LOS ANGELES—2015 promises to be another strong growth year for the US hotel asset class, according to Ernst & Young's forthcoming Global Hospitality Insights report, provided to GlobeSt.com on an exclusive basis. The year will be characterized by widespread growth, continued foreign investment, new concepts and, did we mention widespread growth? "The sector is very strong and attracting high levels of capital," Troy Jones, a principal at E&Y's Real Estate & Hospitality Sector practice, tells GlobeSt.com. In particular, cross-border investment from Asia—China especially—has accelerated rapidly in recent months, he said. This trend is expected to continue and probably gain even more momentum this year. "We expect to see investment from state-owned enterprises in China and South Korea, but also other entities as well from the private sector," he said.
E&Y noted that cross-border investment into the US in this sector, increased a whopping 137% from 2013 to 2014, with foreign buyers continuing to look beyond traditional gateway markets to secondary markets, such as Phoenix, Atlanta, Houston and Orlando.
Other countries that are vying to invest in the US hospitality sector include Canada, Malaysia, Singapore, Japan and regionally, the Middle East. As these capital sources continue to converge, one result has been – and will likely continue to be -- greater competition for the assets and more aggressive lending terms. Indeed, loan-to-value ratios averaged 73% through Q3 of 2014, compared to 66% in 2013.
Capital will also be funneled into new development, both of actual product and of new concepts as well--the latter targeting Millennials with variations of the "less is more" theme.
The capital influx and subsequent competition is also pushing investors into new-but-still-related investments within the sector. This trend as well will continue this year, E&Y says.
For example, a recent trend of acquiring hotel management platforms has emerged, in which the real estate is often not a significant component of the transaction. "The strategic rationale of investors in this space is to acquire a management platform and enlarge it by adding management contracts with minimal capital investment and operating costs, resulting in future earnings growth," the report said.
It also noted the due diligence necessary with this strategy, namely that an operating platform must be carefully evaluated to determine whether the business can sustain earnings growth.
New players are also emerging, E&Y said. In general, certain financial institutions and other alternative investors have been moving beyond their traditional indirect investment positions. They "are now looking to expand to new platforms, taking advantage of their base-level knowledge of real estate from their lending or other investment activities."
Within hospitality, these new players are mainly competing for trophy assets in select gateway markets, it said.
Underlining all of this activity are the fundamentals in the sector, Jones said. "We expect to see RevPAR continue to rise, with translates into profits growth and higher valuations."
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