Thai hotels retain their charm

The massive floods that hit Thailand last year took more than 800 lives, destroyed 20,000 square kilometers of farmland and left seven major industrial estates underwater. In December, five months after the flooding began, the World Bank put a number on the economic damage caused: $45.7 billion.

Thailand posted GDP growth of 7.8% in 2010; it was just 0.1% in 2011. Yet the country still hosted close to 20 million tourists, up 20% on the previous year. Bangkok may have been inaccessible at times, but visitors could still reach the likes of Koh Samui and Phuket further south.

Within four hours flight of three billion people, and offering beautiful scenery and affordable accommodation, Thailand clearly remains a tourist hotspot. Investors in the hospitality sector are bullish. "The long-term prospects are good for Thailand as both the public and private sectors support tourism," says Suchad Chiaranussati, founder of Real Estate Capital Asia Partners (RECAP). "There are also abundant and well trained human resources, while the culture makes visiting Thailand a pleasant experience."

Chiaranussati put his money where his mouth is last year as RECAP purchased Phuket-based Laguna Beach Resort for THB724 million from Laguna Hotels & Resorts. He expects the asset to generate an IRR of over 20% in the long term.

The rebound

Singapore-based RECAP is not the only overseas private equity players in the market. Earlier this month, US-based Pegasus Capital Advisors also agreed to buy the Bangkok-based luxury resort and spa business of Six Senses Resorts & Spas.

In March, Paris-based IREIFS Partners Private Equity reopened its offices in Bangkok six years after withdrawing to Singapore, citing political and economic concerns and moved to Singapore. The private equity firm has earmarked $200 million for investments in Thailand.

According to Jones Lang LaSalle Hotels, total investment in Thailand's hotels - not including transactions below $10 million - came to THB8.4 billion ($271 million), 50% more than in 2010. It completes a V-shape recovery for the industry after a drastic fall during the global financial crisis. Private equity was the leading investor group, accounting for 43% of transactions volume. Family-based private investors were responsible for a further 30% with Thai property funds picking up the remaining 27%.

The return of IREIFS has been tied to Pheu Thai Party's victory in the 2011 general election and the appointment of Yingluck Shinawatra as prime minister. Now the previous coalition government has been replaced it is hoped the political instability that marked the last few years has finally abated.

"With investment offices in Paris, London, Cyprus and Dubai, we have found that our investor clients as well as our private partners are seeking growth markets with stability, and Thailand offers this," says Pat Collins, IREIFS's Singapore-based regional director.

Easy entry

More importantly, private equity funds are still keen on Thailand because it offers an attractive entry level. Assets are available at 30-40% of the cost in Hong Kong and Singapore. David Simister, chairman of real estate consultancy CBRE Thailand, says that a 200-room hotel managed by international chain at Phuket is worth around $30 million up. In most major global markets, this is considered a medium-size investment.

In addition, Thailand's hotel owners are also looking for alternative source of funding because domestic banks are currently only extending loans of 50% against their conservative valuation of the project assets. In some rural areas the principal asset - the land - is not worth much money, thereby limiting developers' leverage.

"Hotels require substantial capital for refurbishment to maintain quality and competitive position and we often see owners who have not planned well in that respect and require more capital," RECAP's Chiaranussati adds.

Although Bangkok remains as one of Asia's most popular tourist destinations and is Thailand's major gateway and commercial hub, its ample supply of hotel rooms in all categories has left little growth potential in room rates. Emerging resort areas - which are less crowded and gaining international recognition - may be a better bet. Koh Samui, which has recently seen a private investor acquiring a villa operated by Four Seasons, is a prime example.

As the likes of JW Marriot, Sheraton and Hilton are expand their Thai networks beyond Bangkok and into Pattaya and Phuket, industry professionals suggest PE players to find opportunities in these emerging cities by rebranding and repositioning hotels to meet international standards. An exit to a multinational operator then becomes a distinct possibility.

"Thanks to the rigorous due diligence process PE players undertake prior to an acquisition, full disclosure about the assets and their trading performance is never an issue when those players ultimately decide to sell their investments," says Mike Batchelor, managing director of Jones Lang LaSalle Hotels. "For some domestic family groups, however, who are often inexperienced sellers, there is a natural reluctance to disclose any information, with the responsibility being placed on the purchasing party to make their own assumptions."

In this context, private equity firms are attractive sellers.

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• Topics
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• Southeast Asia
• Thailand
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