Asia Awakens
Governments are instituting financial reforms, and occupancies are rising. Investors believe Asia hit bottom and is headed back up.
By Joan Marsan, Senior Editor -- HOTELS Magazine, 4/1/2001
|
It may have been the year of the dragon, but the dragon was curled up with his head tucked resolutely beneath his tail. Inactivity seemed to be the major occupation of investors in Asia Pacific in 2000. Only in the outer reaches, in Australia, was there much mergers and acquisitions activity, with companies such as Accor and Bass growing portfolios at a rapid-fire pace. The reason for the apparent sloth is simple. Buyer and seller expectations have been widely divergent, causing sellers to hang on a little longer, often despite having defaulted on loans. Compounding the problem, “Banks are lacking the teeth to force recalcitrant borrowers to consider sell-outs,” says Rob Stiles, managing director, Sonnenblick-Goldman, San Francisco. “That’s the fundamental problem. If you could completely work through the risk elements, you would see a lot of transactions. And we would see a blossoming of the market.”
|
That springtime may be fast approaching. Economic reforms are encouraging owners to place properties on the selling block. “Government agencies are actively and aggressively encouraging the restructuring of large business and are using state banks as the hammer to try to refocus industry,” Stiles says. And investor attitudes are changing. While investors still possess a hold sentiment of 46.3%, higher for Asia Pacific than anywhere else in the world, according to a Jones Lange LaSalle Hotel Investor Sentiment Survey (HISS), that sentiment is shifting to buy. Investors have begun to act on the evidence, in the form of rising occupancies, rates and operator optimism, suggesting Asia is shifting from slump to upward climb. The dragon is stirring.
Banking On Improvement
“Asia is splitting between north and south,” says Robert Broadfoot, managing director, Political and Economic Risk Consultancy, Hong Kong, and the trend will only become more pronounced, he says. Asia’s picture of improvement comes most sharply into focus in the north and blurs to the south. In Tokyo and Seoul, for example, occupancies in the third quarter of 2000 topped 80%, and room rates surpassed pre-crisis levels, averaging above US$150, double the ADRs achieved in most other Asian markets. In Tokyo, as Japan has continued to open domestic markets to international trade, international arrivals have improved, increasing demand and rates, and suggesting that new supply scheduled for completion in 2001 will be absorbed by the expanding market. A substantial increase in demand from the global investor community, paired with a lack of new supply growth, helped hike room rates in Seoul.
Korea, which suffered mightily in the second half of 1997, moved quickly to address its problems. The reformation of legislation controlling international ownership of property in Korea lowered barriers to foreign investment in the Seoul market. Ten years of economic malaise has afforded Japan time to move toward economic reform. The Shinsei Bank, founded in March 2000 with the transfer of the Long Term Credit Bank from Japanese governmental control to a U.S. investment group, introduced lending rules that give top priority to the maximization of shareholder value.
While the region’s hotels historically have provided low-yield investment with a return less than 10% because of overspending and high land cost, these structural changes in the financial systems have resulted in improved performance. And the changes have forced companies to make a decision—whether they will stay in the hotel business or shed properties in order to focus on other core industries, in either case bettering their returns, says Robert Hecker, managing director, Horwath Asia Pacific, Singapore. We can expect to see northeast Asian companies restructuring, and as a result, selling properties by the March 31 close of their fiscal year, Hecker says. But traditionally, hotels in Asia were built with no intention of selling, and so those being sold most likely will hit the block at a significant discount of development cost and to book value. For international companies, this is the window of opportunity for entering a market that previously has presented seemingly insurmountable price barriers to entry.
All Eyes On China
China, however, is the formerly impenetrable market intriguing hoteliers most. With its 1.3 billion populace—one quarter of the world’s population—and its imminent entry into the World Trade Organization (WTO), the country promises untold fortunes to those who can capture its consumers’ loyalty and host the foreign investors who will flock to China in untold numbers when its market opens wide to them. Already, investment is growing. By the third quarter of 2000, contracted foreign direct investments (FDIs) to China totaled US$38 billion, up 28% over 1999. While China was the beneficiary of 18% of FDIs to Asia Pacific and Australia in 1990, its share of the pie increased to 61% in 2000.
