Gaw Capital has dry powder; here’s how it will sprinkle it

Hong Kong-based Gaw Capital Partners has brought its seventh Asia Pacific real estate fund to a final close at $3 billion, an impressive amount of equity raised given prevailing market uncertainties.

On one hand, this reflects investors’ confidence in the family-run real estate private equity firm. On the other, it will test its agility and astuteness in deploying capital amid the current inflationary pressure, rising interest rates and potential recession risk.

Less than one-third of the Gateway Real Estate Fund VII has been deployed, said the company’s Managing Principal and Co-Founder Kenneth Gaw in an interview with Hotel Investment Today.

The fund focuses on office, retail, hospitality, and industrial buildings, and of late has been active in private credit and “thematic-driven investments” such as life science, data centers and logistics warehouses. These relatively new sectors for it are seeing positive responses from investors.

But “there will certainly be dry powder for hospitality,” said Gaw, when asked how the sector competes today with the other asset classes.

In March, Gaw Capital teamed up with KKR to acquire the Hyatt Regency Tokyo from Odakyu Electric Railway for an undisclosed sum.

Investors like hospitality because it is a “clear recovery play,” he said, referring to the sector’s stellar comeback from the pandemic. Moreover, hotels can adjust room rates quickly as pent-up demand proves strong and customers are willing to pay higher prices.

“Hotels are able to raise room rates to be more than the cost of inflation. Investors like these kinds of assets that can still produce positive carry, where income is higher than borrowing costs, whether it is existing income or there are clear trends of growth to achieve it,” Gaw said.

Most of Gaw Capital’s leisure properties in the west, including in Spain, Portugal, Hawaii, southern California and French Polynesia, recovered by last summer and are now performing well above pre-COVID levels, he said. With their city hotels, he noted that those with more leisure offerings such as the Hollywood Roosevelt in Los Angeles and The Standard High Line Hotel in New York do much better. Both have a lot of F&B and entertainment elements.

“People like to go on holiday. Even if they are traveling for business, they want to be in hotels where they can have fun and enjoy unique experiences,” Gaw said.

Yes, Asia is behind the West in recovery. “But many places have started to recover well. This is despite Chinese travelers aren’t back in full swing,” Gaw added.

Japan is especially attractive because borrowing costs are cheap due to low interest rates. Moreover, the country has diverse attractions – big cities, ski resorts, mountains, beaches, culture, shopping and not least of all, food.

The country is also tried-and-tested for Gaw Capital, which entered Japan’s hotel sector in 2014 with the acquisition of Hyatt Regency Osaka. It exited as the second largest hotel deal in Osaka in 2016.

“Room rates have actually gone up a lot in Japan in the first and second quarter, and that’s ahead of mainland Chinese travelers returning to Japan. Travelers from Hong Kong, Singapore, Korea, Taiwan, Southeast Asia and the U.S. are visiting Japan. So, I think there will be a very strong recovery when Chinese travelers return in force,” Gaw said.

Japan welcomed nearly 32 million international tourists in 2019 and China was its top source with 9.6 million visitors, official tourism data showed.

In March, Gaw Capital teamed up with global investment firm KKR to acquire the Hyatt Regency Tokyo from Odakyu Electric Railway company for an undisclosed sum. In a statement, Kensuke Kudo, KKR director of real estate, described the investment as “a rare opportunity” given its prime location in Shinjuku, one of Tokyo's busiest business and retail districts. The 746-room hotel will undergo full renovation of rooms and public areas.

But other than Japan, getting loans for new acquisitions “is not that easy,” Gaw observed. “A lot of hotels did not perform well during COVID-19. So, banks that already have exposure to hotels may be more inclined to try to save their existing portfolio than committing to new ones,” he said.

Opportunities at hand

Having dry powder is thus heaven-sent. Last September, Gaw Capital paid cash for 11 hostels with a total of 1,500 rooms, owned by YHA (Youth Hostel Association) New Zealand. The hostels closed down in December 2021 due to extended lockdowns.

