Hotel investment volume in 2020 witnessed a 60 per cent global decline in comparison to 2019: JLL

Mumbai: Hotel investment volume in 2020 witnessed a 60% global decline in comparison to 2019 and in India, the decline in hotel investment trade was even sharper at 84% in 2020 as compared to 2019 according to JLL. Previous years had seen promising and consistent growth in occupancy and average daily rate (ADR) levels across key cities world over. India was no different.
 
India-wide hotel performance registered a decline in RevPAR (Revenue per Available Room) by approx. 55% over the previous year, closing at a RevPAR of INR 1,675. Whilst performance of business hotels has yet to fully recover, leisure markets led by domestic travellers showcased some resilience in the last quarter of 2020.
 
As a result of the pandemic, hotels were compelled to reset their business plans. Standard operating procedures were drastically transformed with adaptation of available technology to encourage social distancing and increased focus on health safety and hygiene practices. New hotel developments slowed down, and most hotel openings were deferred by at least six months, according to JLL.
 
According to the STR data, Delhi’s hotel market witnessed a 32% PP* decline in occupancy and a 24.1% decline in Average Daily Rate (ADR), resulting in a 57.3% decline in RevPAR, in 2020 over 2019. Additionally, Bangalore’s hospitality market witnessed a 39-pp decline in occupancy and a 23.1% decline in ADR, resulting in a 67.7% decline in RevPAR, as compared to 2019. 
 
Brand signings in the country decreased by 38% over last year with 125 hotels and over 12,000 keys. The year saw a revival of demand firstly in the leisure destinations, with the maximum volume of signings in Tier-III cities
 
India has a strong market for robust domestic tourism
 
The tourism industry appears to have taken the hardest hit across the globe of all the affected industries in the Covid-19 pandemic. In wealthy economies and in certain countries with tourism reliant economies, it was observed that strong direct government support that aided hotel and restaurant industry and workforce.
 
“The post-pandemic world is bound to see more changes. Realignment of source markets, guest preferences, physical space planning will all be more dynamic and will be discussed more often in board rooms and team meetings. Capital assistance has emerged as the focal point and will remain the need of the hour to help hotels sustain till demand picks up.” says Jaideep Dang, Managing Director, Hotels & Hospitality Group, JLL India.
 
One in almost every five hotels signed in 2020 was a converted hotel: In India, hotel conversions had seen a consistent increase, nearly doubling from 33 conversions in 2016 to 65 in 2019. However, the conversions plummeted to just 29 hotels in 2020 under the impact of the COVID-19 pandemic. International hotel chains came at par with domestic chains in terms of converted hotel rooms, stacking at 50:50, showing increased flexibility to sign smaller sized hotels. There were no portfolio conversion deals concluded in the year. The erratic uncertainty in the market made the existing or committed hotel owners to adopt a further cautious approach than take any conclusive investment decisions in the year. With the gradual return in demand over the year or so, the hotel signings are expected to bounce back with some portfolio conversion deals as well.
 
Traction spreads to Tier II and Tier III cities: In line with a growing trend over the previous years, tier-III cities have seen the maximum number of brand signings. The average keys signed per hotel are 137, 97 and 79 in tier I, II and III cities respectively. In terms of the geographical preference in the 2020 signings among the domestic and the international operators, the ratio is 48:52, 43:57, 61:39 inventory volume-wise.
 
Hotel Investment Outlook
 
Hotel investment volume in 2020 witnessed a 60% global decline in comparison to 2019 due to the Covid-19 pandemic. The near zero cash flow environment made asset valuations very challenging also resulting in difficulty of obtaining debt financing. As a result, acquisitions were largely on hold in 2020. Hotel investment volume in India reached a record high in 2019 registering investment sales of USD 762 million.

Investment activity has been on a pause since March 2020 post the nationwide lockdown.  As the country gradually opened up with the unlock measures in phases since June 2020, the sentiment for evaluating hotel assets gained a little traction. The preference for assets in leisure markets increased given the strong recovery of leisure travel across the country since the third quarter of 2020. Investors were also keen on evaluating distressed opportunities in key markets, given last years' decline in corporate travel and its slow and steady recovery has impacted operational cash flows.
 
2021: Opportunistic optimism
 
Given the month on month increase in hotel room demand, there are emerging signs of investors evaluating hotel assets in the country, however valuations are at a discount to pre-Covid levels keeping in mind a slower demand and rate revival, especially for cities that are dependent on corporate and MICE segment and reduced profitability levels for the next 2-3 years.  Investors are mostly inclined to evaluate operational assets in key markets rather than greenfield or brownfield developments.
 
A few developers with strong balance sheets are also actively evaluating hotel deals. This trend has also been witnessed on a global level, where private equity firms and institutional investors have large pools of opportunistic capital to deploy for funding or acquiring quality assets in major cities which may become available for the reasons highlighted earlier.
 
Looking ahead
 
Looking ahead in 2021, we expect that the current COVID-19 pandemic will continue to have some impact on both commercial and leisure hotel markets across the country, however we expect leisure markets will lead the overall recovery with pent up domestic demand. Business travel which has always formed the lion’s share of the market will continue to see a rather muted recovery.