Why hotel investors are opting for upgrades over new builds

Facing higher costs, hotel investors are finding ways to boost values as tourism surges

November 15, 2022

Hotel investors are moving away from new developments in light of expensive construction loans and skyrocketing costs for materials and labor.

Instead, they’re buying hotels with an eye toward upgrading. Around 80% of hotel investors in a recent JLL survey said they’re targeting value-add investment opportunities in the sector.

“Many investors are now preferring to buy existing assets needing refurbishment, repositioning, or rebranding, with the return prospects often much more appealing,” says Xander Nijnens, Managing Director, Advisory & Asset Management, JLL Hotels & Hospitality Group.

The strategies are largely down to inflationary pressures, with construction costs rising and with few development loans available. Development costs have risen by 10% to 30%, according to investors surveyed by JLL, while lending on new builds has become tighter.

In February, Australian hospitality fund manager Pro-Invest acquired the Primus Hotel Sydney and reopened it as luxury boutique hotel Kimpton Sydney following a refurbishment, offering innovative culinary experiences and new lifestyle programming.

“These deals are much easier to underwrite and are quicker to market, compared to building a new development from scratch which easily takes between 24 and 36 months,” says Nijnens.


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Adding value to an existing asset

The rising costs of building materials isn’t just hitting hotels. Soaring inflation, the rising cost of debt, and higher wages have been causing delays to construction across real estate markets, according to JLL’s 3Q22 Capital Tracker.

Likewise for hotels, the high costs, which have escalated beyond pre-pandemic levels, are jeopardizing the feasibility of new developments, Nijnens says.

This has prompted investors to steer toward value-add investment strategies, which require a keen eye and a diverse skillset to identify and execute.

“Doing a value-add refit is, in many ways, more complicated than building a new site with new specifications,” says Nijnens. “An older asset is often more challenging because you have to figure out the state of the existing asset, where to prioritize, whether it can be more sustainable, and consider what guests are looking for.”

Common value-add enhancements for hotel assets include rebranding, expanding the room count or repositioning, which may involve introducing a lifestyle-oriented concept with higher non-room turnovers, and converting underutilized spaces into rooms or food and beverage (F&B) concepts.

These asset enhancements have to consider the evolving guest trends, such as the average length of stay, the type of clientele, or the blurring of lines between business and leisure travel, and how it will impact the overall design of the hotel, according to Nijnens.

Timing and tourism

The push for value-add investment in the hotels space comes amid a recovery in global tourism.

Maldives leads the way with a 128% recovery in revenue generated per available room (RevPAR) year-to-date relative to 2019 levels, with Southeast Asia and Australia following a similar trend, according to JLL data. In the U.S. and Europe, markets like Miami and Paris have seen RevPAR grow 125% and 113% respectively in the same period.

“Our projection of $10.7 billion in total hotel investment in Asia Pacific for 2022 remains unchanged, backed by improving sentiment on the long-term fundamentals of the industry in this region in the coming years,” says Nihat Ercan, Head of Investment Sales, Asia Pacific, JLL Hotels & Hospitality Group.

Hotel investment in Asia Pacific is expected to reach $11.5 billion in 2023, with Japan, China, Australia, and South Korea leading the charge, JLL data shows.

Within the value-add space, in particular, private equity investors are among the most active players, according to Nijnens. “They’re being pushed out of many high-ticket deals due to the higher cost of debt but they’re keen to deploy the capital they’ve raised in the hotel sector,” says Nijnens.

“We expect to see more private equity investors adopt a three- to five-year view and work with us to implement changes that enhance the value of their assets.”

Asia Pacific Capital Tracker 3Q22

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Contact Xander Nijnens

Managing Director, Advisory & Asset Management, JLL Hotels & Hospitality Group

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