Strong fundamentals offset Asian development challenges
Strong fundamentals offset Asian development challenges
18 NOVEMBER 2019 8:41 AM

Stiff competition for sites, capital and partners is producing mild headaches for hotel developers in Asia, but ultimately, the fundamentals point to a profitable time for all if the prerequisites have been met.

HONG KONG—The pace of hotel development in Asia has increased, but new hotel rooms are still behind growing population and traveler numbers, according to sources speaking at the Hotel Investment Conference Asia/Pacific.

Despite fundamentals all pointing in positive directions, investors and hotel developers might not be cheering too soon, though, as costs are increasing and sites—especially in urban markets—are becoming rarer.

The current environment makes every conversation with a potential franchisee crucial, said Jim Chu, global head of development at Hyatt Hotels Corporation, during on “The development outlook” panel.

“The engagement of brand consultants is increasing in every region, and we see a rise of requests for proposals in every segment,” he said. “We do not play in the economy space, but I would not be surprised to see it is there, too.”

The other panelists said having a distinct brand offerings or growing via mergers and acquisitions are gaining ground as a route to expanding portfolios and share of wallet in some of Asia’s most crowded markets.

Moderator Roy Melick, partner at Baker McKenzie, underlined the region’s busyness.

“By 2030, six new cities with other 10 million people will exist in Asia, and of the 30 largest cities, 19 will be in the region,” he said. “Fifty percent of the global population over the next 10 years will be in Asia, and by 2030, 70% of the world’s middle class will be there, too, accounting for 60% of consumption,”

In 2018, 25% of international arrivals and 30% of tourism receipts came to the continent, he said.

That produces opportunities but also headaches, panelists said.

“Land prices for hotels in Singapore have surpassed that of residential, but if you do buy land, you can get the hotel up in eight months,” said Bobby Hiranandani, managing director of Royal Group, a Singapore-based hotel development and investment firm. “Nowhere else in the world can do that.”

Dillip Rajakarier, CEO of Minor Hotels, mentioned geopolitical issues, technological innovation and climate change as headaches, while Hiranandani said government interference has often cropped up.

“They want more hotels, then they do not want more hotels,” Hiranandani said.

One welcoming challenge is the increased demands placed on hotels by new Chinese personal wealth. Melick said this dynamic has led to what he called “interesting diversifications” in the industry, such as retail brand LVMH Moët Hennessy Louis Vuitton SE’s $2.6-billion purchase of Belmond in December 2018. Melick also cited Airbnb’s buy of HotelTonight and a share of Oyo Hotels & Homes and Accor’s purchase of Onefinestay as additional examples.

“There is a pressure from increased wealth from Asia and what it demands,” he said.

Chu said Hyatt remains focused on Asia’s largest markets.

“We are looking at every market, but there is a focus on high-leisure-demand markets that can sustain loyalty,” he said. “The major markets of the last 10 years remain the major markets today. If it is too far outside the outside edge, we stay away.”

Adding value at every step
Fundamentals such as investing into proven locations and ensuring the brand speaks to that market and its inbound guests remain important, sources said.

“We open hotels for 10, 20, 40 years, so people either ask me ‘Why are you there?’ or ‘Wow, how smart you are to get in now,’” said Michael Issenberg, chairman and CEO of the Asia/Pacific region for Accor. “It is about what is the right brand and size, what is the right technology.”

Chu said taking the long view is usually best.

“You can look at your underwriting today, but the perspective needs to be for decades,” he said. “In Asia, it is a longer perspective as there is not so much recycling of capital. Yes, you do see the U.S. method of turning things around every few years happening more globally, but (in Asia) we see it as a multi-decade arrangement. Investors might not see it that way, though.”

Asia’s hotel owners have definitely matured, Rajakarier said.

“Owners are more sophisticated as they have been through the churn,” he said. “They require sweat equity, guarantees, skin in the game, and there has been a shift to smaller hotel firms who work harder for the owner.”

Rajakarier said Minor Hotels also manages Southeast Asian assets for Four Seasons Hotels & Resorts.

“There must be alignment from an owner’s and operator’s perspective. If not, I walk away,” he said. “Look at it in two ways. We wear two hats. We want to make sure the key demand drivers are there to ensure (return on investment), but as an operator we want to concentrate on quality, not quantity.”

Issenberg said partners also have to have economic alignment.

“We spend an inordinate amount of time on the development piece as if you get that right generally things run very smoothly,” Issenberg said.

The sophistication of hotel performance data available also will increasingly be folded into the property value of hotels in Asia.

“All this causes a lot of work on both sides, and it can happen as the market changes or there are customer-service issues, at which point you are not able to capture that target audience,” Issenberg said. “There has to be durability in the management agreement. It is not just a financial agreement but one with our customers, to gain that long-term awareness of our brands.”

Hiranandani demurred.

“Location is the key, and then trust, which has bigger scale than alignment,” he said.

No Comments

Comments that include blatant advertisements or links to products or company websites will be removed to avoid instances of spam. Also, comments that include profanity, lewdness, personal attacks, solicitations or advertising, or other similarly inappropriate or offensive comments or material will be removed from the site. You are fully responsible for the content you post. The opinions expressed in comments do not necessarily reflect the opinions of Hotel News Now or its parent company, STR and its affiliated companies. Please report any violations to our editorial staff.