(Presentation at an Hotel Investment Conference in China, January 2011)
Asia has seen an aggressive growth of new hotels over the 7-8 years and consequently a number of cities and destinations are over-supplied while few Cities within the Region could do with new developments and new supply of hotel rooms.
All indications are that in general this strong growth will continue during next few years with China and India leading the way.
China has the highest number of construction starts of any countries in the World;
- In 2010 where 765 hotels with over 116,000 rooms that opened for business.
- For 2011 it is anticipated that 449 hotels with some 94,000 rooms will open.
- And for 2012 there are 420 hotels with approximately 130,000 rooms due to open.
Those are large numbers and reason for some concerns.
Looking at India, the situation is less alarming, there were 56 new hotels opened in 2010, 88 hotels to open in 2011 and around 95 Star Classified hotels are expected to be completed in 2012.
As for the rest of Asia, the present development of new hotels is less aggressive and there are approximately 180 new hotels to be operative between 2011 and 2012.
As a grand total for Asia at present, there are over 1,640 new hotels with approximately 375,000 rooms in the presence.
Looking at the overall supply and demand situation around Asia, you will notice that at present there are 3 clear patterns;
- Cities/destinations with an under supplied situation.
- Cities/destinations with a balanced supply and demand, and
- Cities/destinations with an overbuilt-oversupplied situation.
- The strong key markets are; Hong Kong, Singapore, Seoul, Sydney. Also to be noted that developing new hotels in those cities is becoming extremely expensive and in some cases not financially viable in particular due to the cost of land.
- While a better balanced situation is seen in New Delhi, Jakarta, Taipei, Manila, Tokyo, Osaka, Mumbai, Melbourne, Bali, Phuket, Saigon, Yangoon and Hanoi.
- And an oversupply of hotel rooms, in some cases critical, is seen in a number of cities within Mainland China, in Thailand specially Bangkok and Chiang Mai, in Kuala Lumpur, Penang, and Surabaya.
Focusing into Mainland China, it is a fact that most of the local and Provincial Governments have favored hotel development and in some cases made it easy for developers to acquire land and build hotels. This has created an oversupply that may last for few more years.
There are many 4 and 5 star hotels across China that have an occupancy level below 60% and more alarming, with a low room rate of around US$ 100-120. In no way those hotels can be profitable with this performance. Of course the room rate in Beijing and Shanghai are higher but not the volume. ( to be noted that the Shanghai hotels did well during the expo but now the industry is experiencing a strong competitive environment).
There are too many high-end branded hotels being developed in the secondary and tertiary cities of China. Those Brands are few years ahead of the local demand. Those markets cannot support the high-end brands as the demand and the spending power is more appropriate for mid-scale price and mid-scale hotel products.
We cannot get away from the fact that in many instances hotels are built for different reasons and purposes. The most common seen reason to develop a high-end hotel is as part of a new/large multi-use complex where the hotel normally provides prestige and status with the specific objective of driving up the value of the real estate within the new complex.
It is clear that in those cases, the hotel market and the consumers are not taken into consideration. This is a serious concern for the industry as those hotels are the first one to practice prices inconsistency and undercuts in order to attract volume of business.
It is also clear that many hotel developers, including banks-lending institutions, are not paying much attention to the actual market situations and to the professional feasibility studies and in some instances those feasibility’s are modified to the wish, the desire and to the individual need’s of the developer therefore the expectations become unrealistic.
It is my personal believe that if ROI is the prime objective to develop a hotel in China or elsewhere in Asia, a well built and efficient mid-scale product will definitely generate higher ROI percentages versus the high-end hotels. At present there is much more demand for the mid-scale in particular within countries with an increase of the middle class.
It is also important to note that during strong business demands, the mid-scale hotels are in better position to drive high yields and REVPAR.
Developing high-end hotels requires extensive capital starting from the cost of land, cost of construction, interior decorations, equipments and of course are much more expensive to operate specially with the rising of the labour costs throughout the Asian Region.
Hotels in general are labour-intensive and requires high volume of business to break-even.
Also we all know that the profitability of hotels comes from the room division and not much from the restaurants and bars. This should be addressed by a developer and if profitability is important, it is suggested to avoid having too many food and beverages profit centers. Couple of very good outlets will do. A modern gymnasium is also high in demand and expected by travelers.
Some high-end hotels in the region are over-specified with too many facilities and too much wasted public space. Considering the high development costs and the ever increasing operating costs, there could be much better discipline on designing and building new hotels.
Operational efficiency and proper equipments, technology included, will make a major positive impact on the financial performance of the property. Hotels are also high consumer of energy therefore this is an area that requires proper planning.
It is a fact that architects and designers tends to look more at the aesthetics versus the market needs and this requires proper supervision at planning stage with strict direction to the concept architect to maximize as much as possible the available GFA. There is a famous say within the industry that “an architect dream is an housekeeping night mare”.
There is no need for large podiums with wasted space. Size and comfort of the rooms is perhaps the most important element however it has been proved that in general the market will not pay more for larger rooms. As an example a 55 square meter room in a high-end hotel, will not generate more revenue per room as compared with a 45 square meter room.
I also believe that in the medium and long terms, an affiliation with a well known global brand will generate better financial results versus hotels operated directly by the developers or by the owning families. Global exposure and being part of an efficient network has become critical to compete in this more and more competitive industry.
Management agreements is the preferred way to be affiliated with a brand however there is lot of work to be done in this area in particular when it comes to commitment to the profitability/bottom line by the operator and on a non complicated termination clauses giving flexibility to the owner to sale or convert the property.
Of course it goes without saying that the final objective of developing an hotel is to provide value to the customer plus profitability & asset appreciation to the developer.
7 principles for owners and operators to practice;
- Location vs Brand;
Location remains very important but there are cases when a top brand takes preference over the location.
- Hotel’s Fundamentals that customers expects;
- A decent night sleep: bedding’s, sound proof, temperature.
- An efficient & fast connectivity.
- A good shower and bathroom.
- A good Breakfast.
- A clean and safe place.
- A practical and efficient hotel offering value.
- Position of the Hotel;
It is critical to properly position the hotel at the opening stage and be consistent in services and pricing. Pricing transparency very important.
- Mistake of Discounting;
Very bad habits by the industry to extend big discounts during downtrends. It has been proved that normally it takes 3 years to recover the rates when business is back. Normally high discounting does not generate market share for the hotel.
Hotel business is a labour intensive work requiring personalized services around the clock (24-7) and this requires proper planning on setting priorities recognizing the importance of trainings & skill development, competitive compensation and opportunity for people to grow and achieve their personal and career objectives.
- Operating Culture;
For an hotel to be successful within the competitive set, it is critical to have in place a strong revenue culture and put customers and revenue first and cost control second. It is also very important that all involved in the hotel have full understand what the hotels have to sale, and in this case it is “SLEEP and FOOD, the two most personal needs of the human body and to do this well it requires committed and well trained people who embraces their culture in full.