HICAP Conversations: Gaw Capital Partners’ Kenny Gaw

HONG KONG – The hotel business is a mixed bag today for long-time investor Gaw Capital Partners. Business has rebounded nicely from COVID and there are even green shoots in its home market of Hong Kong. At the same time, interest rates remain high, making the M&A market it loves so much more challenging than he’d like.

That said, he loves opportunities in Vietnam, Thailand and Japan, and he is inspired today by the experiential movement at his hotels.

As part of the inaugural virtual HICAP Conversations series, Hotel Investment Today sat down with Gaw to talk about all things hotel investment with an eye on what’s ahead.

This marks the first in a series of interviews where we will discuss macro views to market specifics in a one-hour, complimentary Zoom interview format to provide snapshots for owners, operators, developers, and investors to understand current trends. To watch this first Zoom interview, click here.

Here are the interview highlights:

Jeff Weinstein: What gives you cause for optimism and, conversely, what gives you pause? What are you concerned about?

Kenny Gaw: The optimism is travel has been coming back strong since COVID for us. First, we saw that in Europe a lot, also in the U.S. markets and then in our international luxury destination resorts. Whether it’s in South Pacific, in Bora Bora, or in Spain. We’re seeing very strong recovery trends since the last three years already. And then, in the last, probably 18 months, we’ve been seeing that in Asia, as well, and it has been led by Japan and Thailand.

We’ve also seen that customers around the world really value experiences and are willing to pay up. This has been a clear global trend before COVID but even more apparent post-COVID. And then airline schedules have by and large returned to normal.

Kenny Gaw

Interest rates have peaked other than Japan. So, borrowing costs have come down, and that helps with business, as well.

On the other hand, construction costs have been very high. So, it has been challenging for a lot of new supply to emerge in key markets. But that’s good for existing hotel owners because not a whole lot of supply is coming online.

In terms of concerns, I would say that Japan has been one of the strongest markets in Asia, but, unlike the rest of the world, interest rates are actually increasing and also it has been very competitive to buy assets in that market. So, as an investor, whilst we like the market very much, it also has been difficult to expand.

And then, of course, I’m also a bit worried about geopolitics starting to come into play to disrupt all the recovery or growth in the sector.

Weinstein: What markets have your attention from a buy and sell perspective?

Gaw: Clearly, Japan. Hotels are performing very well. The yen is cheap, so tourism continues to be very competitive, and the country boasts a very attractive array of destinations all across the country. And the yen provides a good macro backdrop, as well.

Thailand is another star performer for us both in Bangkok and also in the resort destinations like Pattaya and Phuket.

Vietnam has seen very strong growth. In fact, I just read a report saying that Vietnam has now the highest growth in inbound tourism in Asia, and now is Number 3 in Asia, and probably on trend to move to Number 2 in Asia in terms of international arrivals.

Korea has similar currency dynamics as Japan and many hotels have closed during COVID to be converted to residential developments. So, the supply has declined. So, it could be interesting as well.

Kenny Gaw

In Australia and New Zealand, we have been investing in niche sectors like student housing and also youth hostels. So, we have some platforms there already and want to continue to add.

China could increasingly come into play because the country has been pushing domestic consumption. Also, during COVID, the domestic market discovered a lot more local destinations. It could become more interesting, but I would say by and large it would be resorts. If it’s city hotels, then they have to have a lot of leisure elements because resorts and leisure has performed a lot stronger than pure business hotels.

Weinstein: What markets excite you about new development?

Gaw: As much as possible, I prefer not to develop from scratch because construction costs, since COVID, has spiraled out of control and is very difficult to control. And even for a great market like Japan, it’s extremely difficult to get any general contractors to build for you. So, I would try to stay away from that with the one exception for me is we have a development project going on in Phuket because we actually have owned the land there for a long time and I’m still willing to take on the construction risk.

Weinstein: What’s your biggest learn from the past year that you’re applying to your strategy?

Gaw: As an investor. that availability of credit that was cheap to buy hotels during COVID became no longer easily available. No banks would lend for new investments. They were willing to support existing assets and existing clients who are the borrowers, but not willing to lend for new deals. So, there were very limited deals that we did. We did do some deals, but all of them were with either all cash, which means they’re smaller deals, or deals where we can find sellers who can provide vendor financing.

What we've seen in the past 12 to 18 months that debt is now available again for the hotel industry, mostly because everyone realized that we could stop talking about recovery. It has happened already, and we are now looking at growth. So. that is a key change.

Kenny Gaw

The other one we see is that customers really value unique experiences, and they’re willing to pay up. So, if you have assets, you better make sure that you’re providing that kind of experience… This is not just for the super-rich people, but also younger generations growing up with social media. They’re sharing experiences through Instagram, TikTok – these kind of apps for young people. They’re looking at this experience kind of like our generations looked at possessions in the old days. So, instead of spending money to buy a new jacket, a new dress, a new handbag, their ability to share their experiences on these platforms give them a possession-like satisfaction.

Weinstein: What’s your take on the advancement of third-party management and the franchising model in Asia Pacific?

Gaw: It’s definitely happening more and more and I’m quite sure it will continue to pick up as the market matures… In more mature markets, we’ve always had that. But brands have in the past been reluctant to grant these types of contracts in Asia Pacific, probably for fear of tarnishing the brand value.

But as these markets mature, and we have seen more and more industry professionals moving to the region and that enables more and more domestic and regional companies to develop capabilities and experiences.

Brands are increasingly comfortable doing franchise deals and you have seen some of these third-party management companies coming out of China, Thailand, Australia, for example.

Weinstein: You’re based in Hong Kong. It’s been a tough market, but you’ve mentioned things are picking up. Talk a little bit more about Hong Kong and what your expectations are going forward.

Gaw: Hong Kong, I think, has been one of the laggards in terms of recovery, but it is recovering. Every day is better.

The mass market occupancy is actually pretty healthy. But the luxury sector, I would say, the room rates have generally been well above pre-COVID. However, occupancy is still behind. So, there's still room to grow.

Brands are increasingly comfortable doing franchise deals and you have seen some of these third-party management companies coming out of China, Thailand, Australia, for example.

Kenny Gaw

The government here has also tried pretty hard. They have tried hard to bring back a lot of events. This week, we’re actually very busy in Hong Kong… We’re going have Art Basel later this week, and we’re going to have Rugby Sevens. In 10 days or two weeks, we’re going to have Cold {lay coming. There’ll be more concerts coming to play in the new stadium, and there will be some English Premier League and European football teams also coming for exhibition matches during the summer…

We’re gaining market share every month. We do have the highest room inventory. We have 500 rooms. So, we have the biggest room inventory in our category. So, naturally, we’re always going to be maybe a little bit lower on RevPAR, but our room nights are also well above pre-COVID and we have room to grow. So, I’m quite optimistic.

Weinstein: Where do you find inspiration? What inspires you about the business today?

Gaw: I said earlier about how customers more and more value experiences and are willing to pay up for it. I’m quite inspired by this particular trend because you’re no longer forced to only compete in price.

As long as you provide the right kind of experience, you have a very strong model that you can defend. That makes me quite inspired and happy.

HICAP Conversations: Gaw Capital Partners’ Kenny Gaw

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