Revenge Tourism is the New Direction of Travel for Asia

Despite high airline ticket prices and new widespread Covid-19 variants, we have seen a surge in the demand for travel across regions which have eased Covid-19 restrictions. With staff and operational reductions over the past 2 and a half years, the tourism sector in Europe has been struggling to cope with pent-up demand and the high numbers of travellers. For example, in July 2022, Heathrow Airport controversially applied a daily 100,000 passenger cap to better manage excessive queues, baggage delays and flight cancellations.

As one of the most severely impacted industries as a consequence of Covid-19, this operational crisis is, ironically, a welcomed relief and a sign that the industry is well on track to recovery.

From an Asia-Pacific perspective, the region has seen a significant easing of border restrictions, with most markets reducing quarantine periods and others taking more prominent steps to remove quarantine restrictions altogether such as Vietnam, Indonesia, Singapore, and the Philippines. Indeed, Thailand has just downgraded Covid-19 to the same level as influenza.

Even in Hong Kong, which has up until now had some of the world’s most severe quarantine rules, there has been a welcomed easing of restrictions. The recently implemented ‘3+4’ quarantine scheme is broadly welcomed as a step in the right direction by the travel sector and follows hot off the heels of the Hong Kong SAR government halting its Covid-19 flight suspension mechanism.

As a result of the above, there is no doubt that the trend of ‘revenge tourism’ has already benefited large parts of the Asia-Pacific region with other destinations such as Hong Kong and Mainland China also anticipating the inevitable ‘revenge travel’ boom to reflect the easing of restrictions.

As the hotel and hospitality sector continues to recover across the Asia-Pacific region, we wanted to highlight some other sector trends we have identified from working on a number of projects during the pandemic period.

Environment, Social, Governance (ESG)

The demand for environmental and sustainable travel by consumers has continued to accelerate. Corporate awareness and regulatory requirements have also carved ESG as an important trend in the industry. We anticipate more eco-centric brands to emerge within the Asia-Pacific region and hotels will likely incorporate green and wellness elements as a key offering.

Owners should consider the management structure and operating agreements carefully. Regional and international operators may seek to include enhanced obligations around committing to sustainable development and operational practices, imposing obligations to use particular suppliers (or prevent the use of others that do not have sufficient ESG credentials) as well as including additional budgets / contributions such as social, conservation or development funds.

Finance and the Role of Private Equity

Banks have been working closely with hotel owners over the past two and a half years to restructure debt across the hotel and hospitality sector, which has been badly affected by the impact of Covid-19. Those lenders are revaluating their portfolios and, going forward, will likely be more selective about the type of assets they are financing as well as the borrower’s profile.

We anticipate higher LTVs (loan to value) and / or lower debt service cover ratios. Accordingly, we expect private equity to play an increasingly important role in financing hotel acquisitions and/or required capital expenditure. Private equity as well as private capital more generally, is likely to be agile and not as constrained as the more rigid debt-financing structures.

Linked to ESG, we also anticipate a rise in green and sustainability linked finance in the Asia-Pacific region as both lenders and corporations strive to embed ESG within their practices. In CBRE’s Asia-Pacific Market Outlook 2022, they reported growth in green loans across the region and highlighted a number of noteworthy deals including a USD 160m green loan secured by Hong Kong and Shanghai Hotels Limited and granted by HSBC as well as a USD 299 million green load secured by Worldwide Hotels and granted by Maybank Singapore.

Owners of existing and prospective hotels seeking to benefit from private equity funding or green financing still need to consider their agreements, as hotel operating agreements typically contain a number of restrictions and requirements when it comes to changes of control in relation to the owner’s corporate structure or in relation to the ability to raise financing.

Technology

The use and integration of guest-facing and back-office technology within the hotel and hospitality industry has accelerated over the past 2 and a half years as a solution oriented response to Covid-19. Owners have had to inject additional capital expenditure to upgrade hardware and software including virtual check-in and guest management platforms, QR codes as well as tools to manage the hotel and interpret data more efficiently.

We anticipate a continued investment in technology as brand standards evolve to improve customer experiences and to manage other challenges in the hotel and hospitality industry such as employee shortages. Owners of existing hotels may be required, pursuant to their hotel operating agreements, to deploy additional funds to meet operator requirements. Owners of prospective new hotels should consider negotiating ‘freeze periods’ with operators to minimise additional capital expenditure for a period of time (typically 3 – 5 years) following the opening of the hotel to avoid being materially affected by these fast-paced changes.

Inflation Hedge

Hotels assets are seen as a better hedge against inflation than other types of property assets. The reason for this is that the operator has the ability to regularly revise room rates and other revenue streams to take into account inflation. This is not the case with, for example, a commercial office lease where the rent is usually set for at least 1 year if not considerably longer without the ability for it to be revised.

As such, we anticipate that the supply of hotels and the level of investment in the sector will increase significantly over the next few years in the Asia-Pacific region assuming the post-Pandemic recovery continues. One clear example of this is international hotel chains such as Hilton as well as regional heavyweights such as Shangri-La are both increasing the number of hotels in their portfolio. We understand that Hilton is proposing to more than double the number of hotels it has in Asia over the next few years.

Owners should ensure that they are sufficiently advised to achieve hotel agreements that are reflective of the evolving legal landscape and the direction of travel for hotel agreements including further alignment between risk and reward, additional controls in favour of an owner and more meaningful performance tests.

The above is certainly welcome news to a sector that has been severely impacted over the last few years. We believe the recovery across the Asia-Pacific region has already started. The phenomenon of revenge tourism will only benefit the region further as more and more countries start to ease restrictions – allowing Asia-Pacific to once again be a leading destination for travel and tourism.