Hotel Industry 9-11 Predictions: Who Was On, Who Was Off…

Jones Lang LaSalle Hotels Report

It has been nearly one year since the September 11, 2001 terrorist attacks on New York City and Washington, D.C. Following the tragedy, the country began to regroup and formulate predictions on the overall economic and various industry sector performances in the year that would follow.  In a report to be released later this month, Jones Lang LaSalle Hotels examines which post September 11 predictions came to fruition and which did not and, in doing do, discusses the status and outlook of the economy, hotel sector and capital markets.  

Will it be a “U” or “V” shaped economic recovery? Will operating performance ever again reach the lofty heights of 2000?  Following the terrorist attacks, economists and industry pundits throughout the world put forth their best predictions as to what the economy (and the hotel markets) would be like come September 11, 2002.  Following are some of the more popular theories contrasted against what has

Outcome  FALSE:
While Q1 2002 alluded to a “V” shaped recovery, the remainder of 2002 to-date has been marked by corporate accounting scandals and stock market volatility.   In addition, the decline in GDP was revealed to have commenced earlier than originally forecast.  As a result, GDP growth of 2.3% for full-year 2002 is expected, followed by 3.1% increase in 2003.  Therefore, the reality is more likely a cross-between a “U” and “W” shaped recovery.

Outcome TRUE:
At the operating performance level, hotel profitability has been protected to a large extent by solid reserves and a continual improvement in operating ratios. On the capital markets level, there has not been the number of “fire sales” experienced during the last recession.  Conservative lending, low interest rates and a more educated investment market have meant the mortgage default rate has remained at an historically low rate (according to the American Council of Life Insurers).

Outcome TRUE:
- Large U.S. cities with high proportion of long haul and business travelers – these segments have not recovered at the same pace as domestic leisure demand and therefore hotels in these cities have continued to compete more aggressively on rate to secure business.  The result is continued deep erosion of RevPAR, with cities such as San Francisco, Boston, New York and Chicago recording falls between 10 to 27 percent in RevPAR during ytd July 2002.

- Long-haul fly-over locations – during the last quarter of 2001, Honolulu registered a 24 percent decline in RevPAR, a reflection of its exposure to the international market.  This decline has softened to a decline of 13 percent during ytd July 2002, making it the fifth worst performer of the U.S. top 25 markets.  The Caribbean experienced a fall of 18.8% over the last four months of 2001.  However, winter increases in tourist arrivals were reported for all the major destinations in the region.

-  Airport hotels - statistics prove that this segment has continued to be the poorest performer, with RevPAR falling by 20 percent in the last four months of 2001.  YTD July 2002 results, while improved, still remain 10 percent below 2001 levels. 

Outcome TRUE:
- Convention cities – the immediate fallout on convention demand was significant during the latter part of 2002.  The effect is still washing through the market, with convention and meetings, while not cancelled, are notably smaller in attendances.  Cities that have particularly felt this impact include Chicago, Los Angeles and New York, all experiencing RevPAR declines in excess of 10 percent during ytd July 2002.

- New York and Washington D.C. – definitely hit hardest, recording record drops in RevPAR of between 27 and 37 percent during the last half of 2001.  Performance still remains negative although the depth of the decline has been consistently improving

Outcome TRUE:
- Drive-to hotel locations – regional hotel markets have fared better in the 12 months since 9/11.  For example, Houston and Norfolk-Virginia Beach posted RevPAR gains in 2001, with Norfolk building on this gain by increasing RevPAR by 12.4% in ytd July 2002.  Philadelphia was the only other market (in the US 25 largest) to post a RevPAR gain during ytd July 2002.

- Hotels located on feeder roads – the Highway hotel segment reported the softest decline in 2001 and ytd July 2002 RevPAR of 2.3% and 3.2%, respectively.

- Domestic leisure destination – have indeed fared better than those cities exposed to international visitors and corporate demand, which both experienced sharper declines and are taking longer to recover.

Outcome  FALSE:
 - Hotels proximate to communication suppliers and defense –there is little evidence to suggest markets catering to this demand (such as Washington DC, San Diego, Austin, Seattle and Boston) have enjoyed a market premium, although Washington DC has posted respectable performance in comparison to the top 25 US markets.  San Francisco, the biggest city catering to the technology market, was never predicted to be sheltered from continuing declines.

