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Thailand’s Vibrant Hotel Investment Market

Real estate investors, both local and foreign, have contributed to a solid and steady rise across Thailand’s hotel industry in the almost seven years since the start of the Global Financial Crisis (GFC).

According to figures released by the Hotels and Hospitality Group of Jones Lang LaSalle (JLL), the value of hotel transactions in 2014 in Thailand hit 13.9 billion baht. This was the equivalent of 5.7 percent of all transactions in the Asia-Pacific region. Those figures showed an increase from 10.9 billion baht in 2013, which was the equivalent of 4.1 percent of all transactions in the Asia-Pacific.[1]

According to JLL, since 2012 around 58 percent of buyers of hotel properties in Thailand have been local investors, with the other 42 percent being international investors.

The profile of the investors can be broken down into five distinct categories.

  • 1. Developers or property companies, both foreign and local, who purchase with the intention of engaging in redevelopment.
  • 2. Funds that invest on behalf of international investors.
  • 3. Owner-operators who control a specific brand or series of serviced apartments and retain all management within those hotels or apartments.
  • 4. Corporations whose prime business or businesses are not hotels, but who are keen to add this style of business to their overall portfolio.
  • 5. Wealthy families or individuals.

JLL’s figures reveal that developers and property companies accounted for almost 60 percent of the total value of transactions recorded. Owner-operators were the second-largest group of investors representing more than 15 percent, followed buy corporations (almost 12 percent).[2]

On the selling side of the equation, 35 percent of sales of hotel assets have been conducted by investment funds while developers and property companies claimed 26 percent of the selling pie.

Not surprisingly, Bangkok is easily Thailand’s most popular hotel investment destination, since it has consistently rated among the most popular cities in the world as a tourist destination.

The Bangkok hotel market suffered badly during the 2011 floods, but bounced nack strongly the following year.

According to the Mastercard Global Destination Cities Index, Bangkok ranks as the second-most popular tourist destination in the world, just behind London and ahead of Paris. Singapore ranked sixth and Kuala Lumpur seventh.

Bangkok attracts tourists in huge numbers but also has a strong corporate traveller profile. This strength has led to asset prices going higher even though there has been a significant growth in the number of hotel rooms in the city over the last few years.

According to the JLL analysis, foreign investors are especially keen on putting their money into hotel assets in Thailand for three key reasons. The first is that capital values are lower than in many comparable locations such as Singapore and Hong Kong; second, the return on investment is relatively higher than similar markets; and, finally, investors view Thailand’s long-term tourism industry as remaining as vibrant as ever, despite the occasional glitches, such as the 2013-2014 political crisis.

130701036 620x332 - Thailand’s Vibrant Hotel Investment Market

Investors note how Thailand’s tourism industry is supported by strong general infrastructure (eg, good roads, especially main highways), its geographic location which places it firmly in the sights of any traveller looking to visit countries such as Laos and Cambodia, but also Myanmar and even Vietnam and Malaysia to a lesser extent, and simply its reputation as a world-class holiday destination.

JLL notes that investors look at a number of factors in assessing hotel opportunities. ‘Primarily, hotel investments are a function of purchase price versus existing or potential cash flow that can be generated from the hotel’s operations. For more passive investors, a certain yield expectation is applied to stabilised cash flows being generated by the target property, whether it is approximately six to seven percent in Bangkok or slightly higher in the resort markets.’

Of course, there are many investors who look beyond the current cash flows of a hotel property and believe they can create and extract additional value either by extensive renovation, additions or simply by engaging the services of a leading international firm to manage the asset.

After adding value, it may be that an investor will then on-sell the hotel to a passive investor or one of the real estate investment trusts (REIT’s) which are becoming more and more active in the Thai marketplace.

It is notable that REIT’s only became part of the real estate marketplace at the start of 2013, with REIT Regulations taking effect as of the beginning of January that year. The Securities and Exchange Commission of Thailand (SEC) had approved the establishment of a regulatory framework in October 2010, but REIT’s did not really start entering the general marketplace until the beginning of 2013. The idea was to ‘enable property developers to employ a new fundraising vehicle while providing public investors with an alternative investment product.’

REIT’s were expected to take over from the previous method of raising capital for real estate developments, Property Funds for Public Offering (PFPO).

The move to institute REIT’s in Thailand came at a time when international real-estate investors were no longer looking favourably on the Thai model. With the REIT model now in place, flexibility has been added to the regulatory mix, and this should greatly encourage foreign investors, especially as the hotel and even the office and factory marketplaces will come under this umbrella.

CIMB Thai foresees bright prospect in equity market 620x300 - Thailand’s Vibrant Hotel Investment Market

CIMB Thai, one of the biggest companies in Thailand, announced in March this year that it planned on launching two REIT’s in 2015. The first will be centred around office space while the second will be ‘a combination of two or three hotels.’[6]

Given the rate of land appreciation it is expected that hotel projects in Bangkok will be harder to put together in coming years, but it will also mean that investors should continue to see strong revenue returns, especially in the four and five-star hotel sectors. Naturally, it is the four and five-star hotel market which is of most interest to the REIT’s.

[1] Spectrum, 17/5/15 p.20

[2] ibid

[3] http://newsroom.mastercard.com/press-releases/london-retains-crown-in-2015-mastercard-global-destinations-cities-index/, accessed 15/6/15

[4] Spectrum, 17/5/15 p. 20

[5] http://www.bakermckenzie.com/files/Publication/bbea1264-a777-4382-91a7-f6504d03d06c/Presentation/PublicationAttachment/c05d00c5-66b9-46af-8910-f7afd7a9fc0a/fc_thailand_reits_jun13.pdf

[6] http://www.dealstreetasia.com/stories/cimb-thai-foresees-bright-prospect-for-domestic-equity-market-3985/ , accessed 15/6/15

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