By: Partrick Quek, March, 1997

Patrick Quek is the president and CEO of PKF Consulting, an international hospitality consulting firm headquartered in San Francisco.

As investors in the United States lodging industry enjoy record performance levels in 1996 and 1997, many are tempted to become isolationists. Why bother looking overseas for investment opportunities when I’m making so much money in my own backyard? Unfortunately, this is a very short-sighted attitude. As we all know, the hotel industry is cyclical, and not just here in the United States. The proper strategic move for the savvy investor is to look around the world and time one’s investments according to the various regional business cycles. This is akin to the strategy employed by the surfers in the movie The Endless Summer, constantly traveling around the work in order to catch the oceans during their best wave-producing periods. While investors may be riding the top of the wave here in the United States, they should be looking around the world to find the next boomer to ride before the U.S. surf eventually crashes.

Canadian Curls

The Canadian hotel market continues to lag one or two years behind the recovery experienced here in the United States. While the operating profits for Canadian hotels have been climbing, they have yet to reach the levels needed to recoup the losses suffered in the early 1990s and support the capital costs typically associated with developing and maintaining a hotel. Further improvements in profitability are needed to generate a full recovery of values in the industry. As in the past, these improvements in profit will be the result of continuing demand and revenue growth, limited supply growth, and the maintenance of operating cost control measures and labor standards established during the recession. Unlike the United States, future revenue growth in Canada is projected to be more dependent upon growth in occupancy than growth in room rates. With inflation projected in the 1.5 percent to 2.0 percent range, operators are finding it difficult to achieve substantial increases either in room rates or in food and beverage prices.

Asian Wipeouts

All the excitement over the Asian markets during the early 1990s has resulted in dramatic increases in the supply of hotel rooms in the major urban markets. The result is a projected decline in the occupancy rate for most major Asian cities in 1997. Compounding the problems for current Asian hotel owners and operators, it appears that the growth in room rates is also slowing down because of the increase in competition. Following the theory of business cycles, look for the opportunity to purchase struggling Asian hotels at prices well below replacement cost in the near future. It should be noted that the majority of new hotels that have caused the decline in urban occupancies have been four- or five-star, full-service properties. These days, hotel developers in Asia are looking at building more mid-market priced accommodations to meet the growing demand of price-conscious, intra-regional business and leisure travelers.

European Swells

Seeking untapped markets, hotel developers stormed into Eastern Europe shortly after the fall of the Berlin Wall. Like the urban markets in Asia, this sudden rush of development activity is beginning to show its impact in the form of low occupancies. In turn, the competitive market conditions have lead to either a decline or stagnation in the growth of room rates in cities like Moscow and Berlin. Until there is radical improvement in the Russian economy and a sense of stability in the government, Moscow remains as risky location for hotel development. On the other extreme is the London market, where occupancies are in the 80s and room rates are expected to grow in excess of 8 percent. While the Madrid and Paris hotel markets are absorbing recent supply increases, room rates are showing little growth despite improvements in occupancy.

Middle Eastern Ripples

Contrary to the cyclical nature of most worldwide markets, the Middle East is prone to unexpected and unpredictable events. For example, the peace process had boosted the hotel performance in Amman greatly in 1995 and the first half of 1996, but recent unrest has ended this revival. The relocation of the Saudi Arabian King to Jeddah, combined with the completion of several private contracts with foreign companies, has caused the occupancy in Riyadh to drop into the 50s. On the bright side, tourism to the relatively stable country of Egypt has elevated the occupancy at hotels in Cairo to the 70 percent level. With occupancies growing, look for increased hotel investment activity in Cairo, while the cities of Dubai and Muscat will experience a decline in occupancy as they absorb their recent new hotel additions.

Just as it is prudent to spread your personal investment dollars throughout many types of investments, it might wise to spread your hotel investment dollars around the world. As has been documented many times in the past, more and more people are traveling all over the earth for both business and pleasure. International chain recognition and the development of more moderately priced hotels are common thematic waves worldwide. If you can broaden your strategy, you may wish to diversify your lodging investments throughout the global market and ride the variety of economic waves as they emerge around the world.

For additional information contact the firm:

Back to PKF Special Articles and Reports Index

Please contact Hotel.Online with your coments and suggestions.