Asia Pacific : On the Road to Recovery
Tourism rebuilds, as market reforms slowly take hold
By Andreas Flaig, Singapore, and Steven Shundich, Chicago Hospitality and Leisure Executive Report, Summer 2000
While the overall health of Asia Pacific continues to recover from the financial meltdown that crippled the region in mid-1997, most of the area's domestic economies continue to perform well below their pre-crisis levels. And, while economic conditions improve from market to market, the pace of the recovery varies widely. Indeed, uncertainty still shrouds the region, but what is clear is this: Do not expect a significant amount of real estate transactions in Asia Pacific for the next 12 to 18 months. Unpopular as it may have been with an audience of real estate owners and investors, this was one of the most important messages delivered to the more than 300 hospitality industry executives in attendance at the 3rd Annual Asia Pacific Hotel Industry Investment Conference, "New Era - New Strategies." Held at The Ritz Carlton Millenia in Singapore, the event was organized and hosted by Arthur Andersen and Jones Lang LaSalle Hotels.
Asia Pacific: A macro economic overview
Powered by booming exports, a low risk of inflation and falling interest rates, gross domestic product (GDP) growth for Asia Pacific is expected to reach 6.2% in 2000 and 6.4% in 2001, according to Ray Ferris, the chief fixed income and currency economist in Asia for Credit Suisse First Boston. South Korea leads the way, with 8.3% GDP growth projected for 2000, while Singapore, Malaysia, the People's Republic of China (PRC) and Taiwan are all expected to record growth rates above 6%. GDP growth rates are projected between 4% and about 5% for Thailand, Indonesia and Hong Kong, while only 3% growth is expected in the Philippines. This high growth in Asia Pacific will be driven by externally focused market sectors (primarily technology) while sectors dependent on bank credit - and that certainly includes real estate - will recover at a much slower pace, Ferris says. Private consumption, despite increasing 8%, is still 15% below 1996 levels in U.S. dollar terms. At this rate, pre-crisis levels of economic strength will not be matched until late 2002. More than two years after the crisis, banking systems in the region are either impaired, as in South Korea, Thailand, Indonesia and the PRC, or simply more conservative, as in Hong Kong, Singapore and Malaysia. But without bank credit, property price inflation should remain modest. According to Ferris, there are three primary risks which may constrain growth in Asia Pacific:
1. Governments will have to raise taxes to manage higher debt burdens. Malaysia, for example, is in perhaps the most precarious situation, with a government that will be forced to achieve an annual budget surplus to service its debt. Taxes here
2. simply must be raised to generate revenue.
3. The region's exposure to the global electronics sector is very high, and any downturn in demand - especially in the U.S. market - could hinder growth significantly, especially when coupled with weak domestic demand and fragile banking systems.
4. The impact of higher oil prices on domestic demand in Asia Pacific may be greater than it appears, temporarily masked by the strength in exports. If monetary policies are forced to tighten earlier, this could limit growth. Ultimately, Ferris says these financing constraints and the likelihood of higher taxes in the region imply economic growth in the medium term will be more moderate than the high growth experienced during the early 1990s.
Opportunities abound to build brand equity
With more than 45,000 rooms and 178 hotels in the region, London-based Bass Hotels & Resorts maintains the largest brand portfolio in Asia Pacific, according to research from the Singapore office of Arthur Andersen . Bass is followed by three other global players: Marriott International, Washington, D.C., with about 30,000 rooms at 80 hotels; Accor Asia Pacific, Sydney, with about 28,000 rooms at 168 properties; and Starwood Hotels & Resorts Worldwide, New York, with more than 25,000 rooms at 68 hotels. But, among these four global giants, Arthur Andersen data shows that only between 8% and 12% of their total room count managed worldwide is within Asia Pacific - relatively small stakes. Coupled with the fact that 75% of the hotel stock in the region is nonbranded, clearly there is an opportunity for global brand operators to grow in the region. One of the ways this growth will be achieved is by establishing partnerships with strong, local hotel operators. Interestingly, some of the best candidates for joint ventures in Asia Pacific already have global aspirations of their own. The Mandarin Oriental Hotel Group, Shangri-La, The Peninsula Group, Raffles and CDL's Millennium and Copthorne brands are among those testing their market acceptance outside Asia Pacific.
