Recently, I've developed a real appreciation for capital structure, the REIT and general investing opportunities. Don't get too excited though, my love for investment is not all up there, however, I think it has to do with the fashion in which it is taught, which is generally with not much enthusiasm. Finance can be fun though - just bear with me. Hotels and hospitality is a sector that is pretty exciting whether we discuss technology, branding or something as mundane as debt to EBITDA ratios.
The other day, I found a recent publication by Ernst & Young discussing 13 major topics in relation to global hotel insights. I found a specific one to be of great interest to me. As my colleagues and classmates continue to jet set off into the most exotic parts of the world (many of which call them their home), I wondered where is it that most people are looking to invest in hospitality and hotels. If I, for instance, were to invest in a hotel, where would I even begin?
To no surprise, NA's real estate properties especially in the hotel industry are more financially rewarding in the US. Canadian Business is right when it states the hotel industry is not for "the faint of the heart" due to the fact that it is one of the riskiest investments in the real estate/REIT industry and is relatively sensitive. Hotel stocks tend to fluctuate in relation to the country's economy as proven by 2009's recession. According to CB's "Investment with a View", in 2014, hotel occupancy rates soared and surpassed what they were pre-recession to 65% in 2013 versus 55% in 2009. While they are riskier stocks than office buildings real estate, with more risk comes more rewards. Those who suffered during the recession are being rewarded now. These higher beta stocks can thus be of interest to investors looking for a challenge. Average US hotel rates have increased and saw a record high in the first quarter of 2014: The HPI index by Hotels.com averaged US hotel rooms to be $137 per night, which is a 5% increase from 2013.
In terms of investment, the US is seeing foreign buyers from Canada, China, Singapore, Japan, the Middle East and Malaysia. And with such capital resources, capitalization rates have been low though the net operating income to net assets ratio trend is more impacted by the country's low interest rates, which are expected to rise this year, 2015. San Fran, New York, Boston and other metropolitan areas were low at 5.5% (2014) compared to 6.9% in 2013 (EY, 2014).
After the many articles I read on NA's hotel financial trends, my perception on investing in American property has changed. Instead of looking to the economic disaster circa 2008, it may be time to think about all of the potential gains the continent has to offer.
For many years, I've tried to discuss the potential South America has in offering much to the hotels and hospitality sector. Most countries thrive on welcoming tourists and showing them how vibrant and rich their culture is. I've always thought of being ahead of the game, in relation to my love for travel in SoAm. However, I never thought of investment in the continent in terms of supply and demand in relation to global events, such as, Brazil's World Cup 2014. EY comments on the fact that Brazil, in preparation for the cup, built more hotels and increased the number of hotels in the country in anticipation of a great demand by international travelers. Supply exceeded demand, which is odd seeing as other countries last year expanded and did not face this problem. In 2013, SoAm's hotel pipeline consisted of 400 hotels. As always, we comment on political instability in South, inflation rates and unemployment rates, however, I honestly cannot say I agree with most articles as investment in South America is only discouraged.
No one talks about Panama. No one talks about Chile. No one talks about Colombia.
Did you know that Chile doubled its tourist arrivals from 1.78M in 2004 to 3.57M in 2013? Did you know Colombia has done the same? In 2011, Panama opened its doors to the Trump Ocean Club Hotel and the country has seen a rise in the hospitality sector and growth in general. People discuss Bogota, Colombia and though it is a centre of business, much gains are to be made there. More importantly, the coast of Colombia, such as, historic Cartagena is where the possibilities are. Medellin, Colombia is home to the world's best coffee and one of the world's best textiles. It's too bad the public has an image of economic and political instability resembling the one of many years ago, instead of thinking ahead, however, investors are those reaping the benefits. W Santiago Chile, Westin by Starwood Hotels in Peru, Fen Hotels in Buenos Aires, Argentina, and Sofitel Santa Clara in Cartagena, Colombia and many have much to show investors.
I wish I could discuss Greece and how its political problems will affect its vibrant tourism. Not well, I suppose, however, we'll have to wait and see. Surprisingly, I found that London, England is the "pre-eminent" hospitality center of Europe. I didn't think so. When I went to London, I fell in love with the city. So much history, a love and much talent in the arts, and a passion for learning. However, it's not a city that screams to me "hotel & hospitality" due to its clear distinction between the business centre and artistic culture. It's rigid in many ways but not in others. Although this juxtaposition works and is beautiful and unique, what I mean is perhaps I thought of London as being too traditional. It's the location everyone has always thought of traveling to. Though we look to financial metrics to paint a picture for investors, I think other factors are important to mention, as well. While London is great, hotels tend to be big chains or lower end, innovative hostels - which does not paint an accurate picture of where the demand is going. I would think that tourism is breaking down and spreading across cities meaning primary markets should be seeing a decline in investment, whereas secondary markets should see a rise. Interestingly enough, my theory does boast some support: Munich, Germany and primary markets in Europe have the highest valuations as they mirror wider commercial real estate, however, investors are looking to other markets, secondary markets, such as, Frankfurt for opportunities. I suppose it's because there is a greater demand by travellers to visit and create the new "inn" places. European hospitality is subject to much foreign capital, where Germany saw a rise of $1.9B US in 2014 representing a 100% increase in volume compared to 2013. Back to finance, the reason according to EY is due to low interest rates in the country and high levels of debt liquidity. Canadian Business clarifies that lessons learned from the recession includes that too much debt is "deadly". Earnings are higher these days for hotels and "a real estate research firm based in Newport Beach, Calif., says that some of the better-managed operations have gotten their leverage levels down to a more manageable 4.5 times debt-to-EBITDA."
Ultimately, Europe is experiencing continued growth in the hotel and hospitality sector, More importantly, the trend is going towards investing in secondary markets rather than primary ones.