The 2018 Winter Olympics in Pyeongchang, South Korea, could be a badly needed demand driver in a hotel market struggling with supply growth.
SINGAPORE and HENDERSONVILLE, Tennessee—With the 2018 Winter Olympics beginning in Pyeongchang, South Korea, on 9 February, the South Korean hotel industry will experience a massive influx of new visitors, and given the recent shift in international arrivals, this would be a very welcome boost.
South Korea’s macroeconomic backdrop shows a drastic decline in the all-important exports to Mainland China as the biggest trading partner across numerous fields, including cosmetics and electronics. Many factors contribute to this decline. The economic and political unrest within South Korea both in Samsung and the ruling party aren’t the only reason, but political pressure from the Chinese government concerning U.S. plans to deploy THAAD missiles in South Korea is also a major influence. From a tourism perspective, there were also changes in visa policies to groups traveling from Mainland China.
The combination of all these factors caused international arrivals to decline from 17 million in 2016 to an estimated 13 million in 2017—close to 2015 levels—severely limiting the demand across both business and leisure destinations and accommodation providers.
At the end of 2017, there were 325 hotels with roughly 80,000 rooms in South Korea, according to STR, parent company of Hotel News Now. Ahead of the Winter Games, room supply increased steadily over the last three years, and each year South Korea recorded new room growth of 7% or higher. In the final months before the games, supply increased in November 2017 by 10.5% and in December by 11.2%.
This combination of supply growth and decline in arrivals meant that room demand was not able to keep pace and rooms sold decreased 0.4% in 2017. This follows a 17.9% demand increase in 2016, however, this number is artificially inflated since the 2015 data was negatively affected by the Middle East Respiratory Syndrome (MERS) outbreak in the summer of 2015. After that impact dissipated, Korean hoteliers sold roughly 18 million roomnights in both 2016 and 2017, which was about four million roomnights higher than 10 years ago at the end of 2007 and 1.7 million roomnights more than in 2014.
Occupancy for South Korea has exceeded 70% since 2010, with two exceptions: 2015 (64.9%) and 2017 (65.3%). June and July showed the highest monthly occupancies in the past, often well over 70%, but in 2017 only 63% of rooms were sold in June and 65.4% in July.
South Korea’s weekend occupancy performance has always been much stronger than the weekday performance, and 2017 was no different.
But while South Korea hotels reported weekend occupancy in excess of 80% during eight months of 2016, the country eclipsed 80% occupancy for just one month (August) in 2017.
Room rate decreases followed the occupancy declines. At the end of 2012, the average guestroom cost 193,600 South Korean won ($179.37) but by the end of 2017 cost only 152,200 South Korean won ($140.98). Average daily rate in South Korean won has declined for five consecutive years since that peak, and it will be very interesting to observe if the influx of visitors can lift the country’s ADR for a prolonged period or if the Olympic ADR lift will be short-lived.
High occupancies on weekends allowed hoteliers to keep weekend ADR at a premium to weekday ADR. That said, room rate declines were universal.
Taken all together, quarterly revenue-per-available-room performance shows a rather dismal picture:
As the driving market in South Korea, Seoul/Incheon’s hotels experienced one of the most drastic performance declines across the entire Asia/Pacific region in 2017. Hotels in the market saw year-over-year drops in both occupancy (-7.6%) and ADR (-5.5%).
High-end hotels also report declines
On the upper end, STR tracks 90 luxury and upper upscale class hotels in South Korea. These hotels provide segmentation data about their group and transient demand and revenue.
The MERS crisis hit group demand particularly hard in these classes and STR reported a 25.2% group occupancy decline in 2015; during June, July and August, lost demand decreased by half. In 2016, these segments saw a rebound in overall demand and occupancy, but group occupancy only recovered 12% for the year. In 2017, group occupancy swung widely as demand numbers normalized, but group occupancy still declined 9%. During the same year, transient occupancy was down 4.2%.
Group and transient ADR declines have mirrored the national rate decline for the last few years:
More supply needs to be absorbed
No matter the recent results, developers cast the doubts about the muted demand performance aside and continued to invest in the South Korean hotel industry. The STR pipeline shows 35 projects with 11,185 rooms in the active pipeline.
If all those rooms open, the South Korean room supply would grow by 14%, but this number is likely overstating the actual supply increase because of project attrition. It is noteworthy that an additional 6% of rooms is under construction and will likely open in the next six quarters, and 1,300 rooms in construction will open prior to 31 March.
This is particularly noticeable in Seoul/Incheon, where there are more than 6,000 confirmed rooms in the pipeline, more than 2,300 of which are expected to open in 2018.
The market’s notable 2018 openings include the 528-room Novotel Ambassador Seoul Dongdaemun and 262-room Courtyard by Marriott Seoul Botanic Park.
As the eyes of the world focus on Pyeongchang, South Korean hoteliers will be firmly focused on the future. Recent history shows that the country’s hotel industry experiences wide swings in performance, and 2018 will be no different. It will be important for operators to keep an eye on the new supply and understand their potential for ADR increases given the continued healthy occupancy environment. For the time being, both global and local developers remain interested in the long-term potential of South Korea, and continue to plan new hotels across the country.
This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.