USA Today earlier this week had an article touting hotel REITs as an investment by highlighting NYC’s hot hotel market. A John Kramer of Kensington Investing Group, notes that “It’s hard to build a new hotel, and it takes a long time”. Assuming no other major geopolitical events make people want to stay home for six months, Kramer estimates 20% annual earnings growth in the hotel sector”. Crucially, and somewhat disingenuously, Mr. Kramer does not say for how long. At any rate a 20% CAGR is pretty near impossible to sustain for any thing more than a couple of years.
Approximately 7500 rooms were added over the last five years in the Big Apple and another 7000 is slated to come on line over the next 2-3 years. The loss in room inventory due to conversions to condos has virtually come to a halt and at some point in the next couple of years a combination of a business slow down along with new supply coming on line will result in the shine coming off this sector.
While the foregoing is by now old hat to most savvy hotel companies currently scouring the market for buys, the growth overseas in China and India is another matter. Both economies are on overdrive with companies aggressively seeking access. Travel Weekly’s website quotes Accor’s boss in India, Dennis Oldfield, a former China-hand, as saying “The new low-cost airlines in India are changing everything. There is huge demand from Indian businessmen to travel around the country – and it’s not just to Bangalore. And now, thanks to the lowcost carriers, they’re looking for leisure travel when they’ve finished business.” Investing in a REIT with a focus on those two countries is likely a better bet. For starters there is Hong Kong based Regal Hotels which is on the cusp of forming the first Hong Kong based REIT with an eye on mainland China besides Hong Kong.
A good place for risk averse investors would be to place their cash in Van Kempen’s tax exempt fixed income fund which gurantees a return of 5%, equivalent of a 8% non tax exempt mutual fund.
Thanks for your comment Yaser. You are very right about the returns from tax exempt FI funds for risk averse investors. Of course, investors in real estate are by definition those who are are not averse to some risk. Their expectations usually reflect that except when portfolio managers and analysts misstate the risk as was done with regard to hotel REITs
Vijay,
I have sent you material and e-mails without response, so forgive me for using this venue in a more creative way than you intended.
I would like to meet you in July for a brief demonstration of our Hotel-Specific Accounting and Operations software that can bring much efficiency to your hotel operations. In 8 years of business (with 139 hotel management company clients) we have NEVER lost a client. Thank you for your consideration. Where can I FedEx substantiating info?
-Rick 770.329.9704