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Asia / Pacific's economic achievements during the past two decades have been nothing short of phenomenal.
The "Tiger Economies" of Asia have created new markets, wealth and a fast-growing middle class, which has supplied the Asian hotel industry with unparalleled growth opportunities. Nevertheless, growth has not come without excess. More than 300 three-, four- and five-star hotels are currently under construction amidst falling occupancies and room rates in many of the region's primary cities. Moreover, economic forecasts in recent months suggest that growth rates for the region will decline.

On the one hand, the good news is compelling when it comes to the hospitality and tourism industries. Visitor arrivals, tourist receipts and hotel room supply have never been higher than in 1996. Total arrivals for Asia/Pacific reached 94.3 million in 1996, climbing almost 7.8 percent over 1995. Some 2.9 million beds were added between 1980 - 1995 at a compound annual growth rate of 10.9 percent, encouraging international business and leisure travelers to visit Asia, many for the first time. Nevertheless, the specter of significant over-supply emerging
by the end of the decade in many of the region's primary cities appears certain. Hong Kong will experience a 32 percent increase in hotel rooms by the year 2000, while the number of four- and five-star hotel rooms is expected to double in Kuala Lumpur, Jakarta and Shanghai in the next three to five years. A number of international chains have aggressive expansion plans already in motion, with many thousands of new rooms to be added by the end of the decade, even as the cost of developing hotels has escalated from an average $200,000 a decade ago to some $500,000.

In this special report from Arthur Andersen's Asia/Pacific offices, we offer an analysis of the Asian hotel industry from three distinct points of view: 1) the impact of the hotel boom on select Asian cities; 2) the future development plans of major hotel operators in Asia; and 3) the challenges facing operators in this increasingly competitive market with substantial oversupply in first-class in most of the region's primary cities.

Tourism Matching Region's Growth

Tourism in Asia / Pacific has posted double-digit increases in recent years even with the reduced annual growth rates since 1995. Vietnam reported an increase of 18.9 percent between 1995 and 1996, while the Philippines posted a 16.4 percent rise. Tourist arrivals in Hong Kong and Japan have been near 14.7 percent. Not all countries, however, showed record gains. Thailand's arrivals lagged with only a 3.5 percent increase, while Malaysian visitor arrivals actually declined by more than 4 percent in 1996. Just as significant, tourism receipts for the region rose at a faster rate than arrivals in 1996, demonstrating the positive economic impact of tourism in Asia. Tourism receipts climbed a healthy 12.8 percent for Asia / Pacific from 1995 to 1996.² It is indeed very encouraging to see China, for instance, registering a 20 percent growth in tourism receipts, totaling almost US$10 billion. Singapore (14.6 percent), the Philippines (13.9 percent) and Hong Kong (12.8 percent) all experienced a significant increase in tourism receipts. Yet Malaysia and Thailand again suffered, showing a mere 0.4 percent and 1.2 percent improvement respectively.
 
 

Regional markets in Asia / Pacific offer dramatically different profiles when it comes to new hotel development. East Asia and the Pacific registered the fastest increase in hotel accommodation measured by bed-places, adding 2.9 million beds between 1980 and 1995. This represents a compound annual growth rate of 10.9 percent.³ This trend will continue especially with China becoming the major source for supply growth in north Asia. South Asia - India, Myanmar and Nepal, among others  has seen only minimal growth in hotel supply given both inadequate economic and political policies in recent years. This is likely to change as we enter the 21st century, with these three countries showing exceptional opportunities for hotel development.

Hotel Markets Profiled

A profile of the hotel boom in Asia also reveals that the region's primary cities - including Bangkok, Kuala Lumpur, Manila and Hong Kong are at different stages in the development cycle. In many cases, these differences are dramatic, reflecting a wide range of supply - and - demand characteristics.

