As the leader of JLL’s global hotel research platform, Zach tracks industry trends in the Americas, Asia Pacific, and EMEA and spearheads the data acquisition strategy for the hotels and hospitality group. He shares his insight on the increase in the volume of real estate investment transactions in the luxury sector, the growth of international travel and the global investment outlook for 2023.
What investment trends are you seeing in the luxury sector coming out of Covid? Has there been an increase in the volume of real estate investment transactions?
In tandem with accelerating fundamental performance, the investor appetite for luxury hotels has increased post-Covid. Global luxury single-asset hotel liquidity reached $10.4 billion in 2022, a 5.1% increase relative to 2019 and a 4.5% increase relative to the 5-year pre-Covid average (2015-19). The Americas led all regions globally, with $6.9 billion in single-asset luxury transaction volume as Asia Pacific and EMEA experienced some softness driven by widespread border closures and geopolitical tensions, respectively. China’s recent reopening should provide a boost to both Asia and Europe as the country has historically contributed an average of $900 million annually to cross-border luxury hotel investments (there has been $0 of Chinese capital invested into hotels outside the country since early 2020).
Expect investors to gravitate towards safe-haven markets in 2023, such as London, Paris, Japan, Singapore, Boston, and New York looking to acquire irreplaceable luxury assets with in-place cash flow. Cash-rich Middle Eastern and Latin American investors will likely be highly acquisitive following their 2022 investments into Aman and the acquisition of Baglioni Hotels & Resorts, respectively.
What are you seeing for international travel and the global investment outlook?
Following the removal of many travel restrictions, international travel increased meaningfully in 2022, reaching 63% of pre-pandemic levels, with Europe and the Middle East benefitting the most. Cross-border hotel investment remains limited, though, accounting for only 6% of total global transaction volume in 2022, a decline of 14pp relative to pre-Covid averages (2015-19). All eyes now turn to China with the country’s recent reopening announcement following nearly three years of strict lockdowns. The potential impact of this could be a significant impetus to continued global lodging recovery and cross-border hotel investments. In 2019, the number of outbound tourists from China reached 155 million, the most of any country worldwide. Moreover, in the seven years prior to Covid, outbound Chinese capital for global hotel investments averaged $3.4 billion annually. From 2020-22, outbound Chinese hotel investment has only been $400 million combined.
In 2023, look for cash-rich Middle Eastern and Latin American investors to deploy capital across Europe and in select U.S. markets, particularly in the luxury space. Expect safe-haven markets to remain key for foreign investments, with Asian and Middle Eastern investors likely to focus on gateway markets in Europe, such as London and Paris. London will be a focal market as the British Pound weakens, thereby attracting overseas visitors and investors from major international source markets. Other highly sought-after markets in Europe include Zurich, Geneva, Milan, and Rome. In Asia Pacific, expect European investors to deploy capital into Japan, Singapore, Melbourne, and Sydney. Like London, Japan will benefit from the weakening Japanese Yen.
Increased tensions between the U.S. and China have resulted in some Asian investors opting to take a pause on investing in the U.S. and focus instead on intra-regional and European investors. Other global investors, predominantly from the Middle East and Europe, are selectively looking at the U.S., with New York, Los Angeles, and Boston ranking as the top three most sought-after markets.
What do you see for 2023? Will the market continue to be robust? Do you have any concerns?
As we enter 2023, all eyes are on the debt markets following widespread capital market dislocation driven by monetary tightening policies implemented by the world’s largest economies, namely the Fed in the U.S., the ECB in Europe, and the BOE in the U.K. As a result, lenders have become selective about the projects they will finance, with some moving to the sidelines altogether until the markets normalize. As such, JLL expects some short-term suppression of hotel investment activity which could result in a contraction of total global hotel investment volume by 5% to 10% in 2023 relative to 2022. Robust hotel fundamentals, which are expected to accelerate further across all regions in 2023, will partially offset some of the capital market headwinds. Buyers who are well-capitalized and less reliant on leverage will have an advantage. With a substantial amount of impending debt maturity on the horizon in the Americas and EMEA and interest rates not likely to subside in the near-term, expect opportunity for quality acquisitions to materialize. In APAC, where loan-to-values are generally low, record amounts of capital and accelerating performance will drive acquisitions. Look for hotels in safe-haven markets to continue to garner interest, particularly from foreign investors, as well as those in the luxury sector.
How is the luxury hotel sector redefining itself with the rise of non-traditional hotel brands? What is this telling us about the HNW traveler?
Despite widespread economic volatility, the world’s wealth has continued to grow. The number of HNWIs (those with a net-worth of at least $1 million) has risen significantly over the past seven years, with North America and Asia Pacific leading the way. With global travel demand on the rise, increased flexibility particularly amongst the wealthy, and consumers seeking more authentic experiences, expect the luxury travel segment to transform and expand in 2023. Look for traditional luxury hotel brands to expand into new verticals which will present increased investment opportunities.
Since the onset of Covid, consumers have demonstrated an increased willingness to spend discretionary income on travel and experiences as compared to goods and services. As such, traditional luxury hotel brands have created new product offerings in non-traditional lodging verticals to cater to HNWIs with the goal of owning the entire traveler experience. This includes The Ritz-Carlton Yacht Collection, Four Seasons Private Jet, and Aman Yachts amongst others. Not only have these products been met with tremendous consumer demand, but they have also allowed these brands to further their traditional hotel footprints and increase investor interest, as evidenced by Oaktree Capital’s $850 million investment into The Ritz-Carlton Yacht Collection.
With seemingly little price-sensitivity and an increased desire for immersive experiences, look for luxury travel brands to expand even further in 2023. One area to watch is the evolution of exclusive private membership clubs. While not a new concept, the private membership club space has expanded significantly in the past two years, with many new entrants entering the sector. SoHo House, arguably the leader in this space, currently has a membership base of 140,000 individuals with an additional 82,000 waitlisted. Other hotel brands have taken notice, with Aman recently launching an exclusive membership club that boasts a $200,000 initiation fee. Look for further growth and innovation in this space in 2023.