity. Average rate also dropped by 4.8% YOY, resulting in 1 1% % a 7.1% decline in RevPAR performance. The Average Room Rate RevPAR Occupancy occupancy level in Shanghai increased by 3.6 percentage points, while average rate declined Source: China National Tourism Administration marginally by 2.6%. Demand for Shanghai is set to recover gradually from the World Expo. Hotel supply will continue to increase but is expected to be absorbed in the long-term. Hotel development in Shanghai is also expected to expand to the greater Shanghai area as the city expands. Xiamen climbed to third position in the first quarter of 212; while posting a 4.1 percentage point decline in occupancy, Xiamen hotels increased their average rate by 11.2% YOY. Among the top ten markets, Changsha recorded the strongest growth on all metrics. Occupancy rose by 1.3 percentage points to 84%, while average rate increased by 21.8% to RMB337. Notably, TOP 1 FIVE-STAR HOTEL MARKETS Q1 212 RMB 2, 1,8 1,6 1,4 1,2 1, Average Room Rate RevPAR Occupancy Source: China National Tourism Administration RMB 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % the robust average rate growth is attributable to the relatively low average rate level. The Changsha market features the lowest marketwide average rate among the top ten markets. The opening of more than ten high-end hotels between 213 and 216 is expected to provide uplift to average rate levels here. Beijing has the largest hotel market in China, and its hotel performance continues to improve, backed by a wellperforming, developed economy. However, the city s large hotel room inventory limits rapid marketwide occupancy growth. Beijing hotels recorded healthy average rate growth of 12.3% YOY in the first quarter of 212. The Shenzhen and Guangzhou markets share similar characteristics. Both cities recorded 59% occupancy, with an average rate of roughly RMB44. A mature manufacturing industry and a growing financial industry are expected to be beneficial for the hotel market in Shenzhen and Guangzhou. Chengdu, Nanjing and Fuzhou registered similar RevPAR performance. Fuzhou, the smallest market, recorded the highest occupancy rate among the three markets. The Chengdu market posted 1.2% average rate growth YOY in the first quarter of 212, supported by the addition of some 1, business and upscale hotel rooms in 211. In the five-star hotel market, Sanya continued to excel. Marketwide average rate rose 6.% to RMB1,79, setting a new record. Harbin has the second-strongest five-star hotel market due to limited supply (with only two five-star hotels). The average rate at Shanghai five-star hotels slipped by 9.8% YOY in the first quarter, attributable to the holiday season and decreased international demand as the global economy remains uncertain. Guangzhou and Chengdu are relatively mature markets and their five-star hotel markets are largely supported by the MICE industry and various trade shows. Occupancy at Fuzhou dropped 7.4% YOY, while average rate grew 2.9% YOY. The Shenzhen market is relatively mature. Wenzhou has a small five-star hotel market (two hotels) and hence showed healthy performance. An HVS Quarterly Hotel Market Update Hotel Market Performance PAGE 7

8 RECORD-HIGH AVERAGE RATE IN XIAMEN Located on the eastern coast facing Taiwan, Xiamen is one % 7% 6% 5% 4% 3% 2% 1% % of the first economic zones in China established in the 198s. Today, Xiamen has developed a comprehensive industrial sector (textile, food processing and high-tech), as well as a strong tertiary sector. The MICE industry has seen rapid growth in Xiamen over the past years, given Xiamen s strategic location opposite Taiwan, improved cross-strait relations, government support and a favourable climate. In general, hotel demand was stronger in the second and fourth quarters, driven by business and MICE demand. Fivestar hotel supply in Xiamen remained stable in the observed 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 period, supporting an occupancy level above the 6% mark. Average Rate RevPAR Occupancy Average rate reached a record high of RMB77 in the first Source: Taiwan Tourism Bureau quarter of 212, with additional high-end hotels entering the market. The opening of the Westin, Kempinski, Hotel Indigo and DoubleTree in the first half of 212 is expected to continue to support average rate growth, while exerting downward pressure on marketwide occupancy. RMB First-Quarter YOY RevPAR Change and Size of Overall Hotel Market in 5 Cities in China TRADITIONALLY SOFT DEMAND IN THE FIRST QUARTER DUE TO CHINESE NEW YEAR Source: CNTA PAGE 8 An HVS Quarterly Hotel Market Update Hotel Market Performance

