High net individuals (HNIs) and family offices are emerging as an important investor class in the hospitality sector as they plough back money made in other businesses to buy hotel properties.
The segment accounted for one-third of the transactions recorded by international property consultancy JLL in the first half of 2023, far higher than private equity or institutional players.
The January-June period has witnessed deals worth $175 million, marking a significant uptick compared with the last six years, barring outlier 2019 when two large transactions (Brookfield taking over Leela assets) took place.
JLL predicted capital transactions worth $263 million in 2023, more than tripling from 2022 when deals worth $73 million took place. The transactions include change of hands through the insolvency process.
“There are two clear trends emerging. HNIs and family offices who made money in other businesses — manufacturing, financial markets, data centres and warehouses — are diversifying into hotel assets. Second, the re-emergence of real estate developers as buyers of hospitality after almost a decade,” Jaideep Dang, managing director of hotel and hospitality group, JLL India, told The Telegraph.
After burning fingers in the aftermath of the global financial crisis in 2008, real estate developers had shied away from the hospitality sector. JLL data suggests they are now back in a big way, but with a more disciplined approach.
Developers are now often seen preferring mixed use developments with some bit of residential, retail and hospitality thrown in altogether to manage cash flow better. They are also seen executing projects with a more prudent capital structure having lower debt gearing than in the past.
“From the capital market point of view, the weaker hands are giving away to the stronger hands. Those who made considerable money in office or residential properties are now allocating funds to hospitality,” Dang said.
While the sellers are also mostly from the segments of realtors who are looking to cash out, Dang said the transactions are taking place at a value for money level.
“We have not seen distress sale. Neither there is exuberance. Transactions are taking place at a fair value,” he insisted.
Even as transactions are up, the number of properties coming to the market is expected to be limited in the next four years given that it takes about that time to complete a hotel project. Moreover, there has not been much development in 2020-21 when Covid ravaged the hospitality industry worldwide.
This, along with buoyancy in the domestic travel, is going to support the room rate even as occupancy appears to be plateauing out. Consequently, return on hospitality is expected to remain a lucrative fresh investment.
Dang argued that there appears to be a strong correlation between office market revival and hospitality and as a result hotels in Bangalore and Hyderabad have started performing well.
The JLL study also suggested a diverging trend in shape and size of hotels. While Tier-1 cities are experiencing bigger but fewer hospitality projects — rooms with more than 250 keys — the Tier 2 and Tier 3 cities are witnessing more number of hotels with fewer keys (80-120).
