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THE LOCATION OF INDONESIA'S STAR-RATED HOTEL MARKETS IN RISK & RETURN SPACE

Updated: Feb 13, 2023

ID HOTELIER - We are frequently asked, “What are the best hotel markets in Indonesia?” To which we normally reply, “What do you mean by best?” Does it mean the markets likely to deliver the highest capital appreciation over the next five years or the markets likely to provide the highest risk-adjusted returns? For others, it means markets ripe for development or markets providing the most significant opportunities for buying distressed hotels.

Credit to Dias  I Image from Unsplash
Credit to Dias I Image from Unsplash

Implicit in the question is the notion of risk and return and the expectations of different investment strategies. As an investor, are you willing to accept additional risk to achieve higher returns or are you risk averse? Simply looking at markets that have the highest occupancy or RevPAR growth rates may not be the “best” way of judging markets for a particular investment strategy or hotel portfolio.



The traditional deal-by-deal approach to hotel real estate investing gives way to a more enlightened approach, whereby investors achieve superior risk-adjusted returns by targeting and timing hotel real estate markets. The use of target markets enables investors to better use market intelligence, become more disciplined in their acquisitions, and enhance the performance of their hotel portfolios. An overlooked but a highly valuable byproduct of developing a list of target markets is a list of markets to avoid.

Our experience has taught us that hotel investment opportunities are available at every phase of the hotel real estate cycle and that rigorous analysis of market fundamentals is essential to identifying hotel types, markets, and assets with potential for above-market performance. Most investors seek positive “alpha,” the measure of a hotel investment’s return over the market’s return. Others may seek either high or low-beta hotel investments.



Beta measures a hotel's market-related (or systematic) risk because it measures the volatility of the market’s occupancy or RevPAR growth rate that is related to the overall volatility of Indonesia’s hotel market. Note that the beta for Bali is 1.79 for the past twenty-two years. We can interpret this to mean a 1-percent change in Indonesia’s room occupancy growth was associated with a 1.79-percent change in Bali’s occupancy growth rate. This compares with a beta of 1.03 for Jakarta, 1.11 for Yogyakarta, and 0.99 for Banten.


As the economy and capital markets improve, hotel values will begin to rebound. In anticipation of continuing recovery, a hotel portfolio that is overweight in high-beta sectors and markets is likely to outperform the overall market over the next five years.


Hotel investors with concerns about the direction and stability of economic recovery are focusing on high-beta markets with the potential to deliver top-quartile returns.

Ross Woods is a seasoned hotel investment advisor with over 30 years of global experience in hotel asset management, portfolio management, and hotel advisory services. Known for his collaborative-based consulting style that integrates a high level of strategic and analytical expertise, his “smarts” are sought by clients to solve complex issues, make better decisions and realize the highest risk-adjusted investment returns. His clients include banks, private investors, REITs and hotel management companies in the United States, South East Asia, Australasia, Europe, and Dubai.



 




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