Bangkok hotels take a major hit

May 09, 2010
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The global media coverage of unrest and violence in Bangkok has frightened a lot of travelers away and put the brakes on an otherwise promising recovery.

Since the state of emergency was imposed in Bangkok in April, foreign arrivals are down at least 20 percent from the same period a year ago. The impact on some hotels in the capital has been severe and comes at a time when the industry was just beginning to see a substantial turn around, said Andrew Langdon, senior vice president of Jones Lang LaSalle Hotels.

Accompanying the decline in arrivals have been many cancellations or postponements in the MICE (meeting, incentive, convention, and exhibitions) market, largely for Bangkok-based events.

"Luckily the detrimental tourist conditions seem to be largely limited to Bangkok, with many hotel operators reporting their hotels outside of Bangkok, in regions such as Phuket and Samui, are witnessing limited downside," said Mr. Langdon.

Research by Jones Lang LaSalle Hotels shows that the Thai tourism industry did better than expected last year with tourist and business arrivals totalling 14 million, a drop of only 3 percent compared with 2008. A surge in arrivals in November and December helped, as people worldwide began traveling more in the belief that the global economy was on the mend.

"If you are looking at the early part of last year, say in June, tourist arrivals were down by 15 percent. Obviously we finished the year better than many people thought we would," Mr. Langdon added.

However, hotel performance was not that strong, with declines in the two main gauges used by the industry - revenue per available room (RevPAR) and average daily rate (ADR).

In the Bangkok five-star hotel market, RevPAR declined 26.5 percent from 2008, with full-year occupancy standing at 53 percent, down from 62.5 percent in 2008. ADR fell 13.3 percent year-on-year to 4,916 baht.

In the four-star category, RevPAR fell 28.3 percent and occupancy declined from 66.2 percent in 2008 to 55.5 percent, while ADR fell 14.5 percent to 2,592 baht. Three-star RevPAR declined 21.6 percent with occupancy sliding from 66.4 percent to 59.6 percent and ADR down 12.6 percent to 1,668 baht.

"The three-star segment was probably the best-performing hotel market in Bangkok," said Mr. Langdon. "That is what you would expect, because what happens in difficult economic times is that people who used to stay in four-star hotels now stay in three-star hotels."

However, he sees some upside, because one of Thailand's strengths is that it has a very high proportion of repeat visitors - anywhere from 30-50 percent depending on which statistics one examines.

"The figure is incredible compared to Vietnam, where it's less than 10 percent. People go to Vietnam once.

"In Thailand, people keep coming back, and the reason is Thailand is a very good value-for-money destination," said Mr. Langdon

However, Jones Lang LaSalle Hotels' research also shows that between 2010 and 2015, as many as 40 hotels will be opening in Bangkok, adding 9,728 rooms to the market.

Mr. Langdon said: "This actually represents 16.8 percent of the total room supply in Bangkok, and this is a huge amount of new supply. In any market, to achieve 7 percent new supply is rare. This doesn't include two-star or three-star boutique hotels with 10 to 12 rooms on Sukhumvit Road, but does include large international branded three-, four- and five-star hotels."

Interestingly, a breakdown of the new supply shows that 34.8 percent of the rooms will be five-star, 52.2 percent four-star, and only 12.9 percent three-star.

"There is a large oversupply, particularly in the four- and five-star market, but the three-star market is not going to be affected as much," Mr. Langdon said.

In any case - and barring any more seriously negative political developments - Mr. Langdon foresees a healthy moderate increase in tourist arrivals over the next five years. But despite this, actual hotel occupancy is going to stay relatively unchanged at about 60-65 percent.

Mr. Langdon explained: "Maybe some hotels might touch 70 percent, but the days of 75-80 percent occupancy [seen in 2006-07] are gone.

"The other effect is going to be on the rates, and overall we see rate growth is going to be quite subdued. So rates are going to stay relatively flat for the next five years or so.

"Obviously there will be very strong competition in the four- and five-star market and as they drop rates, it obviously has a flow-on effect down the line.

"However, what you find with international hotels is that they don't drop rates. That's one of the last things they do - they prefer to drop their occupancies, not rates. So at the end of the day, Bangkok will still be one of the cheapest places to stay in a good hotel in Asia, if not the world."

While this is positive for the tourism industry, Mr. Langdon cautioned that the days of hotel owners making big profits are gone.

So why are people still building hotels? In Mr. Langdon's opinion, the appeal of returns on investment from property remains strong, given the low rates on offer at banks. A hotel investment can still return 5-8 percent annually over the long term.

The vanity factor in owning a hotel also exerts a strong pull, he added.

Mr. Langdon went on to say: "Also in the past - and I admit things are changing a bit now - it has been very easy for people to get bank financing to build hotels, because in the last 10 years, it has been very profitable to own a hotel.

"But ever since the global financial crisis, banks in Thailand, like everywhere else, are getting conservative in granting loans and project financing as well."

It is also very difficult to buy an existing hotel. Either there are none for sale, or those that are on the market have asking prices that are seen as too high; thus it's cheaper to buy land and build a new property.

"The thing about Bangkok is that there are still a lot of vacant land sites in key areas, compared to London, Sydney, Paris, New York, and Los Angeles - where you can buy a hotel that is already completed and there is an active trading market because there is no land to buy and build hotels," said Mr. Langdon.

Despite this, it is very difficult to buy land at market prices in key areas of Bangkok and develop a financially viable hotel.

"So if a developer wants to come here and buy land on Sukhumvit Road, they are probably paying 800,000 to 900,000 baht a square wah (4 square meters)," Mr. Langdon concluded.