Bangkok.
In the past five years, the Bangkok hotel room supply nearly doubled from 10,608 in 1992 to 19,323 in l9%.⁴ Given only modest demand growth over the same period, this has led to an oversupply of rooms with occupancy rates at about 65 percent. The occupancy rate in 1995 and 1996 showed only slight improvements, and this occurred only because room rates were eased. Bangkok had become one of the most affordable destinations in Asia even before the currency devaluation of the Thai baht. The daily room rate of luxury hotel rooms has averaged US$75, and demand is not likely to increase as prices are already rock-bottom. It is anticipated that room rates will decrease slightly in 1997 with occupancy unchanged. Furthermore, additional supply during the next two years will reduce the bottom line even more in an already depressed market.

New hotel openings in 1997 included the JW Marriott (446 rooms), while the Renaissance Concorde (400 rooms) is scheduled for a soft-opening later this year. The new Meridien President (360 rooms) is slated to open during the first quarter of 1998, followed by the Peninsula (374 rooms) and New World (430 rooms). The Conrad (398 rooms) will open for business in 1999.

Kuala Lumpur.
Malaysia, along with its capital city, Kuala Lumpur, have suffered from minimal increases in tourist arrivals during recent years compared to other Asian destinations, with slower growth straining the hotel and tourism industry. To prepare for the 1998 Cornrnonwealth Games, the government has initiated a tax incentive scheme, which has led to a "development frenzy" in Kuala Lumpur. New supply in the firstclass and luxury segment is projected at more than 3,400 rooms by 1999. This additional supply, primarily in the up-market segment, is likely to further depress occupancy and room rate growth during the next three to five years.
 
 

Hotel occupancy rates fell from the mid-80s to high 70s between 1995 and 1996, as did the average room rate. Tourist arrivals also dropped in 1996 from the preceding year. This year is expected to show a further erosion of profitability in Kuala Lumpur, particularly given the recent devaluation of the Malaysian ringgit, with average occupancy dropping to the low 70s. Given the additional supply at the top-end of the market and resulting labour demand, a further increase in salaries and wages is expected. Kuala Lumpur's hotel sector appears set to follow in Bangkok's tracks.

Manila.
A total of 60 hotels and 12,112 rooms were in operation in Manila in 1996 - an increase of  7 percent from 11,321 rooms in 1994. Strong economic growth supported improved performance in Manila's hotel market, with occupancies reaching 69.1 percent in 1996 compared with the 62.2 percent occupancy rate in the previous year.⁵ The number of rooms available also fell with hotels under renovation, including the Dusit Hotel Nikko, EDSA Plaza Hotel, the Heritage Hotel, the Manila Hotel and the Westin Philippine Plaza.

Between 1997 and 1998, 12 hotels and four extension projects totaling some 2,347 rooms - will come on stream, increasing the supply in Metro Manila to 14,089 rooms, about a 20 percent gain. These hotels, generally not managed by an international operator, are mainly mid-market. New first class and luxury hotels planned for Manila include a Ritz-Carlton and a JW Marriott in Makati, as well as a hotel development by Mega World in Manila Bay reclamation area. None of these hotels, however, will open before the year 2000. Further supply of at least three Luxury hotels is expected in the new development of Fort Bonafacio with opening dates beyond 2001. Given literally no additional supply during the next two years, both Makati (next to the financial center and thus frequented by the business travelers) and the bay area (where most leisure travelers stay) should see further growth in occupancy and average rates, especially if tourism arrival growth continues at a 16 percent pace as was the case in 1996.

Hong Kong.
As of December, 1996, the Hong Kong hotel market comprised 33,530 rooms and 88 properties. With growth in hotel demand outweighing supply, Hong Kong has enjoyed tremendous success as occupancy rates have climbed to 85 percent on average during the last five years and average room rates have risen to some of the highest in Asia. Supporting this economic success story are the commercial redevelopments of the Lee Garden, Victoria and Hilton hotels, which have been an economic benefit for other currently existing hotels. A mid-market hotel is able to demand at least US$125, first-class hotels US$190 and the luxury segment US$300 a night. Hotel profitability has thus increased substantially during the past five years as labour costs fell as a percentage of revenue.

