Distressed hospitality assets drop in value over pademic

July 10, 2020 | 16:52
The strong economic impact of the pandemic has caused a 25-30 per cent reduction in the valuation of hospitality assets, leading to a buyers’ market for international financiers.
distressed hospitality assets drop in value over pademic
Distressed hospitality assets drop in value over pademic-illustration photo, source: internet

Giovanni Marino, managing director at KPMG Legal Hanoi claims the hospitality sector is one of the most impacted by the coronavirus crisis.

“The situation is proving favourable for mergers and acquisitions (M&A) while the market is becoming a buyers’ market,” Marino said at a last week’s webinar held by the Hong Kong Business Association Vietnam on the theme of M&A transactions during COVID-19, with a focus on hospitality.

“The offered assets are now more affordable than before the pandemic and this is an opportunity for buyers with capital in their pockets,” he said.

Nguyen My, a real estate broker in Danang said told VIR he has been looking for buyers for a 2-star hotel located in Son Tra commune, Danang. The owner of this 450-square-metre hotel agreed to the price of VND128 million ($5,550) per sq.m. Looking to sell as soon as possible, the owner reduced the price by charging only the land expenses, construction fees, and fees for interiors and equipment – which was estimated at around 10 per cent of the land price.

In many other cases, despite assets being offered, sellers are not in a rush and are content to wait.

“In some cases, buyers want to strike the deal as soon as possible but sellers are not in a pressing financial situation and try to postpone or find some more favourable conditions before closing a deal, expecting that their evaluation may go up,” said Marino.

Marino also added that the low occupancy rate has heavily impacted the hotels’ cash flows and their owners in many cases are considering collecting their investment capital to deal with other investments. The most sought after properties by investors are hotels and resorts situated near the tourist destinations. Many investors are looking to commit upwards of $20 to $25 million are aggressively looking for 4- or 5-star hotels.

Govinda Singh, executive director from Colliers International Asia (CIA), said that the world has been facing a period of enormous volatility where experience and decision-making anticipation will be key for the survival and recovery of hotels.

Investment trend

Singh also said that cross-borders trends are visible, with more interest especially from EU investors.

“We are going to see cross-border real estate investment trusts (REIT) and funds especially from Singapore, Japan, South Korea, and Taiwan looking into Vietnam,” he said.

Ho Chi Minh City and Hanoi represent the majority of the deal volume while there is also increasing activity in Danang and Nha Trang. Commonly, emerging market investment starts with key gateway cities and, as local knowledge and brand proliferation increases, investors then spread out in search of higher returns.

“We expect the deal volume to remain subdued until international air routes return without quarantines, with a following sudden bounce in investors seeking to snap up deals. Therefore, the deal volume is likely to significantly increase at the end of the first quarter of 2021. It is all timing and pricing,” Singh added.

In another report with the theme New Buying Opportunities Whet Investor Appetite released in June, CBRE cited that regarding core investment for real the estate market, in the short term, investors would hit towards more core or income producing assets as they look to dial-down risk. Properties generating secure income in gateway cities will be prioritised over assets and locations further out on the risk spectrum.

CBRE also cited that the COVID-19 pandemic has trigged considerable stock market volatility with the S&P Asia-Pacific REIT Index falling by 45 per cent between mid-February and mid-March.

“As lockdown restrictions are being eased and business reopens, previously bearish investors may re-evaluate their views on the retail and hotel sectors. Many retail and hotel REITs have not seen any net asset value (NAV) discount improvements since the end of April,” the report read.

CBRE expects investors to continue to monitor these sectors and select opportunities at the asset level.

“The gradual relaxation of travel restrictions and pace of the tourism market recovery will be potential key factors driving re-valuation,” it said, adding that although the rapid rebound in REIT share has limited privatisation opportunities, investors can still pursue platform acquisitions from office REITs or diversified REITs wishing to realise NAV discounts, with many currently trading at a 15-30 per cent NAV discount.

“Sentiment is gradually improving, decision-making processes are restarting, and there is a large volume of dry powder waiting to enter the market,” the report stated.

Institutional buyers also expected to explore secondary trading opportunities for closed-end funds as valuations are updated and prices become more attractive. In some cases, groups can still compete in cross-border deals despite travel restrictions.

While a mismatch in pricing expectations may inhibit some deals, CBRE expected to see an increase in willing sellers in the second quarter, driven by liquidity needs, funds expirations, and redemption pressure.

Road to recovery

The closure of establishments has meant a total reduction in income and job destruction like never seen before.

“The phase of the establishment’s reopening will be marked by a weak demand which will make it difficult to reach breakeven levels. Hotels will be forced to use their liquidity reserves or to obtain new financing to guarantee a return to short and mid-term profitability,” said a CIA report.

The duration of the crisis for the sector is difficult to predict and will depend largely on containment measures and perhaps a successful drug or vaccine. Nevertheless, the tourist sector will re-emerge strongly and will become once again the key driver of Vietnam’s economic growth, it added.

Singh of CIA also expected strong domestic weekend demand followed by extended domestic and business travel to lead the bounce back.

“This will be followed by intra-Asia travel, long-haul, and lastly business tourism. Phu Quoc, Nha Trang, Vung Tau, and Danang will be top destinations followed by Ho Chi Minh City and Hanoi,” he added.

According to Singh, these destinations offer attractive yields compared to mature destinations, opportunities for geographic diversification, and spreads in excess of 5 per cent on local bonds. Meanwhile, the CBRE report stated that the situation is expected to return to normal within three to six months with gradual quarterly increase in the number of transactions.

By Bich Ngoc

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