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While an abundance of new locations works to the advantage of tourists in keeping rates down, developers are finding it difficult to recoup their investment and also to keep skilled staff by Aliwassa Pathnadabutr
Those living in Bangkok will surely notice that there is a new hotel opening almost every month on average. Many may wonder why the city’s hotel supply keeps growing given the frequent talk of oversupply, without any signs of slowing down. As of the third quarter of last year, there were a total of 30,815 hotel rooms in downtown Bangkok and a further 8,664 rooms in the pipeline to be completed by 2014, representing a 28% increase in existing supply.
The majority of future supply consists of three- to four-star hotels, totalling 6,050 rooms in 24 hotels.In the five-star segment, while the right site in a prime location is a prerequisite for success, there are still 2,131 rooms in seven hotels in the pipeline, including W Hotels, Hotel Okura and Park Hyatt (at Central Embassy).
Last year, tourist arrivals topped 19 million, a 19% increase from 15.9 million in 2010
As tourism is one of Thailand’s key industries, with consistent growth and significant government support, many developers and investors are keen to invest in it to reap the benefits. Last year, tourist arrivals topped 19 million, a 19% increase from 15.9 million in 2010.
Despite the flood crisis running into the high season and travel warnings against Bangkok issued by various governments, Thailand ranked fourth in Asia in arrivals last year.
The Thai tourism industry has rebounded quickly time and again after crises, including the closure of Suvarnabhumi airport in 2008, the red shirt protests in 2009 in Pattaya and 2010 in Bangkok, and last year’s floods.
Such resilience is something very few tourism markets enjoy and it is reinforced by the country’s hospitality and combination of fun, culture, good beaches and vibrant lifestyle, not to mention shopping, dining and entertainment at very affordable prices.
The tourism industry is projected to grow further this year with forecasted arrivals of between 20.5 million and 20.8 million according to the Tourism and Sports Ministry. This alone has drawn developers to enter the hotel business, particularly in the three and four-star segment.
However, there are also some not-so-favourable outcomes of the rapid growth in hotel supply over recent years, most importantly the downward pressure on room rates. As of the third quarter of last year, the average occupancy rate for all hotel grades in Bangkok was 66.2%. In the five-star segment, the average daily rate in the third quarter of last year was under US$200(6,112 baht), surprisingly low compared to five-star hotels in other Asian cities.
In a highly competitive market, room rates struggle to increase even for the best five-star hotels in the city. Hotels risk losing business if they raise rates. The three- and four-star segments also face added competition from serviced apartments, not only from future hotel rooms in the pipeline.
The prestige associated with hotel ownership often attracts cash-rich investors
The lack of an increase in room rates means new hotels with higher construction and land costs (unless the land was previously owned) will require longer payback periods for their investments and a negative internal rate of return for developers. This may not be a significant challenge for cash-rich investors who can afford to constantly inject money into their investments, even though it is not financially logical.
This leads to another reason for the hotel oversupply. The prestige associated with hotel ownership often attracts cash-rich investors into development. They are not particularly focused on annual yields, but more on long-term capital gains and the prestige of ownership. Real developers, on the other hand, will focus on the financial feasibility in the short and long term.
In the case of older, established hotels, although many would have already recovered their investments,they face the challenge of renovation and upkeep which is essential in maintaining room rates and occupancy and preventing the loss of business to new hotels. Five-star hotels in Bangkok that are not well maintained and have slipped in their standards are at risk of being downgraded to four-star status from the customers’ perspective.
Thailand ranked fourth in Asia in arrivals last year.
Another possible adverse outcome of oversupply is the lack of real product differentiation. The sheer volume of supply means it becomes increasingly difficult for a hotel to establish its unique selling point and positioning and to differentiate it from the rest of its peers. This is particularly true for the two-to four-star segment that compete heavily on rates,with limits on the brand loyalty and repeat visits that established five-star hotels tend to enjoy.
Another growing concern in the hospitality industry arising from increased supply is the shortage of skilled hospitality staff at all levels. Older hotels face aggressive recruitment challenges from newer hotels that offer better benefits, while both old and new hotels face the challenge of staff development and turnover.
All in all, the beneficiaries of this growth phenomenon are hotel operators, regardless of the properties’financial results. However, without professional operators, hotel developers will find it difficult to succeed.
The reduced financial viability and return on investment from hotel developments should be a wake-up call to investors and developers considering developing another hotel.
One factor that will help slow down this development is the willingness of banks to lend to new hotel projects, although this would not affect cash-rich investors who are already fully funded.
Originally posted here:
The Downside of Hotel Oversupply