China’s hotel property owners should aim to double their returns to win over investors, before packaging their assets into listed real estate investment trusts or Reits, as the industry enjoys a revival in tourism.

Hotels in prime locations in major cities like Beijing and Shanghai with an annual return of 4 per cent will be welcomed by market regulators and investors looking for steady income, said Zhou Tao, head of hotels and hospitality at JLL in China. Reits backed by hotels could give the asset class a boost, he added.

The current estimated return of about 2 per cent is not enough to draw interest in Reits backed by hotel assets, JLL said. In Shanghai, some properties have reported about 3 per cent return annually, it added.

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“Asset value of old or idled hotel properties can be enlarged with the right [market] positioning and sound management,” he said at a conference in Shanghai on Monday. “Hotels can generate good returns and will be deemed as lucrative assets to invest in and own.”

China’s first Ultraman-themed hotel is seen at Haichang Ocean Park in Shanghai. Photo: Getty Images alt=China’s first Ultraman-themed hotel is seen at Haichang Ocean Park in Shanghai. Photo: Getty Images>

More than 40 Reits have been listed on the Shanghai and Shenzhen stock exchanges since June 2021 as part of China’s financial-market revamp to allow retail investors to diversify their investments from stocks and bonds. The government first allowed infrastructure Reits backed by toll expressways, and later widened the eligible assets to include rental homes and shopping malls.

Pent-up demand by tourists, improved operating capability by hospitality groups and growing appetite for a diverse asset portfolio among institutional funds are creating a good foundation for the launch of China’s first hotel-backed Reits, according to JLL.

Reits allow asset owners to raise cash from valuable but illiquid assets without losing control of them. The investment vehicle also gives investors the opportunity to collect regular dividends with income generated by the underlying properties.

Tourists at the Temple of Heaven Park in Beijing during the May Day holiday. Photo: Getty Images alt=Tourists at the Temple of Heaven Park in Beijing during the May Day holiday. Photo: Getty Images>

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“Reits backed by hotels can be issued once hotels can bring investors stable and strong returns,” Zhou said, adding that better space utilisation and management efficiency can add value to the package. “Renovation with meticulous planning can effectively maximise returns for existing hotels.”

The world’s second-largest economy enjoyed a surge in tourism during the recent Labour Day holiday from May 1 to 5. However, many big hotel chains failed to capitalise on the boom as budget-conscious travellers filled into lesser­-known resorts. Stiff competition has also prevented hoteliers from raising room rates, according to analysts at Caitong Securities.

Some 13 billion yuan (US$2.1 billion) of hotel assets in Beijing and Shanghai changed hands last year, according to JLL statistics. They have become a target of big investors seeking to pick up bargains amid a three-year property market crisis. The value worked out to about 8 per cent total commercial property transactions, it added.

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