Concrete Analysis | Limited service hotels continue to grow in Asia

Over the last twenty years, limited service hotels have expanded its footprint to all major regions in the world. Rising demand from growing tourist markets is the primary reason, but changes to the hotel ownership and operational models have also accelerated capital investment into the sector.

Starting from a notion that the room experience is key to travelers, limited service hotels have stripped out many traditional amenities that characterized full service hotels. This modification lowers investment outlay and operational cost, which leads to an investment product that generate stable income returns and an on-par to slightly higher risk-adjusted total return versus other commercial real estate assets.

The Asian in-bound tourist arrivals have seen explosive growth, growing from 100 million arrivals in 2000 to more than 220 million in 2015. As the region continues to develop, the UN World Tourist Organization expects inbound tourists to grow to 300 million by 2020 and 500 million by 2050. In the airlines sector, low cost carriers (LCC) have increased their seat capacity from less than 20 million seats in 2003 to over 170 million seats in 2014. The growth in the LCC market suggests that the travellers’ market has diversified and grown deeper. This provides a larger and thus more stable market for the hotel industry.

In many gateway cities, including Hong Kong, Singapore, Tokyo and others, hotel occupancy has remained above 85%, and in some cases above 90%, in the years since the Global Financial Crisis. As 85% is typically seen as full occupancy for hotels, the currently observed high occupancy has led to double digit revenue growth in the last five years. With traveller arrivals expected to increase by another 50% in the next five years, many gateway markets remain undersupplied, even factoring in the current pipeline.

Hotels were once seen by institutional investors as being higher risk than office or retail assets, but several factors have lowered risks that used to be inherent to hotel investments. First, the segregation of hotel ownership and operations started in 1993 has shifted hotel operations to hotel brands. Freed from the operational burden, owners can now focus on investment strategies such as buy-and-hold, renovation, and development.

Second, revenue management systems, driven by artificial intelligence, allow hotel chains to manage occupancy, average daily rates, and RevPAR in real time. This allows a better revenue optimization than the previous model driven by fragmented, local managements.