London and Paris combined attract 30 percent of all hotel investment worldwide--but up-and-coming cities in Asia and the Middle East are catching up quick. A recent report from JLL called Dubai, Beijing, Bangkok, Shanghai and Guangzhou “the world’s most dynamic emerging markets” with huge potential for future growth, and makes a strong case for looking eastward to see the future of hospitality investment.
The Global Giants
Hong Kong, Las Vegas, London, Los Angeles, New York, Orlando, Paris, Tokyo and Washington D.C have the world’s most established hotel markets, accounting for nearly 50 percent of total investment in the hotels sector and representing 7 of the 10 largest markets by room numbers (23 percent of rooms across the 106 cities JLL surveyed). They are also attracting interest from investors, including Chinese, Asian and Middle Eastern capital targeting trophy assets.
Despite their huge scale, the Global Giants can still be vulnerable to geopolitical tensions, economic weaknesses and excess supply. For example, Paris has seen demand and performance decline in the aftermath of terrorist attacks; Hong Kong has been impacted by falling visitor numbers from mainland China and currency appreciation; while the uncertainty of Brexit overhangs the London market. Yet the depth of assets, the diversity of demand and their inherent attraction for business, investors and tourists enable these Global Giants to bounce back quickly from shocks.
The Rising Giants
To see the future of hotel investment, look east from Europe. Shanghai, Beijing, Guangzhou, Dubai and Bangkok are quickly gaining global scale.
Shanghai and Beijing have already expanded to become the second- and third-largest markets in terms of number of guestrooms--only behind Las Vegas.
Shanghai attracted $1.3 billion of hotel transaction volumes between 2014 and 2016, while Beijing drew $1 billion of investment over the past three years. However, Beijing’s momentum has slowed due to lower government demand and lower levels of new development.
Dubai's hotels market, meanwhile, is set to expand by 50 percent in advance of the 2020 Expo, but this may not be an entirely good thing, as oversaturation is driving down occupancy and rates. The city's supply pipeline represents 50 percent of its already substantial market, and the pace of supply is having an impact on hotel performance, despite demand continuing to increase.
Yet for all the potential these cities offer, investment is still lagging: Together, these Rising Giants only account for 5 percent of global hotel investment.
The Next Rising Giants?
Shenzhen’s strong performance indicators and growing demand suggest it could be the next candidate to join the Rising Giants. Likewise, Moscow and Seoul are just outside this group. However, Istanbul and Sao Paulo have recently fallen out of this group, highlighting the vulnerability of these fast-moving markets to geopolitical tensions or economic headwinds.
In Saudi Arabia, Riyadh and Jeddah are each set to double their hotel room supply in coming years, but much like Dubai, the strong pipeline is negatively affecting performance. In the coming years, Jeddah is set to be the major beneficiary from the decision to relax the quota on religious tourists visiting Makkah (also known as Mecca).
In Southeast Asia, increasing global visibility has boosted the hotel sectors in Hanoi, Ho Chi Minh City and Manila. These cities are more fully integrated into global networks, attracting high levels of foreign direct investment (FDI), gaining global visibility and building new connections.
In India, exceptional socio-economic growth is buoying the prospects of the hotel markets in its leading cities. Delhi, Bangalore and Mumbai are showing strong momentum, as are the hubs of Hyderabad, Chennai and Kolkata. These cities are combining rapid growth with high levels of new supply and growing levels of demand.
These cities, however, are yet to attract large scale real estate investment into the hotels sector, although Bangalore saw more than $250 million invested between 2014 and 2016.
Chengdu is leading the charge among China’s second-tier cities, possessing the country’s largest supply pipeline. While Chengdu is one of the more balanced of China’s cities in terms of demand drivers, it is nonetheless at risk of oversupply.