Is this trend likely to continue? As the price gap between the leisure and business segments has narrowed, Hong Kong is now facing a major challenge to further expand the leisure sector. Recent arrival figures, however, have been discouraging and the 100-day, posthandover public relations campaign by the Hong Kong Tourism Association had no immediate impact on business. With bargains on shopping becoming more and more difficult to find and no additional tourist attractions on the drawing boards, Hong Kong may see a long-term decline in leisure travelers unless new strategies are put in place by both the public and private sectors. High prices in Hong Kong are one reason for the drop in tourist arrivals. The devaluation of major Southeast Asian currencies during recent months will also force Hong Kong (whose currency is pegged to the U.S. dollar) to review its future pricing policy. Most Asian travelers have seen their local currency drop more than 30 percent against the U.S. dollar and the Hong Kong dollar.

In addition, Hong Kong developers have 9,000 rooms on the drawing boards before the year 2,000, a 27 percent increase - pushing supply from 33,536 to 42,685 rooms. Given recent political and economic developments, however, it is unlikely that all projects will remain on time, while some may never materialize. The majority of the new developments are planned along the new MTR railway to the Chek Lap Kok airport opening in mid - 1998. Given that this new supply is primarily in the mid-market sector, leisure travelers now staying at firstclass hotels may find themselves trading down in their accommodation once these new properties open. The growth in business travelers to Hong Kong should remain strong as the city will continue to benefit from being the financial and business center of Greater China (Hong Kong, China and Taiwan). The IMF and World Bank meetings this year have underlined the fact that Hong Kong remains the principal economic gateway to China.
 
 

The Challenges Ahead

Clearly, Asia has experienced a hotel boom that is historically unprecedented. Is this trend likely to continue? Clearly, some markets are experiencing severe financial problems, the most serious being in Thailand and Malaysia. This will likely interrupt domestic developments for the time being until financial institutions have identified a new way forward. This comes at a time when both markets suffer from growth in tourism and a substantial oversupply in the firstclass and luxury segment of the hotel market.

This time of uncertainty and volatility is bringing with it opportunities for investors as distress sales and acquisitions are likely to follow in select Asian markets during the next 9 to 18 months as some owners and operators may default on their payments. This will create opportunities to buy hotel properties at minimal replacement cost primarily in Thailand, but possibly in Malaysia as well. This will occur as hotel owners are forced to adjust their assets to today's market value, and financial institutions seek buyers to purchase assets newly acquired by default. Lending for new construction will be very hard to come by, while new regulations will need to be put in place to reduce the lending risk for banks and other financial institutions going forward.

At the same time, intra-Asian business travel is on a rapid rise as the business interests of major Asian and international corporations drive further expansion in the region. A rapidly growing middle class in countries such as Indonesia and China also will assure the need for more affordable accommodation in the region, especially for individual leisure travelers. Owners and operators in Asia will increasingly face the following challenges:

Productivity & Training.
Shortage of skilled labour in almost all Asian markets remains a serious problem for the foreseeable future as new hotels come on line. This will inevitably drive labour costs higher as a percentage of revenue. Hotels will need to review and increase the productivity of all staff, from rank and file to executive, to stave off this rise in costs. Profit margins will inevitably slide if hotels do not reinvent their primary processes and eliminate services not sought by today's travelers. The high staff room ratios of the past may well decline during the next five years to levels much closer to what is common in Europe and the United States.

Training is another major challenge, more so than ever, and must become an integral part of the human resource strategy. With turnover often exceeding 30 percent annually, training still focuses on getting newcomers assimilated to the company as quickly as possible. Limited funds are typically made available for training and developing existing staff to improve knowledge and productivity. Unless the industry embraces training and measures monetary pay- offs, service quality, productivity and turnover are unlikely to improve in the region.

Marketing & Distribution.
Increased marketing activities in main feeder markets and alliances with key suppliers of demand (such as wholesalers and airlines) will become critical in the future due to intense competition. In addition, electronic distribution systems, still in the infancy stage in Asia, will gain in significance. Often up to 70-80 percent of hotel bookings are currently made by phone or fax directly with the property. This must change. An interface with Global Distribution Systems (CDS) is one of many competitive advantages of international hotel management companies, yet their impact is reduced in Asia as travel agencies and wholesalers do not use the technology to the same extent as their counterparts in Europe or the United States. This is significant as the percentage of intra-Asian travel is rapidly increasing - with the ultimate effect of reducing dependency on overseas feeder markets during the next five to 10 years. Investments in Central Reservations Systems (CRS) will allow hotel chains to control inventories and pricing through sophisticated yield management systems, as well as offer a one-stop shop for travel agencies to make bookings for the entire hotel portfolio. An interface with a recognized GDS is the next step only if  a) the non-Asian business mix justifies the investment in added distribution and cost; and  b) the Asian travel agencies use the available GDS technology to book hotel rooms in larger quantities.

