Why hotel returns have outpeformed other APAC core real estate sectors

This has been observed in recent years.

Like most property sectors, it has been observed that Asia Pacific hotels experienced strong capital growth in the lead up to the Global Financial Crisis driven by high investor confidence and readily available credit.

According to a research report from JLL, when the crisis peaked, hotels were impacted on two fronts. Within capital markets, repricing of risk, debt and assets witnessed the capital gains of previous years reversed.

Concurrently, the report said, the underlying demand for hotel accommodation was impacted as companies cut travel budgets and consumers reduced their discretionary travel spending.

The Asia Pacific region was somewhat insulated from the crisis by resilient local demand. Both corporate and leisure demand have improved substantially since

2010 and capital growth returned despite the uncertainties of the European Sovereign Debt Crisis and a stalling US recovery.

Further, the report noted that despite the slowdown, hotel returns have outperformed other core real estate sectors in the Asia Pacific region in recent years.

Here's more from JLL:

Compared to other property types, hotel investments performed favourably over the seven years to December 2013.

The risk return profile of hotel assets was similar to that of industrial assets but considerably outperformed office assets with higher returns and lower volatility.

This is true for all of the major regional markets except Hong Kong. The contrast between office and hotel performance is stark, especially given that office assets in the region are usually considered to be a safer and more popular investment option.

However, there is a degree of regional variation in these results. The slowdown in the Australian resource boom has resulted in diminished performance in Perth and Brisbane meaning that overall Australia experienced marginal capital decline in recent quarters.

Japan by contrast, boosted by aggressive government stimulus, has emerged from nearly five years of declining capital values to post annualised capital growth of 1.7% as at December 2013.

Regional variation is also apparent in the income return premium available from investment in hotels. Looking across the markets in Japan, Hong Kong, Singapore and Australia, hotels have enjoyed between 90 basis points and a 220 basis points of spread over office income returns for the seven years to December 2013.

This spread has tightened in recent years in most markets as investors have chased yields but Japan is the exception to this trend.