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.