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PricewaterhouseCoopers
develops
econometric forecasting model for
Hong Kong hotel industry
PricewaterhouseCoopers released performance forecasts for Hong Kong hotels for the period to 2003 using their econometric forecasting model which has been newly introduced into the Asia Pacific region. Hong Kong’s average daily room rate (ADR) for 2000 is expected to be HK$703 (US$94) and will reach HK$839 (US$108) in 2003, while occupancy rates will remain high at just under 80% for the next three years. The Hong Kong model is the second in a series of econometric forecasting models for Asia Pacific cities. Hong Kong’s average rates will grow at an annualised average growth rate of just over 6% over the next three years. “The steady recovery of rates for the whole industry is indeed good news after hotel rates fell dramatically in 1998 with the simultaneous impact of the Asian crisis and the post hand-over blues. However, the forecasted rate in 2003 of HK$839 (US$107) is still 30% off the pre-crisis high in 1997 of HK$1,233 (US$158), when Hong Kong was caught up in the hand-over fever and hotel rooms were a scarce commodity,” noted Michael Chin, Senior Director of the Hospitality and Leisure Group in PricewaterhouseCoopers, Hong Kong. Even with an expected increase of 5,000 rooms in 2001, occupancy levels for Hong Kong hotels are forecast to remain high around 80% throughout this period until 2003. Apart from occupancy levels and the average daily rates, the more important industry measure of the performance of the hotel industry is the revenue per available room (RevPAR), which is the product of the occupancy and room rate. RevPAR is accepted as a more relevant performance indicator as it considers both elements in combination, thereby allowing hotels to compare their performance more accurately. The PricewaterhouseCoopers model forecasts RevPAR growth for Hong Kong to remain flat in 2001, due to a 12.8% increase in new supply coming online that year, but will resume its upward movement to reach HK$667 (US$86) in 2003. The key driver of RevPAR is the ADR which is supported by the forecast increases in gross domestic product and tourism demand. “The econometric forecasting model has become one of the most effective tools available to the hospitality industry. They have now at their disposal a reliable analytical tool for forecasting future hotel performance statistics for better planning and decision making,” said Christopher Khoo, PricewaterhouseCoopers’ Hospitality and Leisure Research Director for Asia Pacific. Mr Khoo elaborates, “Hotel managers, owners and investors will have a decisive competitive edge when they are able to anticipate accurately when room rates and occupancy levels in a particular city will peak or bottom out. Projecting future performance and demand in the hotel industry has always been a weakness in the planning framework. The result is invariably too many new hotel projects coming into the market just at or before its peak, thus perpetuating the boom-bust cycle of the hotel industry in many cities.” PricewaterhouseCoopers’ experience in modeling and forecasting – at regional, country, city and even at the individual property level, has benefited clients and the hotel industry as a whole in better formulating their expectations for their future and the impact on their portfolios. PricewaterhouseCoopers intends to roll out a series of econometric models for major cities in the Asia Pacific over the next few months. This will allow us to advise interested stakeholders on the state of the hotel industry in very detailed terms,” Mr Khoo continued. The econometric model for Hong Kong consists of two regression equations, with annual observations from 1986 to 1999. The first equation estimates room demand and the second room rates. Each equation is designed to integrate the behavior of demand and room rates with the overall macroeconomic environment. Once each equation has been successfully estimated, both equations are simultaneously solved to calculate future values of room demand and room rates. Future rooms available were based on latest figures released by the Hong Kong Tourist Association, Hotel Supply Situation No. 3, 2000. The room demand equation is structured as a function of lagged real room rates, lagged real gross domestic product and a qualitative variable that accounts for the 1998 Asian crisis. The room rate equation is structured as a function of inflation and lagged occupancy. Hong Kong Hotel Performance
Source: PricewaterhouseCoopers, Hospitality and Leisure Practice, 17 November 2000
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