As the millennium ended, Asian economies were rising again like the proverbial Phoenix, overcoming the economic malaise that the region had been plunged into in 1997.  Stabilized regional currencies, improved domestic economies and strengthened stock markets indicate that most markets have bottomed out and are beginning to recover.  These improved economic conditions and a revival of consumer confidence have led to a substantial increase in intra-regional travel. The World Tourism Organization estimates that visitor arrivals to Asia expanded by about 11 percent during 1999. 

To investigate the state of the region’s hospitality industry, Arthur Andersen launched its first, groundbreaking survey of senior executives - Taking the Pulse of Asia Pacific - in late 1998. Since that time, the landscape of Asia Pacific’s hotel industry has been transformed dramatically. As a result, we launched our second study to again take the pulse of the region’s hotel industry by surveying executives at companies that own, operate or invest in hotels. In this year’s survey, we have focused on several areas: firstly, on brand-related issues in light of the industry’s continuing consolidation; secondly, on the direction of opportunistic capital and the performance of hotel stocks; and, finally, on the impact of the Internet, eBusiness and technology on the hotel industry in Asia Pacific. This article summarizes key findings from Arthur Andersen’s second region-wide survey of hospitality industry leaders - Taking the Pulse of Asia Pacific 2000. 

The research - scope and methodology 

A total of 927 surveys were mailed in April 2000 to senior executives who are among the leaders of major hospitality industry organizations based in Asia Pacific. Our aim was to identify disparities, as well as similarities, among hotel operators, owners and investors.  The response rate for Taking the Pulse of Asia Pacific 2000 was an encouraging 15.7 percent based on 146 valid responses. 

Global brands to drive M&A 

With just 20 to 25 percent of Asia Pacific’s hotel inventory branded, global and regional hotel operators alike are eager to expand their market share in the region. Not surprisingly, many hotel operators have built several brands to penetrate market segments, notably the mid-tier and resort sectors where competition in the past was relatively weak. These trends led us to ask - will the global or regional brands dominate a majority of the mergers and acquisitions (M&A) activity in 2000 and beyond, as they seek to gain breadth and depth? Or will independent hotels drive change by forming franchise agreements or marketing alliances? 

Some 86 percent of the respondents concur that consolidation will be driven by global brands, while 60 percent of respondents believe that regional brands will contribute to the majority of the M&A activity in 2000 and beyond.
                                                 
Number of brands at issue

The number of hotel operators in Asia Pacific that control several brands is on the rise, and major hotel transactions have recently contributed to this trend. The acquisition of SPHC by Bass Hotels & Resorts, as well as Accor’s purchase of All Seasons Hotels from the Thakral Group, are cases in point. These hotel operators grapple with challenges that include:

• How will hotel operators maintain product consistency? 
• How can hotel operators ensure that the consumer can easily discern between the brands? 
• How does a hotel operator decide if the existence of two similarly tiered brands will yield synergies or result in cannibalization? 
• How can an umbrella company holding a portfolio of hotels add value, even though that company itself may not be considered a brand? 

Singapore - top market for hotel acquisitions

With hotels yielding cash flow improvements, the pressure on hotel owners throughout the region to sell their assets has softened.  Hence, we were interested in assessing the industry’s opinion on the location of the best hotel acquisition opportunities, as well as markets to avoid.

Figure three indicates that the three primary gateway cities - Singapore, Hong Kong and Seoul - achieved robust occupancy rates, as well as significant increases in RevPAR during the first six months of 2000. These cities possess sound market fundamentals, which include relative political stability and healthy demand growth, as well as an absence of oversupply. Seoul, for example, has seen increasing room rates due to lack of new supply growth and a substantial increase in demand from the worldwide investor community. These cities, however, also constitute the most difficult markets to penetrate. High land prices in Singapore and Hong Kong, for example, are among significant barriers to entry. Most owners in these markets are local, rather than foreign investors, and these owners typically believe that real estate is not a cyclical, but a long-term investment. In addition, most local owners have a diversified investment portfolio, which has allowed them to weather the crisis rather than be forced to sell their assets to pay off debt. 

Singapore stands as the most desirable market, exhibiting political and economic advantages. Hence, it is not surprising that respondents unanimously rank the island city as the most desirable market for hotel acquisitions. Given that Singapore’s five-star hotel inventory is saturated, hotel executives are likely to be lured by opportunities arising from the mid-tier sector. Because of Singapore’s relatively low RevPAR in U.S. dollars, the industry no doubt perceives an opportunity to capitalize upon the potential of future RevPAR growth. 

Hotel operators and owners rank Hong Kong first and second respectively as the most desirable market for hotel acquisitions, yet investors rank it as the third least desirable place. Investors may be looking to the high barriers to entry in Hong Kong, since hotel values have remained relatively high throughout the economic crisis in this market, and there are relatively few acquisition opportunities. Local investors and developers have controlled most hotel investments in the past with little foreign participation. 

