According to Mr. Stiles, "the supply of hotel rooms has grown substantially in most of the region in the last few years only to be met by flat or falling demand associated with the region's current economic contraction. This environment, coupled with depreciated local currencies and profits, are increasing the pressure on hotel owners that had financed their properties with U.S. dollar loans. Although, this is bad news for existing owners, the severe economic cycle in Asia is expected to create risk adjusted value-buying opportunities for the shrewd investor."

Transaction Capital Flows

Stiles speculates that there will be a resultant fundamental change in the direction of hotel investment capital flows.  "For many years, direct hotel equity investment flowed in only one direction -- out of Asia.  A major reversal of this trend is underway.  Asia is now and will continue to be a net recipient of hotel equity capital."

Changes are occurring on two levels, notes Stiles. First, the emergence of international investment into Asian hotel real estate; and secondly, in dispositions of off-shore investments by Asian owners.

Dispositions of Asian Hotels

To date, both pricing and policy issues have provided little opportunity for foreign investors looking to enter Asia's hotel sector.  "Markets with few restrictions on foreign investment were too highly priced.  Those more emerging markets, which might have offered a better yield, had policy problems which effectively prevented foreign investors from entering the market."  As a result, Stiles believes changes in pricing, foreign ownership regulations, and other policies, will be critical for securing the international capital infusion the industry now needs in Asia.

Yield attractive investment opportunities are, in fact, beginning to emerge. Initially, these changes will occur in the mid-market sector where owners in default of loan agreements are more likely to lack protective political connections. According to Stiles, "more opportunities will emerge as banking and political reforms increase the pressure on even the most well connected owners."

Stiles indicated that many of the best hotel investment opportunities in Asia will be quietly negotiated with no public marketing or exposure. Relationships with existing owners and local bankers will be critical in accessing the relatively short-fused deal flow that is beginning to emerge.

Global Dispositions of Asian-Owned Assets

In general, Asian hotel investors and real estate investors are responding to both the Asian economic crisis and to the peaking or recently peaked markets outside Asia by selling North American, European and Australian assets.  Stiles points out that assets acquired in those markets a few years ago by Southeast Asian investors (bought at or near the bottom of the cycle) are likely to yield attractive, currency-charged capital gains.

While the disposition (both voluntary and involuntary) of Japanese-owned hotels has been underway for a number of years, the remaining inventory is immense. Stiles further noted, "changes in Japanese banking regulations leading to increased requirements for more conservative classifications of non-performing loans will accelerate the pace of asset dispositions considerably -- both off-shore and domestically." Stiles concluded by noting that "Asia's troubles are creating global buying opportunities -- and those which will
quietly emerge in Asia over the next couple of years are not likely to be seen again."

Sonnenblick-Goldman Company is an independent real estate investment banking firm. Founded in 1893 to serve the financing needs of the real estate industry, Sonnenblick-Goldman Company provides a full range of real estate financial services including debt and equity placements, sale/lease-backs, joint ventures, brokerage, and other real estate advisory services. Headquartered in New York, Sonnenblick-Goldman Company maintains offices in Los Angeles, San Francisco, Miami, Washington, D.C., Denver, Singapore, and Hong Kong.