“We have reopened them, and they are all doing well above budget. With consistent cashflow, we can then go and refinance [the portfolio],” Gaw said. There are plans to rebrand the properties which are undergoing upgrading one at a time.

“Without cash, or vendor finance, it really limits the number of deals you can do,” Gaw said. “We bought several hotels during COVID-19 in Portugal and Thailand with vendor finance, where we negotiated deferred payments to the vendors in order to get the deal done.”

Without cash, or vendor finance, it really limits the number of deals you can do,” Gaw said. “We bought several hotels during COVID-19 in Portugal and Thailand with vendor finance, where we negotiated deferred payments to the vendors in order to get the deal done.

Kenneth Gaw

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Going forward, he believes private credit “could be interesting for hospitality as well” and Gaw Capital is already looking at a few opportunities.

Baird defines private credit as a loan extended to a privately held company that may not otherwise be able to access the traditional loan market such as banks. Repayment of the loan is often secured by a pledge of the borrower’s assets.

When asked about its two hotels-specific funds, the Pan-Asia Hospitality Fund and the European Hospitality Fund, Gaw said as only 50% of the latter has been deployed, the company will invest more in the continent. It will continue to look at opportunities in Spain and Portugal, where it already has assets, and at other southern European markets such as Italy, along with hotels in gateway cities in Europe.

The Pan-Asia Hospitality Fund, fully deployed, is now in exit mode and the company is in the market to sell a couple more assets. In 2022, it sold the Renaissance Okinawa and Hyatt Regency Danang; its website shows there are seven assets left under the fund.

On whether there will be new hospitality funds, Gaw said, “We’re not in a big hurry as we've just raised Fund VII. So, there’s enough to work on for now. And we still need to complete the deployment of the European fund and exit the pan-Asia fund.

“But there are investors who are interested in having more turnaround hospitality opportunities, so there may be some co-investments.”

As of first quarter, Gaw Capital has assets under management worth a total of $36 billion. Of this, hospitality accounts for around 15%, which Gaw believes is “about right” for a diversified portfolio.

The largest sector is office, which is 35% to 40% of the pie and “which unfortunately a difficult sector right now,” Gaw admitted.

“For most large managers, office as always is the core because historically it’s always the safest, the most mainstream, the most liquid. But who knows that there would be COVID, that there would be work-from-home, especially in the West. Luckily for us, most of our assets are in Asia, where there’s a lot less of a work-from-home culture,” he said.

Eyes wide open

And what of the biggest challenge or risk for hospitality that he’s watching closely? 

“When interest rate is high, will it induce a recession? So far, I’m surprised by how resilient the market has been. I was expecting a recession already but as you can see from the stock market, not yet. And obviously people are still very happy to travel at such high rates.

“But if there is a recession, obviously that would affect rates. So, to your question, I’d say it’s the risk of whether the current monetary tightening would be too much for the market to bear.”

In the meantime, Gaw Capital’s Regent Hong Kong, which soft-opened last December, is enjoying rates that are “50% higher than what we have underwritten.”

The hotel’s average room rate currently is around $640, similar or higher to competitors such as Rosewood and Peninsula, he said.

“I'm quite happy to see that Hong Kong is finally geting a similar level of rates to Europe, maybe still a bit behind. For many years before COVID-19, we had close to 90% occupancy, yet with $300-$350 kind of rate.”

Gaw is gold in its track record but isn’t necessarily immune to setbacks. In a rare controversy, the company recently defended the foreclosure of the Standard High Line Hotel New York, which it bought in 2017 for $323 million. Wells Fargo alleged that Gaw defaulted on loan repayments for over a year from May 2020 – the height of COVID-19 crisis – and sued for the hotel to be sold to recoup a loan over $186 million in principal, interest and fees, according to media reports in the U.S.

On June 26, Wells Fargo dropped the two-year lawsuit, according to real estate news, The Real Deal.