Outcome  FALSE:
The flight to suburbs has not occurred, but rather city centers remain popular.  In a recent survey of commercial real estate occupiers by Jones Lang LaSalle, the majority of respondents (54%) reported no changes in plans regarding their dispersal of operations by geography or property type, nor did they expect to consolidate locations, reduce locations within CBDs, high rises or trophy locations, or expand operations in suburban locations. 

Post September 11 Prediction
The gap between bid and ask price in hotel transactions will narrow as owners realize that 2000 was a “bubble” and hotel values have since fallen.

Outcome TRUE:
Following a dearth of activity in the six months following September 2001, buyers and sellers finally came together, with transaction volume spiking at just under $1 billion.  This represents a 243 percent increase over Q1-02 levels, although remains 23 percent below the corresponding quarter in 2001. 
         
Further evidence that investors are being more realistic about asset values is the easing of cap rate expectations over the last six months, as confirmed by the July 2002 Jones Lang LaSalle Hotels’ Hotel Investor Sentiment Survey.  This survey also indicates bullish investment intent, with over one-third of investors indicating they wish to buy hotels.  As we progress into 2003, investors will become more confident in underwriting the U.S. hotel sector and, given the existing pent-up demand, this will help create an environment ripe for transactions.

Post September 11 Prediction
Insurance premiums will escalate and render the debt markets more difficult to navigate.

Outcome TRUE:
Insurance costs have definitely escalated, with increases from 58 to 280 percent cited in Senate hearings during February 2002.  The ability to secure terrorism insurance to a certain extent still remains a key hurdle.  According to a survey by the Mortgage Bankers Association of America, the lack of terrorism insurance has directly affected more than $8 billion in commercial property deals in the first half of 2002.  However, in the hotel sector it appears that the issue of terrorism insurance has not stalled/cancelled any specific deal. For those properties managed by a major flag, the hotel is often eligible to be covered by the management company’s blanket insurance policy.  For individually managed/owned hotels, securing terrorism insurance has been more problematical and costly. 

Post September 11 Prediction
The debt markets are unlikely to shutdown lending to real estate, although capital flows will reduce.

Outcome TRUE:
Lending underwent a temporary freeze post 9/11, when the market adopted a wait and see approach.  What followed was a flurry of loan restructuring, in an attempt to adjust to the altered operating ratios and take advantage of the 40-year low in interest rates.  Hotel debt markets have remained open however are characterized by higher pricing (225-300 bps over LIBOR) and lower loan-to-value ratios (55-65 percent).  While lenders remain conservative there is in fact a surplus of debt capital available given the comparatively limited number of deals in the market. 

Jones Lang LaSalle Hotels, the world’s leading hotel investment services group, provides clients with value-added investment opportunities and advice. In 2001, its success story includes the sale of 7,972 hotel rooms to the value of US$1.3 billion in 39 cities and advisory expertise on 100,550 rooms to the value of US$26.3 billion across 255 cities. Jones Lang LaSalle Hotels’ services include transactions, mergers and acquisitions, financial advice and capital raising, valuation and appraisal, asset management, strategic planning, operator assessment and selection and industry research.  Jones Lang LaSalle (NYSE: JLL) is the world’s leading real estate services and investment management firm, operating across more than 100 key markets on five continents. www.joneslanglasallehotels.com

Asian hotel industry sees pick-up next year

NewsAsia  -  It has been a tough year for the Asian hotel industry because of the effects of September 11 attacks and the global slowdown.

But it seems there is light at the end of the tunnel after all as analysts believe there will be a pick-up next year.

The Asian hotel industry was hit last year by downward pressure from the double whammy of the September 11 attacks and the global economic slowdown.

This caused hotels to rethink the way they do business, to change their marketing strategies and really get out there and hustle for business.

Barring unforeseen circumstances, the outlook for the hotel industry this year looks brighter, with a pick up seen in both leisure and business travellers.

Millennium & Copthorne International Hotels in particular saw an 11 percent increase in occupancy rates in September, year on year.

Hongkong, Taiwan, and Singapore were the strongest markets, but the Philippines and Malaysia are still seeing some weakness.