In Seoul, the devaluation of the Korean Won and the reformation of legislation governing foreign ownership of property have lowered barriers to international investors in Seoul’s hotel market. As a result, it is not surprising that our respondents overall rank this city as a desirable market for hotel acquisition opportunities in third place following Singapore and Hong Kong. It is noteworthy, however, that two groups of respondents - hotel owners and investors - rate Bangkok and Tokyo respectively as the third most desirable market. The appeal of Bangkok is driven by a substantially weakened Thai Baht, a focused tourism campaign by a very proactive tourism bureau, political stability and continued improving operating performance throughout the crisis years of 1998 and 1999. 

In Japan there is clearly much interest on the part of both international hotel operators and opportunistic investment funds. Whether this interest will bear fruit appears to depend a great deal on the evolution of the restructuring of the financial system - a process that seems to have faltered of late. 

Jakarta and Kuala Lumpur, the least desirable

Respondents among hotel owners, operators and investors resoundingly rank Jakarta and Kuala Lumpur first and second respectively as the least desirable markets for hotel acquisitions. Indonesia’s new government continues to struggle with the sheer scope and complexity of the archipelago’s economic and political woes. These unfavorable conditions characterize Jakarta as a high-risk investment destination. Although Malaysia does not share Indonesia’s political problems, the soft operating performance of Kuala Lumpur’s hotel market is mainly due to severe oversupply, thus rendering it the second most unattractive target for hotel acquisitions. Asking prices have generally not been backed up by income streams from hotel properties, some of which do not produce operational profits.

Not surprisingly, hotel operators consider Yangon as the third least desirable market for hotel acquisition. Given its under-developed tourism industry and the hotel market’s frail operating performance, hotel operators do not see this destination as yielding attractive returns. Hotel owners, by contrast, rank Manila as the third least desirable market for hotel acquisitions. Recent unfavorable events such as the bombings in a Manila mall, as well as the hostage situation in Jolo by Muslim separatists, have had a detrimental impact on tourism. 

RevPAR growth posted in nine markets 

As the region’s major hotel markets continue to recover, we were particularly interested in assessing opinion on which markets will exhibit significant RevPAR improvement within the next 12 months and how these views compare with the recent performance of the same markets, using data provided by Arthur Andersen’s Hotel Industry Benchmark Survey. Figure four captures that information. The right-hand column in this exhibit shows how our respondents rank RevPAR growth in the next 12 months. Adjacent to this column are the actual changes in RevPAR in local currency.

Among the sharpest differences among the rankings noted are Jakarta and Kuala Lumpur, which achieved RevPAR growth rates of 29 and 26 percent respectively during the first six months of 2000, albeit from a very modest base. Despite this, hotel executives have pessimistic views of both cities’ performances going forward, mindful of the supply-demand imbalance, as well as political and social uncertainties. These factors have resulted in both cities showing relatively low RevPARs of U.S.$28 for the first six months of 2000.  Respondents rank Tokyo in fifth place, although its actual RevPAR growth places it in ninth place - implying that hotel executives believe that the city still has room for substantial operating performance improvement. 

What happened to the “Great Asian Hotel Sale?” 

The Asian economic turmoil was supposed to have transformed the region into fertile ground for investors seeking hotel acquisitions. During the early stages of the downturn, industry observers forecast an unprecedented number of hotel transactions. Yet the “Great Asian Hotel Sale” never materialized and it is unlikely to occur any time soon, in large part because of pricing differences between sellers and buyers. Additionally, lenders in general have been extremely reluctant to exert pressure on hotel owners to repay debt or sell a majority stake in their assets as part of restructuring plans. 

As a result, Asia’s hotel transaction activity has remained dormant for the most part throughout the crisis. In valuing hotel property, the lack of historical data on hotel transactions over the last three years has rendered the comparable sales approach impractical. Hence, two alternative methods for hotel valuation have dominated the market, but on either side of the buy-sell divide. Generally, hotel owners price their properties close to or at replacement cost, as opposed to most investors who adhere to valuing properties by relying on the discounted cash flow or “income capitalization” method. This reality compelled us to assess the approximate price gap encountered by industry executives during attempts to close a deal. 

Our three respondent groups are of like mind in citing pricing gaps as an obstacle in hotel transactions, indicating there has been a weighted-average gap ranging between 23 and 26 percent. Thirty-six percent of respondents put the price gap between 11 and 20 percent. Approximately one-third of respondents report a price gap in the 21 to 30 percent range. Overall, the weighted-average price gap of total respondents was 24.1 percent. 

Whither hotel stocks? 