Branding & Mergers.
Branding will become one of the most important issues facing Asian-based owners and operators, many of whom have accumulated portfolios of assets without a proper framework for growth. Asset management and hotel management are two distinct businesses requiring different resources. Some Asian-based companies are trying to do both at the same time, often with disappointing results in developing a strong brand with a critical mass of properties. The global trend of mergers and acquisitions will continue regionally with further rebranding and reorganization of hotel property portfolios of Asian-based companies into two single asset and hotel management entities. Don't be surprised, however, if a seemingly "small Asian fish" swallows a "big Western fish" in the not too distant future as pockets are deep in this part of the world.

Diversification.
With an oversupply of first-class and luxury hotels in most Asian cities today, the development of new mid-market hotels has the greatest potential, especially in population - rich countries such as China, Indonesia and India. Supply of internationally operated hotels does not currently meet the demand in these countries. International operators are eager to introduce their mid-market brands to the Asian market. For the past decade only Accor and Holiday Inns have made major strides in the region in the mid-market sector. Much competition is now expected from ITT Sheraton's "Compass," Marriott's "Courtyard," Shangri - La's "Traders" and Inter-Continental's "Forum" brand, which will push hard to get a market presence.

Secondary cities are also on the screens of international operators to guarantee management fee growth as primary Asian cities seem to enter the bottom of the cycle. These secondary cities are likely to gain in importance as a sound strategy to grow market share and a balanced network with all of the obvious economies of marketing and operational scale. Although the payoffs are usually longer-term in secondary markets, rapid growth in the economy and population (especially the middle class) should support future profitability. India and China are in desperate need of hotels in secondary cities, yet more often than not first-class and luxury hotels in Asia enter the market first followed by the mid-market properties years later.

Given the rise of an Asian middle class and the desire of Western tourists to look for culturally rich and less crowded vacation spots, Asian resorts are providing major international operators with additional growth opportunities. Four Seasons is expanding its resort portfolio in Bali and India. Sheraton and others have made similar strides to increase their resort portfolios. Although pristine destinations are harder to find, the future of the resort industry, especially in Malaysia, Indonesia and the Philippines, should be bright. Serviced apartments is another sector of significant potential growth. Despite high yields available, most international hotel operators have stayed clear. Given the scope for growth, however, their absence may not last for long.

Conclusion

Given the strength of the economic growth rates of the "Asian Tigers," the fundamentals for success remain in place for both the hotel and tourism industry as a whole for the next few years. Nevertheless, the region must cope with the economic problems causing growing pains. The future of some currencies is uncertain. There are fears that even Indonesia with much sounder economic fundamentals is on the brink of seeing its currency fall. Oversupply in the depressed markets of Thailand and Malaysia is the most serious in the region. Hotel properties may be taken quietly off the market in Thailand during the next few months, but because the country has no bankruptcy law, solutions to the problem may take an extended amount of time. New construction and development will come to a stop as financing will be impossible to get and operating hotels at pre-crisis margin will be especially difficult. Other areas, including South Asia, are primed for new development, however. Hotel owners and operators will need to embrace change, improved processes and advanced technology to realize an optimistic future. Furthermore, hotel owners and operators will find it necessary to diversify and innovate to satisfy the ever-growing Asian middle class who are eager to use their increasing disposable income for leisure purposes.

1 Emerging Room Glut Seen Hurting Asia's Hotel Industry, bty Alkman Granitsas, Dow Jones News Service
2 World Trade Organization
3 ibid
4 Tourism Authority of Thailand
5 Manila Department of Tourism