|
Travel
Impact Newswire by Imtiaz Muqbil - Distinction in
Travel Journalism
Arthur Andersen Study Probes Impact of Crisis on Hospitality
Summary: The Asia-Pacific hotel industry has suffered major shockwaves
and is set to undergo major changes in ownership, management,
marketing and operational strategies. The results of this survey by
management consultants Arthur Andersen show how some of these
changes
are likely to pan out.
-
PART II (continued from Part
I) -
The Japanese banking system is severely burdened by under-performing
real estate loans, a problem of immense scope arising from
over-valuation of markets.
Real estate loans are currently being sold off by the hundreds of
millions of dollars (US$) to begin the process of remedying the
situation. The Hong Kong SAR government's intervention in the stock
market, although controversial, has managed to bring back confidence
although tourism figures have not shown a similar pace of recovery.
Nor has the new airport, which had a disastrous opening, induced any
new air carrier and tourist demand.
Is the hotel business a good real estate business to invest in when it
comes to cash flow? About 45% of hotel investors agreed that hotels
offered the fastest turnaround in terms of cash flow when compared
with residential, office and retail real estate. But opinions were
split. More than 40% disagreed. Hotel owners are divided right down
the middle with 35% agreeing and 35% disagreeing on this question.
Roughly 80% of hotel investors and owners agreed that the anticipated
financial performances, primarily, and the economic conditions
secondarily, will be the most important factor influencing their
capital investment. It is notable that hotel investors gave a 10%
higher rating to the general economic conditions, whereas
hotel owners ranked the availability of capital higher by a similar margin.
The
unfavourable investment environment has clearly threatened the
appetite of hotel developers and investors, delaying many hotel
transactions. Investors, particularly from Europe and the United
States, are interested in attractive buying opportunities, but remain
cautious about any development prospects.
Of the executives surveyed, more than 60% of the hotel owners believe
that hotels present good value buying opportunities at 40-50% below a
realistic price level relative to replacement costs. Investors have a
slightly different perspective with 48% also believing that hotels
present good value buying opportunities at 40-50% below a realistic
price level relative to replacement costs. A further one-third of
investors, however, believe that at 20-30% of below replacement
cost, there is already a good value buying opportunity.
This expectation of potential buyers, however, does not meet the
current seller's expectation. A large gap remains in what hotels would
be considered a good buy, which in some cases represents 10-25% of the
acquisition value. Places such as Phuket and Samui in Thailand have
recently seen significant improvement in performance, while the real
estate market has declined as a result of the devaluation.
Coming to an agreement on a basis for acquisition values will be
especially difficult in these markets. More often than not, Thai hotel
real estate has been valued as a fixed asset rather than on a "going
concern" basis using the method of discounted cash flow. Increased
lending spurred additional development and then further rounds of
lending, which were backed up by rising real estate values. This
vicious cycle suddenly came to a halt in the last year. Gaps in value
perception, however, are unlikely to be overcome in those countries
where bankruptcy and foreclosure laws are non-existent or impossible
to enforce. Only if the ultimate holding company or owner needs to
urgently divest property for other company purposes will transactions
likely occur. Otherwise, owners will weather the storm.
This scenario is becoming ever more likely as owners ride out the
economic crisis by keeping their lenders, who have often much to lose,
and possibly their co-investors, at bay. Selling properties when the
worst is over and the market turns might work in many countries as
long as the hotels generate enough cash flow to weather regional
economic shocks. To do this they will need to cover wages and
management fees, minimising capital expenditure.
International management companies, however, will also find themselves
under intense pressure from owners to achieve "more with less."
Conflicts over what constitutes the business's core objective will be
inevitable. One example is the reduction in Capex, which hotel owners
answering the survey said they favoured. International managers will
find this hard to swallow as they endeavour to maintain market share
and drive operating profits.
How and Where to Grow in These Challenging Times
Owners, investors and management companies will have to adapt to this
quickly changing and dynamic economic environment. As in other
recessions, the events in Asia-Pacific also represent opportunities
for some aggressive companies. We asked the management companies to
rank the importance of various growth strategies in terms of their -
expansion. About 46% of the respondents favour management contracts as
a strategy for expansion, followed by mergers and acquisitions and
strategic alliances. Joint ventures with local partners were not rated
very favourably with less than 5% indicating such a strategy is
suitable for growth in the current environment. In contrast,
44% of hotel owners agree or strongly agree that they are increasingly
interested in franchising rather than management contracts.
