Is Covid-19 Causing Distressed Hotel Assets in Thailand?
The pandemic has brought financial pain across the tourism industry in Thailand. Few have been hit harder than hotel owners. Many owners have done everything right. They built a great product in a great location, but they are victims of timing. Hotels that only just opened in 2018-2019 or didn’t have the chance to reach stabilization and are saddled with huge debt after having just finished construction, are in dire straits right now, and its through no fault of their own. Sure, there are risks to development and hotel ownership, but who included a scenario where a pandemic causes a country to close its borders to foreign tourists for one year or more?
2021 is supposed to be the year of the beginning of a recovery. As far back as April/May 2020, real estate experts were predicting a gradual return of inbound tourists to Thailand by the fourth quarter of 2020 with the high season welcoming a limited number of foreign tourists and recoveries beginning in the first quarter of 2021. Fast forward to January 2021 and unfortunately that reality did not materialize and what we have instead is a new wave of the pandemic, limiting the already minuscule domestic tourism market. Such is the unpredictable nature of a pandemic.
Properties in Thailand that had already faced some trouble during 2019 due to fewer Chinese tourists, a strong baht, economic problems in Europe and the Chinese-USA trade war, did not enter 2020 equipped to carry the property for months-on-end with little to no revenue. The BOT and banks have tried to provide some relief, but it is temporary and likely will expire well before a real recovery is underway, which could be 2022 or beyond, once a large portion of the population has been vaccinated and sufficient time has passed to observe the effectiveness of the vaccine.
Foreign tourists are not returning to Thailand in large numbers anytime soon and that is a huge cause for concern among hotel owners. Nobody doubts that foreign tourists will return to Thailand, but how many hotels will be able to survive until that moment?
Many investors in Asia are looking at distressed opportunities in Europe or the United States, but international investors are also looking at Thailand for distressed opportunities. Thus some of the options available to hotel owners looking for a solution are to sell, JV or borrow from an overseas investor.
There are a number of family offices, funds, and high-net worth individuals interested in purchasing distressed hotel properties in Thailand. The demand comes from within Thailand as well as from overseas. Many investors expect there to be an abundant supply of properties in the market, but that’s not the case yet. Hotel owners do not see pre-Covid and post-Covid pricing. For investors looking for a bargain, as of now, they will not easily find one. For owners looking for a buyer, they may be able to find interested parties. However, buyers today are looking for bargain pricing and definitely considering pre-Covid and post-Covid pricing. It will take some time for the pricing acceptable to both buyers and sellers to meet.
An interesting but complicated option extremely dependent on the two parties considering entering into a JV. From a hotel owner standpoint, a JV with an overseas investor can provide much needed cash, some bargaining power with lenders, fresh ideas and concepts for repositioning a property, and a clear exit. In addition to normal due diligence on a property though, in a JV, both parties need to do due diligence on each other. The hotel owner will need to consider the exit requirements of the JV partner and usually this means selling the asset after a fixed holding period.
Thai banks are reluctant to lend to hotels. Overseas alternatives exist, but these are typically short-term loans with interest rates in the mid-teens.
For hotel owners thinking of a possible sale, JV or borrowing in the future, it is important to prepare in advance as speed will be a factor in whether a transaction is successful or not. Prepare all due diligence material in advance, have it scanned to PDF and save it all in a secure place that can be easily and securely shared.