Increase in tourist arrivals across the region
Every country in Asia Pacific recorded an increase in tourist arrivals from 1998 to 1999, with an average increase across the region of 9%, according to statistics from Arthur Andersen and the Pacific Asia Travel Association. There is no reason to believe arrivals will slow in 2000. The People's Republic of China (PRC) led the way in 1999 with an 18.6% increase in arrivals, followed by Hong Kong at 11.5%; Singapore, 11.4%, and Thailand, 10.3%. Taiwan and the Philippines recorded the smallest increases, 4.9% and 1.0%, respectively. Yet, the data also shows that only two countries - Thailand and South Korea - have recorded three consecutive years of arrivals growth. Undoubtedly, as the economies of Asia Pacific develop and the region's middle class grows, a rise in intraregional travel will follow. Here, Arthur Andersen analysts believe strong regional chains may be able to capture this market ahead of global operators because their products and services are distinctly "more Asian." Indeed, international brands that do not make a greater attempt to adapt culturally may be missing out on a fantastic opportunity. This change in market mix is not necessarily a change for the better, though, because Asians generally stay fewer days and spend less than travelers arriving from long-haul destinations such as Europe and the United States.
Performance improves in several key markets
The across-the-board increases in tourist arrivals in Asia Pacific do not translate into equally significant increases in operating performance. Here, the relationship between supply and demand determines the outcome from market to market. In 1998, virtually every Asia Pacific market covered in Arthur Andersen's monthly benchmarking survey recorded negative growth in revenues per available room, or RevPAR. But in 1999, the survey, which covers 550 hotels in 24 markets, revealed four cities that registered double-digit positive RevPAR growth: Seoul, up 30%; Bali and Tokyo, 16%; and Bangkok, 10% (See Operating Performance Indicators 1998 and Performance Indicators 1999 below). Although the economic recovery in Asia Pacific is clearly underway, it has not yet hit every country in the region. Despite increases in arrivals, three markets that managed to record negative RevPAR growth in 1999 were Beijing at -14%; Shanghai at -17%; and Jakarta at -24%. In Jakarta, which recorded negative RevPAR performance for a third consecutive year, the decline is inexorably linked to local politics. The market has been so unstable that travelers simply avoid it. But in Beijing and Shanghai, the issue clearly is oversupply. Both cities have become primary targets of foreign investors and global hotel chains alike. They hope an early entry into these two markets will pay huge dividends in the long term. Indeed, designs for Shanghai are to make it the central commercial hub for the PRC. Unfortunately, overbuilding there probably will prevent investors from receiving any returns for three to four years. At this time, Shanghai simply cannot attract the amount of corporate or leisure travelers necessary to support the vast increases in supply. The market also has been very dependent on the Japanese, who have been traveling less because of their own economic woes. Until new source markets are found, the poor performance is expected to continue.