9 Marketwide Performance of 15 Key Markets in China SURGING REVPAR IN TAIYUAN AND LUOYANG; SUPPLY GROWTH PRESSURE IN SANYA 2Q1 3Q1 4Q1 1Q11 2Q11 3Q11 4Q11 1Q12 1Q YOY Change Beijing Occupancy (%) p p Average Rate (RMB) % RevPAR (RMB) % Ch engdu Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Ch ongqi n g Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Guangzhou Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Sa nya Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Shanghai Occupancy (%) p p Average Rate (RMB) % RevPAR (RMB) % Shenzhe n Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Liji ang Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Ku nmin g Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Nanning Occupancy (%) p p Average Rate (RMB) % RevPAR (RMB) % Guiyang Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Xi 'an Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Ta iyua n Occupancy (%) p p Average Rate (RMB) % RevPAR (RMB) % Shijia zhuang Occupancy (%) pp Average Rate (RMB) % RevPAR (RMB) % Luoya ng Occupancy (%) p p Average Rate (RMB) % RevPAR (RMB) % Source: China National Tourism Administration An HVS Quarterly Hotel Market Update Hotel Market Performance PAGE 9

10 HOTEL INVESTMENT RISK AND RETURN When valuing or investing in hotel real estate, as in any kind of business, one has to be aware of the level of risk involved in the asset class. There are several types of risk that apply, and while some arise from the macro environment and apply to most assets in the region, others are very specific and unique. There are eight different kinds of risk. Market or Business Risk Is the risk that net operating income will be affected by changes in the market, such as shifts in supply, shifts in demand or both. Market risk is most specific to the property and influenced by the type and location of the property and its stage in the market cycle. Financial Risk Is the risk related to the use of debt to finance an investment, which can result in default, pre-payment, or contractual terms that do not allow for changes in the face of interest rate changes. This risk is influenced by the type and amount of debt. Certain investors prefer not to have any debt on their property in order to reduce their financial risk exposure. Financial risk is driven more by macro conditions rather than the individual property. Capital Market Risk Is the risk that market value will be affected by changes in capital markets, such as changes in equity yield rates, mortgage yield rates, overall yield rates (due to changes in mortgage or equity yield rates), or overall and terminal capitalization rates (due to changes in overall yield rates). Capital market risk is influenced by factors only indirectly related to the individual asset, and includes changes in availability of capital (both mortgage and equity), changes in the level of interest rates and the rate of return for alternative investment opportunities. Liquidity (Marketability) Risk Is the difficulty of converting a real estate investment into cash at market value in a reasonable amount of time. Liquidity risk is both driven by the specific property and the wider market, and reflects the inefficiency of the real estate market. Short-term, opportunistic and non-real estate investors are often concerned about the exit, a risk that promotes the creation of an investment in derivatives and real estate investment trusts (REITs). Environmental Risk Is the risk that the market value of a property will be affected by its physical environment. This risk is influenced by perceived health hazards (eg, SARS), the costs of dealing with potential environmental problems (land remediation) and acts of nature such as flooding, earthquakes and weather conditions. Political and Legislative Risk Is the risk that a potential change in the legal system or legal factors will affect the market value of a property. Political risk is less prevalent in stable and generally strong economies, but can be a factor in emerging markets. Asset seizures by the government would the worst-case scenario that arises from political risk. Legislative risk is influenced by the ability to navigate the permitting process, tax law changes, environmental regulation and PAGE 1 An HVS Quarterly Hotel Market Update Hotel Investment Risk and Return

11 changes in land use regulation (zoning). The latter not only applies to a specific property, but also to the neighbourhood and other/competing districts within the area. Inflation (Purchasing Power Risk) Is the risk that unexpected inflation will cause cash flow from operations and reversion to lose purchasing power. At the same time, inflation drives interest rates and the availability of capital. Proper lease provisions can partially provide protection on the revenue side; however, such provisions are difficult to implement in the dayto-day business of hotels. Management Risk Is the risk that management cannot ensure that the property meets defined goals; this risk defines in great part the owner operator relationship. Management risk is influenced by the competence of management, the type of property (limited-service versus luxury resort) and the fit between the two (and the owner). When conducting operator searches for clients, this match is an important factor we consider in evaluating and selecting operators. Risk and Return By nature, the above risks are interlinked and not always controllable. For example, an environmental disaster can warrant new legislation that changes capital markets with knock-on effects in financial risk and market risk. How can investors manage the above risks when buying or developing hotels? Sufficient due diligence is critical for anyone to get a good sense of the risks involved. Hence, the definition of market value includes mention of a knowledgeable buyer. These risks need to be quantified and cumulated. At the same time, risk relates to probability or standard HIGHER RISK CALLS FOR A HIGHER RETURN Apartment Office Hotel In an efficient market, riskier classes of real estate should call for a higher expected return. Hotels have the highest risk given that leases are on a daily basis and operations are complex. As a result, hotel investors should require a return premium over other assets. An investor educated in hospitality can be confident and comfortable with the higher risk profile. deviation of potential future financial outcomes. A greater standard deviation or lower probability/certainty or higher risk calls for a higher return in order to make a compelling investment proposition. An HVS Quarterly Hotel Market Update Hotel Investment Risk and Return PAGE 11

