Check-ins dip, so hotels must check out options

The period of rapid and easy growth is over and the sector now faces the combined pressures of reduced demand and increased supply, writes ROBERT MCINTOSH

HOTELS in Singapore have witnessed a spectacular performance over the past few years, reaching unprecedented highs in 2008. Singapore hotels reaped the benefits of strong tourism demand, achieving a record in average room rates at $246 in 2008, and garnering a record $2.1 billion in room revenue, a 12.1 per cent increase over 2007.

Hotel room rates (also called average daily rates or ADRs) have grown at an impressive pace since 2004, with a compounded annual growth rate of over 19 per cent. The strength of this performance is unmatched in many markets, and is testament to Singapore's image as a vibrant destination for both business and leisure. The result is that revenue per available room (RevPAR) grew from approximately $100 to $200 between 2004 and 2008.

But Singapore's record-breaking run was to end in mid-2008. Since June 2008, visitor arrivals have declined, and as the gravity of the current financial crisis began to unfold, changing consumer sentiment across the region saw travel budgets and plans cancelled or restricted, impacting hotel performance.

Recent indications suggest that performance in 2009 will continue to weaken. In January 2009, hotel rates declined by an estimated 11.7 per cent year on year, while occupancy levels dropped to 67 per cent (the lowest level since the Sars crisis).

While the decline in performance may in part be due to the occurrence of Chinese New Year in January, much of it is attributable to the deteriorating worldwide economy and poor consumer sentiment.

The extent to which falling demand for hotel rooms impacted on different hotel tiers is difficult to determine at this stage. However, in assessing the most recent data in January 2009 compared to January 2008, economy hotels in Singapore saw a 26.8 per cent decline in RevPAR while hotels in the luxury tier registered a drop of 32.4 per cent over the same period.

This suggests that while all hotels have suffered a considerable decline in RevPAR, the impact is less apparent in the economy sector vis-à-vis the luxury market.

Uncertain future
Looking forward, there are few signs of the global economic crisis abating, and a high degree of uncertainty regarding the future remains. Economists are revising market projections on a daily basis, superceding previous forecasts as the market continues to fluctuate.

The difficulty in forecasting hotel performance is that no one really knows how deep or how protracted the economic crisis will be. However, at a fundamental level, future hotel performance in Singapore will primarily depend on two key drivers: the demand for, and supply of, hotel rooms in the market.

In January, the United Nations World Tourism Organisation (UNWTO) projected international tourism to either stagnate or decline by up to 2 per cent this year. While tourism in Asia is expected to fare slightly better and retain positive growth rates, projections will likely be revised downwards if the global economy continues to deteriorate.

The Singapore Tourism Board (STB) has also adjusted previous forecasts for 2009, with visitor arrivals now expected to be nine to 9.5 million, a decline of between 5.9 and 10.9 per cent on 2008 figures.

In addition to shrinking demand, Singapore is expected to see the largest increase in room supply across South-east Asia in the next few years. According to CBRE Research, an estimated 32 new hotels with over 12,000 hotel rooms are expected to enter the Singapore hotel market by 2012.

Assuming all projects proceed as planned, total room nights available will increase by 40 per cent to reach 15.2 million in 2012.

Impact of IRs
The largest contributors to future room supply are the two integrated resorts (IRs) which offer a combined 3,978 rooms. At the opposite extreme, conversions from historical buildings into creative boutique properties will provide diversity in the market.

In forecasting future supply in the current environment, it is inevitable that some projects will experience delays in construction, and the probability that a project will face postponements or even cancellations increases the later the hotel is expected to open. In the current economic climate, difficulty in accessing finance from capital markets may force some investors in the smaller projects to reassess their developments.

While the IRs will be the largest contributors to future supply, they will also generate significant additional demand for both the tourism industry, and more broadly, the economy.

In addition to the gaming facilities, the massive increase in conference and exhibition space will enable Singapore to host larger business and MICE (Meetings, Incentive Travel, Conventions and Exhibitions) meetings, and further build on the Republic's reputation as a venue for top international meetings. Furthermore, leisure visitors will be drawn to new attractions and events hosted in the new IRs, including Universal Studios, Marina Life Parks and the new ArtScience Museum.

So how will hotels perform in 2009? If STB visitor arrival forecasts hold true, and the fundamental ratios between arrivals, length of stay and visitor days remain stable, occupancy levels may decline to around 71 per cent in 2009.

However, CBRE Hotels believes demand will show a strong recovery in 2010, driven by additional attractions and, hopefully, increased stability in the global economy.

CBRE Hotels is of the opinion that the fall in occupancy will impact room rates which are likely to decline by 10 to 15 per cent in 2009, to reach an average room rate of between $209 and $221.

This would still be above 2007 levels. RevPAR will then face the most significant decline, and it is likely to drop by 20-25 per cent, to reach an average of between $148 and $158. The decrease in RevPAR represents a downward revision from previous industry estimates and is due to declining performance and continued uncertainty in the global economy.

At present, it is difficult to predict what will happen in 2010 and beyond. While the additional supply will have a negative impact on room rates, this will be countered by the potential improvement in the economic environment and the new demand drivers. Nevertheless, occupancy levels appear likely to take several years before they recover to 2007 levels.

Fortunately, the underlying fundamentals in the Singapore market are extremely strong. In addition, the Singapore government has announced a variety of initiatives to support businesses in general, and the tourism industry specifically.

The recent $90 million BOOST (Building on Opportunities to Strengthen Tourism) package aims to generate demand through activities such as global marketing campaigns, value-focused packages, funding support and training.

Hoteliers should make sure that they participate and throw their support behind these proposals, as a way of helping to mitigate the adverse impact of the downturn. There will be changes and challenges over the short term. For example:

Hotels will need to be more innovative by offering value-added packages and benefits such as free breakfast, wireless Internet, spa vouchers or complimentary transportation.

Hotels will be looking to further develop and nurture their existing customer base, revisiting customer preferences and requirements and exploring other opportunities to provide value to loyal existing customers.

Long-haul travel is also being sacrificed for short- and medium-haul destinations. This is particularly true for leisure travellers. Hotels will be exploring opportunities to attract regional demand and provide packages which offer a strong value proposition.

Hotels will need to ensure that their product and services are clearly differentiated from competitors. A strong marketing strategy targeting both existing and new customers through a variety of channels is essential to ensure sufficient publicity during competitive times.

Finally, downturns also present opportunities to focus on efforts which are often overlooked in busier periods. Hotels could go ahead with refurbishment and upgrading of facilities during quiet periods; this is less likely to impact overall performance and will ensure that they are well-placed for a market recovery.

In the short term, the hotel market is going to be under the combined pressures of reduced demand and increased supply. The extraordinary period of rapid and easy growth is over. The next few years will be challenging and this is when well-managed and branded hotels in strong locations will outperform the general market.

The writer is executive director, CBRE Hotels,Asia-Pacific

Source: Business Times, 26 Mar 2009