This influx of foreign money has created a surge in inbound international travel to China, and hoteliers are anticipating a corresponding increase in occupancy and room rates. Almost 3 million overseas travelers visited Beijing in 2000, up 11.7% from 1999. The overbuilding of the past has kept this growth from heightening occupancies and room rates to stellar levels just yet, but occupancy is holding at 65% to 70%, and ADRS, while still 15% below their pre-crisis highs at about US$70, are on the rise. Shanghai, meanwhile, has seen a solid 10% increase in occupancy, with hoteliers reporting they are 77% full. These figures may dip as additional rooms open in 2001, and rates, which have stayed stable, are not expected to rise yet. But, “Shanghai has to be the hottest market in Asia,” says Michael Cottan, area manager, South China, Shangri-La, Shanghai. “Infrastructure is being developed at a rapid pace exceeding what you’d see in the States, the government is putting a lot of effort into development. The city is doing well. We’re up 10 points on the previous year, and this year looks even busier.”
The impending economic and legislative changes that have spurred this booming business are also encouraging hoteliers to become actively involved in ownership and operations in China. Accor, which already counted nine Sofitel and Novotel hotels among its Chinese portfolio at the turn of the year, announced a partnership with Zenith Hotels International, operators of nine hotels, including eight in China. “We want to have between 22 and 23 hotels in China in 2002,” says Reggie Shiu, regional vice president, Accor Asia Pacific, Bangkok, adding that Accor intends to pursue mainly management contracts. For companies bent on buying in, however, more activity in the region can be expected under the WTO agreement, which would enable the establishment of 100% foreign-owned properties within three years and would give unrestricted access to hotel operators, allowing majority ownership upon accession to the trading body.
The opportunity to become more fully vested in properties comes as good news to foreign operators looking to make deals in Asia. “We are actively seeking for opportunities to leverage our financial capability in Asia,” says Ian Lien, vice president acquisitions and development, Starwood Hotels & Resorts Worldwide, Singapore. “We believe there is a cycle play in Asia and plan to take advantage of that by acquiring or joint venturing on existing hotel opportunities... Whenever there is a limited time for a real estate venture, as in China, where joint ventures expire after a certain number of years, the amount of acceptable opportunities for many non-PRC [People’s Republic of China] based companies is limited.”
Limitations or none, now is the time to enter China full force, most international brands agree. And throughout China, brand building now is essential to secure long-term customer loyalty and enhanced profitability. “In Beijing, hotel branding is a major competitive advantage in attracting foreign visitors and high-spending domestic travelers,” says Christopher Khoo, research director, hospitality and leisure, Asia Pacific, PricewaterhouseCoopers, Singapore. Recognizing this, companies such as Marriott, with its gateway city strategy, are plotting their arrival on the scene. With one Beijing Courtyard property, Marriott wishes to introduce more brands, particularly Renaissance, to the city. “We’re not present yet in Beijing,” says Ed Fuller, president, international operations, Marriott International, Washington, DC. “We need to get into that gateway city.”
Returning To Prosperity
China’s burgeoning outbound travel market has contributed to the growth of the region, particularly Hong Kong, where mainland Chinese account for more than 30% of total arrivals, or 3 million visitors per year. As a result, Hong Kong has made significant progress in achieving its pre-crisis occupancy rates, reaching levels above 80% in 2000. Rates, however, remain suppressed, in part because the Chinese market tends to be more rate-sensitive and demands lower room rates, Stiles says. Also, additions to the room supply in 2001-2002 will account for a 23% increase in room count over 1999. Hence, Stiles anticipates a two- to three-year gap before ADRs return to their pre-crisis levels of HK$1,225 (US$157).
Like Hong Kong, Singapore, fed in part by the Chinese travel market, has seen occupancies rise above 80%. But ADRs remain low (US$104) in the fully saturated 5-star market, here, too, and Stiles says it will be three more years before they rise to pre-crisis levels. The mid-tier market will prove most attractive for hotel executives wishing to enter the desirable politically and economically stable island city. With zoning changes resulting in the closure of several hotels that are being redeveloped into residential buildings, almost 1,400 rooms have been removed from the inventory, which despite new construction will see a 4.7% loss of total room stock by the end of 2001. The promise of heightened occupancies and the growth of an already-low RevPAR could offer an opportunity for capitalization on the potential of future RevPAR growth. “RevPAR is likely to rise at least 15%,” Khoo says.
