For a sign of how investor sentiment towards the pandemic-battered hotel industry has improved since the vaccine breakthrough in early November last year, look no further than the share price of an S&P 500 index of hotel-focused real estate investment trusts (Reits). The gauge has surged 63 per cent since November 6, compared with a decline of 3 per cent for an index of industrial and logistics-focused Reits, which benefited hugely from lockdowns as the coronavirus pushed more consumers online, prompting a rush for warehouse space. The prospect of a faster-than-anticipated reopening of the global economy, underpinned by the mass roll-out of vaccines , is a boon to the hotel industry which, having been among the sectors hardest hit by the pandemic, is expected to enjoy a brisk recovery. Investors are eager to deploy capital in the sector. Private equity groups are expected to be the main source of liquidity following a dramatic fall in transaction volumes in 2020. According to data from JLL, investment activity plunged 63 per cent year on year as pandemic-induced restrictions decimated demand for leisure and business travel. In Asia, 70 per cent of investors polled by JLL at the end of January were keen to increase their exposure to hotels this year, with Japan and Southeast Asia seen as the most attractive markets to acquire assets. Indeed, there are already signs that investment activity is starting to pick up, particularly in the more transparent and liquid markets. The opportunity to acquire rarely traded assets, with the aim of repositioning them for a post-Covid-19 world, was a key factor in Sydney-based Iris Capital’s purchase last November of a portfolio of Australian hotels from the property arm of French hotel group Accor for US$140 million, the largest hotel deal in Australia last year. JLL expects hotel transaction volumes in Asia to increase 20 per cent year on year in 2021. This would bring the level of investment in the sector to US$7 billion, still only half of 2019’s amount. “We have light at the end of the tunnel. But it’s a long and winding one,” says Nihat Ercan, head of investment sales for JLL’s hotels and hospitality group in Asia. Part of the reason the light remains dim is the uncertainty surrounding the timeline for recovery, and the strength of demand in different destinations and segments of the market. In a coronavirus-ravaged hotel landscape, China is outperforming the rest of the world The performance of hotels across the region varies significantly. According to hotel data provider STR, average occupancy rates in late January were below 30 per cent in popular resort markets, such as Thailand, but were between 50 and 60 per cent in markets that can rely on domestic tourism, such as mainland China , and have kept the virus under control, as has been the case in Australia. Yet, even in China, revenue per available room – the industry’s favoured performance measure – last year was down 36 per cent year on year, compared with almost 60 per cent for the rest of Asia. Moreover, the gap in price expectations between buyers and sellers has widened further during the pandemic, partly because of the acute lack of distressed asset sales in the sector. While the gap is expected to narrow, pricing remains competitive, especially for core product in resilient markets. This puts more pressure on investors to correctly identify the hotel operators and markets that are best positioned for recovery, and, just as importantly, anticipate the key factors that will define the new normal for hospitality in the post-Covid-19 era. Coronavirus crisis offers Hong Kong a chance to reshape tourism While the unprecedented drop in demand has forced operators to slash costs and optimise cash flow, the prospect of a vaccine-fuelled recovery taking shape in the next 12-18 months is shifting the focus from cost control to addressing customers’ concerns and expectations. The immediate priority is putting in place measures to mitigate the risk of infection. However, initiatives that enhance guests’ well-being, and have environmental and social benefits, are also being taken more seriously. Investment strategies with a strong asset management component stand the best chance of paying off in the coming years. Value-add investors – who seek to improve a property’s performance, often through repositioning – are well placed to capitalise on post-pandemic shifts and trends in the hotel industry. Buyers who acquire assets with the intention of rebranding and repurposing them while the recovery is still under way should be able to sell them at a premium in several years’ time. Last October, Hong Kong-based private equity fund Alta Capital Real Estate launched a US$50 million fund to acquire undervalued urban and resort hotels across Asia with a view to renovating and rebranding them with a focus on wellness and sustainability. “As we move out of the pandemic, we feel people will search out wellness experiences,” says Rakesh Patel, Alta’s chief executive. Yet, in order for this to happen, the light at the end of the tunnel needs to get brighter. The hotel industry, in Asia and across the world, is pinning its hopes on the efficacy and deployment of vaccines. Nicholas Spiro is a partner at Lauressa Advisory