In general, the hotel stock indices during the last several years have exhibited lackluster performance relative to the Hong Kong and Singapore stock indices - the Hang Seng Index and the STI Index. This observation compelled us to seek answers to two key questions: 

1. What are the possible reasons for this performance? 
2. When does the industry think there will be a significant improvement in Asia Pacific, European and US hotel stocks? 

Some respondents attribute the lackluster performance of hotel stocks to the industry’s cyclical volatility and lack of risk-return benefit, as well as the presence of
many other higher-yielding investments. Others cite the dot.com frenzy and the promise of high returns as compounding the unattractiveness of hotel stocks, leaving the hotel management, ownership and REIT stocks out in the cold. 

Opinions diverge in relating the investment community’s lack of understanding of the hotel industry to its lack of interest. Hotel owners (70 percent) and operators (57 percent) believe that the investment community lacks understanding of the industry. This contrasts with just 39 percent of the investors. It needs to be seen whether the lack of understanding is a key factor in the less-than-average liquidity of hotel stocks that forces global investors and funds to shy away from investing in and assigning dedicated resources to hospitality. 

All respondents agree that Asia Pacific hotel stocks will likely trail their U.S. and European counterparts in showing signs of significant improvement over the short term. Investors are most bullish about European hotel stocks, which are expected to exhibit significant improvement in the next 14 months on average, as opposed to hotel owners and operators who expect European hotel stocks to improve within 16 and 17 months respectively. Given the strong operating performances in Asia so far this year, however, we would not be surprised if Asia hotel stocks rebound more quickly than expected. 

Owner and operators: marriages and divorces 

Unfavorable operating conditions in 1998 and 1999 exerted unprecedented strain on profit margins. Not surprisingly, the crisis has also strained some relationships between managers and owners. Raffles International’s decision not to renew its contract with Starwood is a case in point, as are the Hilton International’s withdrawal of management services from Indonesia, and the cessation of Swissotel and Nikko management services in Bangkok. 

Given the changing nature of the dynamics between hotel owners and operators, some owners have considered franchising or self-management as an alternative.  As a consequence, we investigated whether owners are considering other hotel operators or self-management, foregoing any association with a recognized brand. We also set out to ascertain the preferred parameters of management contracts today, highlighting any gaps that might exist between the expectations of owners, investors and operators. 

More than half of all respondents (57 percent) strongly agree or agree that a majority of the owners are considering another operator, given that a growing number of owner-operator relationships seem to be weakening. Seen from some perspectives, this is an alarming statistic. Yet it also presages an opportunity for many brands to increase market share by re-flagging a competitive hotel. It appears owners believe that some operators do indeed deliver superior brand value. 

It is also of note, however, that 52 percent of our respondents believe owners might well decide to self-manage. Decisions by the owners of the Royal Plaza on Scotts in Singapore not to renew its contract with Bass is evidence of this trend, as is the decision by The Fullerton Singapore, a new luxury hotel opening at the end of this year, to self-manage.  Roughly 59 percent of the hotel owners in our survey concur in considering self-managing as an option. This stands in contrast to just 30 percent of hotel investors, who think owners are considering self-management. An over whelming 70 percent of hotel investors agree that hotel owners are considering another hotel operator, suggesting that they may believe they are more likely to realize an “upside” if the hotel asset changes its hotel operator. 

Having assessed our respondents’ opinions about the owner-operator relationship in the region, we now look to survey results relating to the parameters of management contracts.  Predictably, hotel operators expect higher management fees than those suggested by both owners and investors. With respect to the preferred duration of management contracts, a considerable gap emerged between operators and the other two constituencies. Hotel operators on average prefer to secure a 13-year contract, whereas both investors and operators are unanimous in favoring seven years. Figure 8 indicates the range of opinions. 

In terms of fees, hotel operators on average expect base management and incentive fees at 2.4 percent and 8.3 percent respectively. This is considerably higher than the weighted-average responses of 1.4 and 7.3 percent for base and incentive management fees respectively from hotel investors. Fee expectations of hotel owners are in the middle ground between investors and operators - averaging 1.6 percent and 7.9 percent for base management and incentive fees respectively.

When it comes to risk sharing by means of operator equity participation, the survey reveals that hotel investors have the highest expectations among the three groups. On average, hotel investors expect an equity participation of 9.4 percent, which is significantly higher than the weighted-average response from hotel operators of 8.1 percent. Hotel owners, on the other hand, have a lower expectation as evidenced by their weighted-average response of 7.7 percent.

From bricks to “clicks and mortar” 

The rapid proliferation of the Internet and the emergence of eBusiness has ushered in a new era often referred to as the “New Economy.” An increasing number of brick-and-mortar companies, including those in the hotel industry, are in various stages of exploring and reaping the benefits of new strategies and technologies. 

