Last year was a bumper one for Asia’s hotel investment market. Transaction volumes surged by 61 per cent year on year to an all-time high of nearly US$14 billion, compared with a decline of more than 20 per cent in North America and a flat market in Europe, the Middle East and Africa, according to data from JLL. In the first half of this year, though, the hospitality industry had the rug pulled out from under it as Covid-19 spread like wildfire across the globe. Hotel investment in Asia plunged 45 per cent, on a par with the drop in sales of retail properties. By contrast, office deals across the region fell 38 per cent while transactions in the industrial market, the most resilient real estate sector, declined only 6 per cent, figures from JLL reveal. Asia’s hotel sector – which relies heavily on international tourism and has a thriving meetings, incentives, conferences and exhibitions market – was shaken as lockdowns and travel restrictions were imposed. Even in countries with a significant amount of domestic tourism, demand has collapsed. In Japan, where local travel accounts for the lion’s share of the market, occupancy rates had already tumbled to 30 per cent before the government announced the postponement of this summer’s Olympic Games in Tokyo. Nihat Ercan, the head of JLL’s investment sales division in Asia, said the shock was unprecedented and across the board, affecting both city and resort hotels in all segments of the market. “It’s like someone flipped a switch and all the lights went off,” he said, adding that transaction volumes were expected to drop to US$4 billion this year, the lowest annual tally since the 2008 financial crisis. The immediate concern for hoteliers and investors is the severity of the cash crunch. Many properties have had to close for several months , with demand likely to remain weak for at least the next year. The economic shock, exacerbated by a resurgence of Covid-19 cases in several countries, is all the more acute in a region that has not suffered an annual contraction in output in recent memory. In a blog published on June 30, the International Monetary Fund forecast that output in 2022 will still be lower than the level predicted before the crisis, with the gap “much larger if we exclude China, where activity has already started to rebound.” According to hotel data provider STR, the average occupancy rate in the region in June stood at 39 per cent, a decline of 43 per cent year on year. Revenue per available room – the industry’s favoured performance measure – fell to US$23, a staggering 63 per cent drop year on year. The sector is banking on domestic tourism to help kick-start the recovery as curbs on travel between countries remain in place. However, the “staycation” market is not strong enough to recoup a sizeable portion of the demand lost by the collapse in international arrivals, especially in popular resort markets such as Indonesia and Thailand. In a May 21 report, Colliers noted that China’s outbound tourism spending grew at a compound annual growth rate of 21 per cent between 2003 and 2018. In the Asia-Pacific region, China alone accounts for more than half of the region’s travel and tourism GDP. Still, it is not all doom and gloom for the industry. Leverage ratios in the sector are generally lower than in Europe and America, while bank lending is more relationship driven. This cuts hotel owners and operators more slack in debt servicing, limiting the level of distress in the sector. Moreover, many owners are high-net-worth individuals who have been in the hotel business for generations. Crisis-hardened and willing to take the long view, they are less likely to dispose of their assets. While this widens the gap in price expectations between buyers and owners, it increases the resilience of the sector at a uniquely perilous time for the industry. “Asians are net buyers in this market,” Ercan said. In addition, the pandemic will have a profound impact on the day-to-day running of hotels. Operating models and safety procedures are being revamped with a stronger focus on cleanliness. This will act as a disciplining mechanism for the sector, creating new standards that should help reassure guests as fear of the virus persists. Govinda Singh, head of hotels and leisure in the Asia valuation and advisory team at Colliers, said the reopening process provided an opportunity for operators to differentiate themselves through hygiene standards. “Expect a flight back to well-established brands ,” he said. The pandemic will inevitably cause development pipelines to shrink, especially in emerging markets. This will give owners some breathing space and, coupled with cost-cutting measures, put the sector on a firmer footing once the recovery takes hold. What is more, although hotels are viewed as a more volatile asset class by investors, tourism is one of the sectors that is likely to rebound quickly once travel restrictions are lifted. With a fast-growing middle class across the region with a voracious appetite for travel , “tourism will remain a must-have for many”, Singh said. Asian hotels are at the sharp end of the crisis for now. However, the resilience and appeal of the sector should not be underestimated. Nicholas Spiro is a partner at Lauressa Advisory