Struggles In The South
“For developers, there are few if any opportunities on the horizon,” says Antony Karp, executive vice president, Jones Lang Lasalle Hotels, Singapore, of the Asia Pacific region, but he quickly notes Phuket as an exception. With several international operators missing from the market and occupancy rates reaching for 80%, fed in part by Indonesia’s slump, Phuket is attracting builders. Thailand, it appears, is the beehive of activity in a region otherwise devoid of flowers.
“Southeast Asia is in real danger of becoming the backwater of investment,” Broadfoot says. Indonesia, the Philippines and Malaysia are overbuilt. Political upheaval continues to rock Jakarta, all but paralyzing the nation’s ability to attract vacationers. In a desperate attempt to attract visitors, the Indonesian Tourism Office is offering travelers three nights free in 5-star hotels in Bali, which despite its history as a bastion of serenity has been tainted by Jakarta’s reputation. Like Indonesia, which receives failing marks in growth dynamics from Broadfoot, the Philippines, also suffering from political instability and terrorist actions, are barely passing.
But no situation is permanent, investors know, and multi-national brands seeking entry into gateway cities still consider Jakarta, with its 33% occupancy rates, essential for growing brand presence. “We have embarked on an aggressive program for the Inter-Continental brand,” says Richard Hartman, managing director, Bass Hotels and Resorts Asia Pacific, Singapore. “We will continue to expand in Asia Pacific to close strategic gaps within the region. These gaps include Kuala Lumpur, Phuket and Jakarta.”
Vietnam is picking up as a tourist destination, says Hecker, especially as individual properties begin to market themselves. But in Vietnam, Hecker says, “A lot of fundamental changes need to occur. In the early ‘90s, people got burned, so while there’s cheap labor, there’s huge risk. And now with selling likely to occur, people can get into other markets, so there’s less incentive to check out Vietnam.” Still, foreign investors have poured more than US$5 billion into tourism projects in the country, expecting to capitalize on the 17% annual increase in foreign visitor arrivals, which totaled 2.5 million in 2000.
Meanwhile, in neighboring Cambodia, Siem Riep is overwhelmed with tourists. The government set aside a 1,007-hectare hotel zone surrounding Angkor Wat, the UNESCO World Heritage Site that attracts travelers to the city. Several hotel projects will open to support the demand, “But there’s going to be an undercapacity problem,” Hecker says. “Only so many people can enjoy the ruins at any one time.” Meanwhile, Phnom Penh has been canibalized by Siem Riep’s success. Because Angkor Wat is Cambodia’s primary tourist attraction and is now serviced by direct flights, Phnom Penh, which used to serve as the hub for the region, has been bypassed, and occupancies have fallen severely.
An Island Unto Itself
While Asia pulls itself out of its sickbed, Australia holds its own. It survived the Asian crisis fairly unscathed, and continues to play an integral role in many companies’ Asian expansion plans. “Australia is both separate and a part of the rest of the region,” Starwood’s Lien says. “The future will see growing economic ties between Australia and the Asia region. The two feed off each other, and it is necessary to keep a strong presence in both areas.” Starwood also sees Australia as an ideal testing ground for new concepts, launching the Asian permutation of its W brand in Sydney, locating the property over the water on a converted historic pier.
While the Asian dragon has been sleeping, Australia has been a hotbed of activity. Accor Asia Pacific, with the acquisition of 25 All Seasons properties (3,522 rooms), held on to its position as the leading hotel management company in Australia, keeping ahead of Bass Hotels and Resorts, which jumped from its tenth-place position in 1999 to second in 2000 with the US$315 million acquisition of most of the Southern Pacific Hotel Corporation’s portfolio. Meanwhile, the fresh, young Stamford Hotels and Resorts leapt into position as the eighth largest operator in Australia with its purchase of four properties, including the trophy Ritz-Carlton Double Bay and The Heritage, Brisbane.