To address some of the key issues, we chose to survey our respondents on their views related to the adoption rate of technology in the hospitality industry, as well as the areas where technology is expected to play a role in their organizations in the future. 

Hotel owners, operators and investors strongly disagree about the reasons behind the relatively slow adoption of technology in the hotel industry.

Sixty-one percent of investors and 44 percent of operators agree or strongly agree that capital costs have contributed to hampering the adoption of technology with 41 percent of the owners disagreeing with this notion. About 53 percent of hotel operators and 43 percent of owners disagree that considerable training costs will be required, implying that both parties generally do not view this factor as a serious hindrance in integrating technology in their organization. This contrasts to 48 percent of investors who respond that training costs are indeed an obstacle. 

When asked to comment, a number of hotel executives indicate that people in the
industry are not technologically inclined and hence do not understand the potential benefits of hospitality technology. Other respondents cite technology as not vital in enhancing guest experience. Several executives comment that they fear technology has a detrimental effect on delivering personalized guest services, arguing that the
hospitality industry has always been and should remain a “people” business. Others
believe the industry’s current technological infrastructure is sufficient and therefore do not recognize a need to pursue further investments in IT. 

Respondents also cite the fragmented nature of the hotel industry as an impediment to adopting technology, given the sheer number of owners who own hotels flagged under different brands. The recurring issue remains: who should be shouldering the costs?  Owners argue that operators are not willing to invest in information technology (IT).  Operators cite unwillingness on the part of owners due to conservatism and lack of understanding. 

To maximize the benefits of technology, it is often necessary to abandon traditional work processes and adopt new ones that are more efficient. Hospitality executives indicate this transformation is perhaps the most arduous obstacle to overcome for many different reasons. Other issues compounding the complexity of technology adoption include disruption in day-to-day operations and integration with existing legacy systems - especially those with larger hotel portfolios. Furthermore, to realize technology’s full potential and benefits, it must be implemented across the property portfolio to drive economies of scale and improvements to the bottom line. Such an endeavor typically incurs substantial costs. 

To assess the importance of technology in the hospitality industry, we also sought to understand which immediate areas of IT and eBusiness have caught the attention of hotel executives. (See figure ten.) Almost 93 percent of all respondents report they are considering the use of Internet reservations in the near future. Internet reservations offer the benefit of lowering distribution costs by offering the industry a new medium of distributing hotel products in a potentially interactive and efficient manner. Similarly, 80 percent of respondents indicate they are likely to use technology to implement eProcurement. This year has already witnessed the announcement of several eProcurement ventures in the United States, Europe and Asia. By amassing a larger combined purchasing power, eProcurement enables hotels to enjoy significant savings through unit cost, as well as process cost savings. 

Almost 78 percent of our respondents report they are interested in Customer
Relationship Management (CRM). And 64 percent of all respondents agree that
shared services is an area in which technology is likely to be of use, while 31
percent were neutral on this topic. The basic function of shared services involves
centralizing and outsourcing routine and repetitive functions in a manner that saves
cost yet provides an integrated data and process platform on which to build all
other IT and eBusiness offerings. We believe that hotel executives may either not have considered such a strategy, or are evaluating the risks and rewards in those areas where shared services might have application. 

Conclusion 

Taking the pulse of Asia Pacific 2000 draws a broad profile of an industry yet to see all of the “fall out” from the recent economic downturn that swept the region into a deep recession. Gateway cities - Singapore, Hong Kong and Seoul - possess sound market fundamentals, which include political stability, healthy demand growth and absence of oversupply. But some markets remain in difficult straits for a variety of economic and political reasons. 

Consolidation has been brisk in the region, and most of our executives believe it will continue with global brands driving it. Meanwhile, our respondents ascribe various reasons for the lackluster performance of hotel stocks in Asia Pacific, with the majority of hotel owners and operators believing that the investment community does not understand the industry. Among the biggest casualties of the downturn appears to be relationships between some owners and operators. And on the technology front, many respondents are clearly of a divided mind. Some respondents do not believe that the industry’s slow adoption of technologies is a problem. Yet almost all of the hotel executives polled are considering the use of Internet-based reservations systems. 

All told, however, Taking the pulse of Asia Pacific 2000 spotlights an industry that is well on its way to recovery as travel and tourism grows, and hospitality companies in many markets look to consolidating new gains as the region returns to economic health. 

Andreas Flaig is a Senior Associate Director in Arthur Andersen’s Hospitality Consulting practice, Singapore. He can be reached at andreas.flaig@sg.arthurandersen.com.

Kenneth Wen, Consultant, is also in the Hospitality Consulting practice, Singapore. He can be reached at kenneth.wen@sg.arthurandersen.com

© 2000 Arthur Andersen.