By Robert McIntosh
Rapid improvements and easy access to capital, led to the creation of significant levels of supply but today there is fear of oversupply and declining demand says Robert McIntosh
Much has been written on the falls in tourism demand due to the current global economic crisis. Declining visitor arrivals, occupancy levels and RevPAR across Asia driven by the global economic crisis have already severely impacted the performance of the hotel and travel industry in recent months. Unfortunately, many markets in Asia have been further affected by security concerns and political unrest.Â
At the same time the global financial crisis has reduced the availability of capital for the purchase of hotels.
Global hotel sales in terms of total volume declined by 75% in 2008, to reach just US$31 billion (down from US$127 billion in 2007). The Asia Pacific region alone declined by approximately 67% in 2008 to reach a total of US$3.6 billion (down from US$10.8 billion in 2007).
The previously rapid improvements in hotel performance in many markets, as well as easy access to capital, had led to the creation of significant levels of new supply in several markets
CBRE Hotels researched supply changes in the cities of Singapore, Bangkok, Hanoi, Ho Chi Minh and Kuala Lumpur and found that over 23,000 four and five star hotel rooms are presently expected to enter these markets by the end of 2012. China and India also have a significant number of hotel properties in the pipeline.
However, according to Lodging Econometrics, the construction starts for new hotels across Asia Pacific has decreased by 82% over the last four quarters, primarily due to difficulty in accessing finance. Furthermore, the number of cancellations and postponements in the region has reached an all-time high and new project announcements have declined by 73% from the peak in Q4 2007.
Despite the likelihood that a number of projects will be cancelled, the additional supply, combined with declining demand, will present a challenging period for hotels in some markets in the short to medium term.
Looking forward, there are few signs of the global economic crisis abating, and a high degree of uncertainty regarding the future remains. So what does this mean for hotel investment in the future?
Investors globally are rethinking their investment models. One of the key issues for the last few years has been the focus on the level of return and the consequential under-pricing of risk.
This was being opening questioned in the market well before the current crisis. We believe that the re-pricing of risk is going on now. Certainly, required returns on equity have increased in the last 12 months. At the same time risk is being priced even more expensively. When this is combined with the reduced availability of finance the pressure on yields to rise increases.
A lack of hotel sales across Asia makes estimating hotel values difficult. However, global markets can provide a benchmark.
In the United States, cap rates are starting to show signs of increasing, primarily driven by the increasing weighted average cost of capital. In Australia, which has been an active market, cap rates are following a similar trend rising between 100 and 200 basis points in the last 12 months.Â
Whilst it is still difficult to determine the value of hotel assets in Asia due to limited acquisition activity, it is likely that we will see an increase in loan maturities and financing difficulty in the next 12 to 18 months.
This will lead to an increase in transaction activity across Asia, and a narrowing of the bid/ask gap between buyers and sellers in the region. At the same time, measures which see the increased availability of finance will help investors to take a more positive view on pricing.
The trading outlook for hotels is heavily dependant upon the global economic crisis and economists appear to forecast a range of periods for the recovery to take place. There is no doubt that this will have very different impacts on different markets. Some have already been impacted badly, such as Beijing, Shanghai and Mumbai. Others such as Bali have actually had improved performance.
Within the markets some hotels will fare better than others. For example, in relative terms, the impact on economy hotels is likely to be less significant than others.
 Hotels which have a strong brand, or are clearly positioned, and have a clear understanding of their target customers will be better able to weather the storm and ensure some income stability. Some types of business are likely to be impacted more than others, such as international conferences and meetings.
The reaction from hoteliers has been positive in many cases. Improving the offering to guests by adding benefits, improving services, doubling airline rewards etc will tend to encourage travellers.
Those markets, owners and operators that respond rapidly based on a good understanding of the demand for their product are likely to come out of this crisis better positioned than their competitors. There are already some clear signs of opportunities arising for those able to respond in this rapidly changing environment.
Robert McIntosh is executive director for CBRE Hotels, Asia Pacific. CB Richard Ellis is the global leader in commercial real estate services.
The hotels division combines transaction, operational and consultancy expertise for the hospitality industry.
The author can be reached on Robert.McIntosh@cbre.com.sg