Australia is an attractive market for international corporations—and not just at the high end—because of its balanced, level economy and its familiar legal system, says Paul Kirwin, president, Country Inns & Suites, Carlson Hospitality Worldwide, Minneapolis, Minnesota. “Australia didn’t have the excessive development and contraction,” Kirwin says. “It hasn’t had a significant wave of mid-market new construction over the last decade. There hasn’t been the development of limited service products.” Kirwin expects that this is the industry segment most apt to feed on Australia’s 80% domestically generated travel market.
The mid-market and limited service segment also is the area most likely to grow in India, which, like China, holds a huge percentage (about 1/5) of the world’s population and is being eyed hungrily by developers who recognize its explosive growth potential. The country’s population increasingly is becoming middle class. The government is working to forge stronger relations with the United States and has granted incentives to the telecommunications and hi-tech industries that promise economic growth. As in China, bureaucratic challenges plague outsiders attempting to crack the Indian market, but legal reforms, such as defining management contracts, which until recently were not recognized, are improving the situation for developers and operators. Still, in India, as they do the world over, strong partnerships set the stage for growth.
Stamford Sets Its Sight
The blistering pace that characterized Stamford Hotels & Resorts growth in Australia in 2000 may slow down, only to pick up elsewhere. Owner and operator of 11 5-star hotels in Australia and New Zealand, Stamford, established in 1996 to manage the hotel acquisitions of shipping magnate Chio Kiat Ow, is poised to purchase properties in Southeast Asia, Europe or South America.
“We are ready to buy, but the price has to be right,” says chief financial officer Tay Lai Wat. And properties must fit Stamford’s acquisition profile: undervalued, under-performing, and located in a region ripe for growth. Australia and New Zealand provided a perfect fit for the fledging company. A common language, culture, and political and economic systems helped Stamford grow a solid brand regionally. Now, Southeast Asia, with its cultural and political systems already familiar to the Singapore-based corporate staff, is the logical next step for Stamford. But in Southeast Asia, some new problems arise.
“We are always afraid of oversupply,” Wat says. “If there’s oversupply, it won’t be worth it anymore.” While countries such as Vietnam offer the potential for regional growth, Wat cites Ho Chi Minh City, with occupancies of 20%-30%, and says he is relieved Stamford chose to steer clear. Jakarta, he says, is more intriguing. “Everybody’s nervous about Indonesia,” he says, but hotels there are likely to trade at more reasonable valuations when, ultimately, banks are able to sell them. Tokyo is “not easy,” Wat says, but with banks applying pressure on distressed mortgages and owners of prime real estate increasingly likely to sell as they opt out of hotels in order to focus on their core businesses, “Who knows?” Wat asks.
“We are not like the companies that say ‘Meet this program of expansion,’” Wat says. “We are not blasting through the world. For two years, we didn’t buy anything, and then we bought three hotels. It very much depends on pricing.”
Meanwhile, Stamford profits from an operating strategy widely respected by its Asia Pacific counterparts. In a Hotel Industry Benchmark Survey, Arthur Andersen revealed that the majority (64%) of hotel executives at large in Asia Pacific believe that an operator should maintain three to four brands in order to emerge as a dominant hotel operator, and 20% believed one to two brands would be sufficient. While only 14% of respondents felt as many as five to six brands would offer an advantage, this has been the category into which the region’s leading international hotel management companies fall. The figures suggest a disparity between operating practices of large international companies in the region and attitudes of the local community.
|
C.K. Ow, executive chairman, chose to develop the Stamford brand rather than rely on management contracts with large multinationals, which suggested they would provide larger revenues and profits by offering support in the form of brand standards, reputation and infrastructure, customer support, established reservations sales and distribution systems, and market positioning. Ow felt the major, multi-brand operators were inflexible. They failed to offer “an equitable relationship...where the pain, as well as the gain arising from the hotel’s performance, was fairly and transparently shared.”