Transaction activity still hard to find
Despite reforms, there remains little, if any, pressure on property owners in Asia Pacific to service outstanding debt. Financial institutions have been reluctant to enforce new bankruptcy laws, limiting the number of foreclosures to a handful-even in Thailand, one of the markets hit hardest. With businesses continuing to operate as is, the general consensus is that liquidity will not return to the real estate market for at least 12 to 18 months. Indeed, the price gap between property buyer and seller remains wide. If there is no pressure to sell, then why would owners discount the value of their assets? The only market where there have been a significant number of transactions is Australia. Merger and acquisition activity has been driven by two major regional transactions: Paris-based Accor's purchase of the All Seasons group, and London-based Bass Plc's takeover of Southern Pacific Hotels Corp. Single asset turnover in Australia has been driven primarily by the Japanese, who are selling their overseas properties wherever they may be - New York City, Los Angeles, London. Hong Kong-based property owners also have come under some pressure to sell, but other Asian owners? It's just not so. What is interesting is the fact that real estate transactions have begun to take place within Japan, traditionally a market closed to foreign investment. If this liberalization continues, expect more and more investment activity to take place there. Discounting still takes place on a wide scale As one conference attendee put it, hotel operators in several Asia Pacific markets continue to "cut each other's throats," discounting rooms stock despite the recent recovery in average occupancy rates. One would assume that once occupancies rise to a certain level, operators would start squeezing out higher rates. To maintain rate integrity, the decision would then have to be made to either turn business away or raise the hurdle even higher, letting the customers decide whether or not they want to pay. Three markets where this heavy discounting still occurs are Hong Kong, Manila and Singapore, where occupancies are up almost 10% but heavy price discounting still continues. Why? There are two reasons: Many property owners are still focused strictly on the utilization rates - that is, the occupancies - of their hotels. So, rather than focusing on RevPAR or gross operating profits (GOP), operators are forced to discount to increase occupancies, because that is the directive they are getting from hotel owners.
The market may not be well balanced-that is, supply does not match demand, not only in size, but also in terms of market mix. Singapore is a prime example. Here, there are too many 5-star hotels and not enough 5-star travelers. As a result, 5-star operators try to reach down to grab 4-star market share. They do this by lowering their rates. While the typical 4-star business traveler resists the 5-star segment, they will upgrade if it is made attractive to them. What ultimately happens is 3- and 4-star hotels suffer most because they reach down for business at the bottom rungs, but find that there is none. Not surprisingly, these middle segments in some markets have been hit harder in RevPAR terms than the 5-star sector. "We must reposition Asia," says John Wilson, chief executive of Millennium & Copthorne Hotels Plc. "It [the region] has taken three years to claw its way back, and it is our responsibility to never, ever have Asia known as a 'cheap' destination."
Delivering shareholder value
While the path to a complete recovery of the hospitality and real estate markets in Asia Pacific will be full of obstacles, there are a few key improvements that can be made to help recover shareholder value in the region:
1) Asset management: More attention needs to be paid to the overall hotel performance, focusing on yield management and improving gross operating profit (GOP), rather than strictly trying to increase occupancies. Owners already have gained more leverage as they have become more prudent, demanding shorter management contracts with performance-based fees from hotel operators.
2) Brand and distribution: Shareholder value is associated with distribution. While hotel companies in the United States and Europe have been looking for incremental business in Asia Pacific, they also would be wise to revisit the impact of global distribution systems (GDS) and the Internet on driving regional business.
3) Customer relationship management: The hospitality industry in Asia Pacific will need to raise its level of sophistication with regard to utilizing customer data. To date, hoteliers have been good at collecting the data, but less so at using it to the best effect, such as in target marketing.
4) Benchmarking: The collection of business information - costs, revenues and other operational data - in the region also is in its infancy. For the benefit of all, knowledge sharing must be encouraged.
Overall, hotel companies with operations in Asia Pacific will have to rethink some of their more traditional business methods and strategies, quickly moving to embrace the ways of the new economy. The Internet, with its new technologies and e-business applications, has arrived - and it's here to stay.
Based in Singapore, Andreas Flaig is the Associate Director of Arthur Andersen's Hospitality Consulting group in Asia Pacific. Steven Shundich is the Chicago-based editor of the Arthur Andersen Hospitality and Leisure practice Web site. If you have a comment or require more information about this article, please send an e-mail to Arthur Andersen's Hospitality site editor, Steven F. Shundich ©Arthur Andersen ( http://www.knowledgespace.com/splash/ )