Franchising allows hotel owners to keep management control of their
hotel properties, but enjoy the franchiser's reservation and marketing
network for usually a fixed percentage fee of room revenue.
As most of the management companies prefer management contracts as a
growth strategy, fee structure will remain a major concern between
owners and management companies. 70% of these executives agree that a
growing number of operators are willing to accept a fee structure
based on profit performance.
Hotel management fee structures have
changed over the years as competition has been increasing and owners
have come to understand the business better. Revenue based fees are nowadays anywhere between 1% and 5% with gross
operating profit (GOP) based fees of 5-10%. More recently, management
contracts have been signed which are only GOP or even NOI-based. We
see this trend continuing in Asia.
Customers today increasingly prefer branded hotels. Branding conveys a
certain level of quality to customers, evokes expectations and reduces
risks for customers travelling in many different parts of a country or
the world. More than 80% of hotel investors and hotel management
companies believe that business travellers will prefer branded
products and services. In contrast, only 60% of these respondents
believe the same holds true for leisure travellers.
International brands have traditionally invested most of their
resources in establishing themselves in key gateway cities in
Asia-Pacific and have only in the past few years entered the resort
markets after development opportunities ceased in major metropolitan
areas. This also suggests that regionally managed and often smaller
brands might be able to sustain their competitive advantage in
delivering an authentic product true to its surroundings and genuine
service for some time longer. International brands generally have less
flexibility in adapting their product since their customer base tends
to demand a certain level of product and service.
Consolidation has been a powerful force in recent years as the
hospitality industry has been reshaped by waves of mergers and
acquisitions. A significant volume of mergers and acquisitions took
place last year (most notably Bass' acquisition of Inter-Continental).
And the executives surveyed in our study believe this trend will
continue. More than 80% "agreed" or "strongly agreed" that we can
expect more mergers and acquisitions in the hotel industry.
Lastly, we asked all three groups of respondents to tell us about
their choice of most desirable markets for city hotel and resort
developments in Asia-Pacific. Not surprisingly, the outcome varied.
(See Exhibit 7) In order of priority among city hotel developments,
the hotel investors polled cited Bangkok, Hong Kong and Sydney. Hotel
management companies still saw room to expand their brand
in Sydney, Shanghai, Manila and Singapore. Hotel owners favour Bangkok and
Hong Kong, a market with traditionally high barriers to entry. Management
companies see opportunity outside Southeast Asia, i.e. China and
Australia, possibly due to the current supply-and-demand situation,
and their existing coverage of key cities elsewhere.
In terms of resort developments, all three respondent groups seem to
agree that Phuket and Bali are locations where capital might be
invested. In a distant third, the hotel investors cite The Maldives;
hotel management companies also thought highly of Palau in Micronesia.
Conclusion
Hotel owners, investors and management all share a common view that
the economic turmoil of the Asia-Pacific region has cut deeply into
the industry's strength, and left much of the region with little
access to equity or debt capital. And markets, these executives
believe, will not be on the upswing for some time to come.
Nevertheless, there are rays of light, in part due to the wisdom and
willingness to act aggressively in the face of the current
circumstances among some governments and private industry.
Certain resort destinations, especially in Thailand, have seen strong
demand growth recently as their infrastructure allows for easy access
of international leisure travellers who believe Asia is now a bargain.
Governments also are feeling the pressure to act by making
destinations more attractive, especially to tourists. Under
consideration in some areas are new attractions and expanded marketing
campaigns. The economic crisis that so quickly engulfed Asia-Pacific
will produce winners and losers. By encouraging the hotel industry to
get on a solid footing, the turmoil of the past year and a half
will eventually have its benefits for hotel managers, owners, and
investors-and, of course, for the business and leisure travellers it
serves.
=========================
Travel Impact Newswire is the Asia-Pacific's first email travel
industry news feature and analysis service. Mission Statement:
Dedicated to reporting with Integrity, Trust, Accuracy and Respect the
issues that impact on the Asia-Pacific Travel & Tourism industry.
Distributed every week to senior industry executives, consultants,
academics and media.
=========================
Return
to Part I
|
Secure HOTEL RESERVATIONS