So Ow went his own way, establishing the Stamford brand, which relies on a reputation for operating luxury hotels in landmark locations, primarily catering to corporate segments. As is expected of hotels in the luxury market, Stamford embraces and implements high-tech products in its properties. And service is thoughtful, yet unpretentious and economical. By cutting back on amenities high-end travelers won’t miss—turndown service, for example, which only 15% of travelers wanted and many more reported was a nuisance—Stamford guarantees quality attention to both guests and the bottom line.
Stamford, in choosing to build its own single, strong brand, has proven the proficiencies of this smaller scale, brand-wise, operating strategy that Asia Pacific hotel executives seem to favor. With its focus on 4.5- to 5-star properties, in one year, Stamford became the largest operator of luxury-only properties in Australia and achieved a six-point increase in bottom line margin, seeing gross profit margins rise from 27% to 33%. “We have gone from a bit player to a force to be reckoned with,” Ow says.
This is not to say Stamford isn’t considering growing more brands. Wat says a 3.5-star product may be in the works if suitable buying opportunities arise. “We have to worry about the message,” he says, suggesting Australia might not be the best market in which to launch a mid-tier Stamford product. But with plans for expansion imminently on the horizon, the need for new territory is no limitation at all.
Hoteliers Building Brands In Asia Discover One Thing Leads To Another
|
Twelve years ago, there was huge opportunity for growth in the 4- to 5-star hotel market. But with the 1997 meltdown of the Asian economy, the industry reached its plateau. “It’s hard for someone to come in or even sustain growth rates,” says Rob Stiles, managing director, Sonnenblick-Goldman, Singapore. Operators looking to grow must increase cash flows or change management contracts. “The faster growth opportunities,” Stiles says, “are in the mid-range domestic markets. But this takes big investment, overseas investment. It promises long-term payoffs, though.”
Analysts and hoteliers alike agree China offers the most expansive opportunities for growth. India, too, has been cited as offering potential for long-term development. Major international operators such as Accor, Carlson, Holiday Inn, and Hyatt have made inroads into either China or India, some building mid-market brand presence with the expectation that higher tier properties will follow. These operators acknowledge that much of the consumer base in these regions is generated domestically by customers who, while currently they are more rate-sensitive than high-end, 5-star travelers, are experiencing increasing levels of affluence. The customer loyalty these hoteliers engender in the meantime and the partnerships formed and lessons learned as 3-star operators serve to set the groundwork for 5-star success.
Partnerships with known, experienced local operators have formed the foundation for Parsippany, New Jersey-based Cendant’s entry into these markets. Master franchisees “know the market, culture, economy political system,” says Rajiv Bhatia, corporate director, international hotel division, Cendant. “All that helps to develop in that territory much faster than if we went there as an American company.” Cendant secured master franchisee agreements in China for Days Inn with Yeu Yang and for Howard Johnson with Wilburt Chang, and anticipates the opening of up to five Howard Johnsons and 10 Days Inns in 2001 after the opening of the first, a Beijing property, in the second quarter of 2001.
“In China we haven’t moved as quickly as we would like,” Bhatia says, citing the collapse of the Asian economy. “Coincidentally, the Indian economy, which is a lot less strong, wasn’t affected so much by the Asian meltdown. From our standpoint, it has been better.” Cendant has nine Days Inns open in India and another seven in the pipeline. Occupancies have averaged above 60%, and ADRs range from US$50-US$55. With GDP growth expected to rise almost another 7% in 2001, Bhatia forsees further expansion of the travel market and Cendant’s share of it, and cites the imminent finalization of a Howard Johnson master franchisee agreement in India.
Despite the difficulties inherent in growing brands in India and China, Bhatia says, the payoffs are huge. “Once one of your brands enters the market, people become curious. Then they see your other brands. This fuels their interest.” That interest, converted into hotels, room nights, occupancies and rates, is the basis for big returns in Asia.
In its Hotel Industry Benchmark Survey, Arthur Andersen revealed that the majority (64%) of hotel executives at large in Asia Pacific believe that an operator should maintain three to four brands in order to emerge as a dominant hotel operator, and 20% believed one to two brands would be sufficient. While only 14% of respondents felt as many as five to six brands would offer an advantage, this has been the category into which the region’s leading international hotel management companies fall. The figures suggest a disparity between operating practices of large international companies in the region and attitudes of the local community.
View All Blogs