12 The return is commonly referred to as Internal Rate of Return (IRR), Equity Yield or Discount Rate. Notably, the IRR derives from the cash flow generated by an investment, whereas the Equity Yield relates to the capital structure and requirements of the investing entity. If the IRR does not exceed the Equity Yield (as a hurdle), the investment should not be made. RETURN AND PROBABILITY (MATURE MARKET) Through a mortgage, an investor can assume financial risk and ideally obtain a higher (leveraged) return on his equity. In this case, the Discount Rate would be different from the Equity Yield (which is usually higher than interest rates). This typical distribution shows the return probability for hotels to be least symmetric. Offering lower probabilities for higher maximum returns than other classes, hotels also have a higher probability to incur a negative return on investment. More importantly, equity yields are unique to each investor and depends on a range of factors, including the type of business (fund, conglomerate, REIT), the geographic location of the company and its main business interests, its balance sheet, and shareholder/investor expectations. Based on our work in the industry, we have come across a range of return requirements, starting from 8.% over 2 years for development projects to 3.% in three years for an opportunistic investor. To determine a market s equity yield, surveys can be conducted. Alternatively, the return profile of investment alternatives, such as stock in corporations, REITs or investment in a fund, can be reviewed. If asked, can you quantify your company s Equity Yield?. PAGE 12 An HVS Quarterly Hotel Market Update Hotel Investment Risk and Return

13 ABOUT HVS NEWSLETTER 2 ND QUARTER, 212 HVS is the world s leading consulting and services organization focused on the hotel, restaurant, shared ownership, gaming, and leisure industries. Established in 198 by President and CEO Steve Rushmore, MAI, FRICS, CHA, the company offers a comprehensive scope of services and specialized industry expertise to help you enhance the economic returns and value of your hospitality assets. Over the past three decades, HVS has expanded both its range of services and its geographical boundaries. The company s global reach, through a network of 3 offices staffed by 4 seasoned industry professionals, gives you access to an unparalleled range of complementary services for the hospitality industry. The company performs more than 2, assignments per year for virtually every major industry participant. HVS principals are regarded as the leading professionals in their respective regions of the globe. In Asia-Pacific, HVS is represented by six offices in Hong Kong, Shanghai, Beijing, New Delhi, Mumbai and Singapore. HVS hosts two of the main annual industry events in the region, namely the China Hotel Investment Conference (CHIC) in Shanghai and Hotel Investment Conference South Asia (HICSA). HVS publishes a wide range of leading research, which can be found in our online library. The Hong Kong team has worked on a wide range of projects that include economic studies, hotel valuations, operator search and management contract negotiation, development strategies for new brands, asset management, research reports and investment advisory for hotels, resorts, serviced residences and branded residential development projects. HVS Hong Kong s clients include New World Development, The Wharf, Sun Hung Kai, Samsung, SK, Lotte, Taj Hotels and Resorts, Agile Property Holdings, Citibank, LaSalle Investment Management, amongst others. Cathy Luo is an associate of HVS Hong Kong, working primarily on hotel consulting assignments, including market studies and feasibility studies in the Asia-Pacific region. Graduating with a Bachelor of Arts (Honours) degree in Hospitality Finance and Revenue Management from Glion Institute of Higher Education, Cathy has accumulated a number of working experiences in various hotel operation departments and has a solid understanding of hotel operations. Her previous experience in revenue management with Marriott International further enhanced her knowledge of hotel strategy planning and management. With work experiences in Dubai, Hong Kong and China, Cathy brings a comprehensive knowledge of the hospitality industry to HVS. For further information, please contact dvoellm@hvs.com. To sign up for this or other HVS newsletters, please visit Daniel J Voellm, Managing Director of HVS Hong Kong, has provided advice in major markets including China, South Korea, Hong Kong SAR, Taiwan, Thailand, Vietnam, Cambodia, Singapore, Indonesia and Maldives. Prior to heading the Hong Kong office, Daniel Voellm was Vice President at HVS global headquarters in New York conducting a wide range of appraisals, market studies and underwriting due diligence services in 22 states as well as Canada. Daniel brings a strong understanding of the hospitality industry to HVS. His experience in hotel and food and beverage operations in Germany, Switzerland, England and the United States is complemented by an Honours Bachelor of Science degree from Ecole hôtelière de Lausanne in Switzerland. Daniel works closely with key institutional and private owners of hotel properties, financiers, developers and investors, and has gained a strong understanding of their investment requirements and approaches to assessing market values of investment properties. Daniel further advises on property and concept development and strategy. HVS Hong Kong Level 21, The Centre, 99 Queen s Road Central, Hong Kong