Once little noticed, the hospitality real estate segment has been growing in prominence during the past decade, becoming one of the highest performing property plays. That’s according to data provider Preqin and investment firm Pro-invest Group.
Returns for the hospitality real estate sector have met or outpaced the MSCI US REIT index over one-, three-, and five-year horizons, the Preqin-Pro-invest report indicated. The report said that fund managers have put this capital to use by deploying more than $110 billion into hospitality assets since the beginning of 2015. It also said they are increasingly targeting larger deal opportunities and are diversifying into Asia and Australia.
The hospitality industry includes hotels, amusement parks, golf courses, cruise ships, and restaurants.
“The hospitality sector has seen a flurry of activity in the past couple of years, hitting levels not seen since the global financial crisis,” Justin Hall, real estate product manager for Preqin, said in a release. “Returns in the sector have outpaced both office and residential assets in every vintage year since 2010, and investors are taking note.”
Investors’ search for yield has led to robust private equity real estate fundraising. The capital secured by funds focused on hospitality real estate has nearly tripled since 2010 and has outpaced that of the global market. The number of hospitality funds has also grown as a record 62 funds targeting hospitality held a final close in 2018.
Investors have been attracted to the returns provided by the sector: Hospitality real estate returns have surpassed those of public market benchmarks such as the MSCI US REIT Index in recent years. Hotels have also outperformed other property types. The report attributed hospitality’s outperformance to the steady growth in international tourism, which it said is leading to an increase in hotel occupancy rates and revenue per available room (RevPAR).
The World Tourism Organization (UNWTO) said that international tourist arrivals rose 5% in 2018 to 1.4 billion, reaching the level two years faster than it had predicted. The increase has been spurred in part by the growing number of middle-class families in emerging economies such as China and Indonesia that are spending more holidays overseas.
The world’s top 10 tourism destinations based on international tourism receipts, generated close to 50% of total tourism receipts in 2018, according to the UNWTO. They are the US, Spain, France, Thailand, the UK, Italy, Australia, Germany, Japan, and China.
“Given the sector’s out-performance and positive outlook for tourism this year,” said the report, “it is no surprise that hospitality is attracting more and more investors from around the world.”
The report said that private equity real estate deal activity in the hospitality sector has soared in recent years as deal value grew by more than 210%. It hit a record $28 billion between 2012 and 2017 before dipping to $27 billion in 2018.
There have been several major private equity hospitality real estate deals at $500 million or larger to date this year. That includes the Blackstone Group’s €900 million ($1 billion) portfolio sale of seven hotel properties in Europe to Aroundtown Property Holding. There also was the $610 million sale of 1 Hotel South Beach in Miami Beach by a joint venture that includes Starwood Capital Group.
The report said that although the industry remains heavily focused on North America, there could be significant opportunities for growth in less saturated markets. As of August 2019, hospitality funds investing in Europe have raised $3 billion, already surpassing last year’s total of $2.9 billion. Hospitality funds investing in North America have raised $3.9 billion for the year to August.
“With a stable and growing tourism industry across international borders, the hotel sector has increasingly come in the spotlight and is progressively accepted as an institutional grade asset class,” said Ronald Stephen Barrott, CEO of Pro-invest Group. “In many cases, hotels outperform traditional real estate asset classes, as hotels have the ability to yield high returns.”