Des Pugson, Senior Vice President, Millennium & Copthorne International, said, "We've seen the leisure market decline although that's starting to recover now. Business travellers dropped considerably in the last quarter of last year but recovered from February onwards."

Millennium & Copthorne said the occupancy growth rate in February was slightly over 10 percent, largely attributed to the corporate segment.

Analysts say occupancy rates have been on the rise in recent months.

As far as influx of travellers go, people coming from the US and Europe declined, but Intra-Asia travel was quite positive.

Chan Guat Cheng, Executive Director, Chan Brothers Travel, said, "I would say it has recovered compared to pre-911 last year by about 20 percent."

In fact, an increase in Chinese travellers to the region boosted the performance of 3-star budget hotels, leaving the upmarket hotels to focus on corporate clients.

But industry analysts say that while an improvement is being seen, the travel market will lag the economy by six months, so a real recovery is now estimated to be seen in the second quarter of next year, at the latest.

JW Marriott Hotel Jakarta wins best new Business Hotel in Asia

JW Marriott Hotel Jakarta was awarded the BEST NEW BUSINESS HOTEL IN ASIA by the Business Asia magazine and Bloomberg TV Asia Pacific. The award is based on stringent criteria such as quality assurance and guest satisfaction ratings. It is awarded to hotels that are open less than two years.

General Manager John Jaskula officially received this prestigious award at the 5th Annual Best Business Hotels in Asia Awards Ceremony earlier this month at the Portman Ritz-Carlton Shanghai. 

"We are proud to have achieved this great recognition," says Jaskula. "The accomplishment is even more meaningful knowing that we were directly nominated by our guests. This award is really an excellent present for our first anniversary."

The Best Business Hotels in Asia Awards, now in their fifth year, have become one of the most sought after prizes in the highly competitive Asia Pacific Hotel industry. It was established in 1998 to recognize the Hotels that provide the business traveler with excellence in service and facilities. The awards honor the top Business Hotels from 14 countries across in the Asia Pacific in 17 different categories. 

The awards process involved more than 85 hotels in Asia Pacific. The nominees in each category were chosen by a panel of industry experts and the winners were determined by popular vote via a ballot paper, published in Business Asia Magazine

Gazprom Wades Further Into Hotel Management

Moscow Times  -  With a history of bad business deals and money going missing, Gazprom is seldom referred to as an efficient manager in the country's natural gas sector. But that has not stopped it from giving hotel management a shot.

Indeed, the Gazprom-controlled Radisson SAS Lazurnaya -- the first Russian firm to try its hand at hotel management -- plans to become the industry's leader.

In July, RSL began operating its third hotel, the RSL Park Hotel in Sochi. RSL also manages the four-star Peak Hotel and the Lazurnaya Hotel in the Black Sea resort. Only one other firm runs as many hotels in Russia, the U.S. company International, which operates three Marriotts in Moscow. But RSL's management says it has deals in the works that will make it the country's biggest operator.

Gazprom's interest in hotels is not unusual for a company of its size. Almost all the major oil and gas firms own hotels in their regions or in resort areas. But only Gazprom has created a structure to manage them.

RSL was created in 2000 as a subsidiary of Lazurnaya, which is 78 percent owned by Gazprom, to manage Lazurnaya and Peak. RSL also runs a management school to train its own employees as well as some from other hotels.

Lazurnaya and Peak were first managed by the U.S. company Radisson Hotels Worldwide, which won that right in a tender Lazurnaya held in 1993. Radisson merged with SAS in 1994 to become Radisson SAS.

In 1999, Radisson SAS signed a master franchise agreement with Lazurnaya, giving it the right to manage hotels in southern Russia and propose expansion initiatives. The franchise passed to the newly created RSL the following year.

Radisson SAS manages the majority of its hotels directly from its headquarters.

A company official in Brussels would not say why Radisson SAS decided to sign a franchise agreement with Lazurnaya or comment on the financial arrangement.

Scott Antel, an analyst at Ernst & Young, said Radisson SAS would not need to invest much in the franchise and would therefore have lower risk. "But a hotel chain puts its name on the line when it signs a franchise agreement," he said.

Expansion Plans

RSL said it is moving to expand the number of hotels under its control and is looking beyond southern Russia.

"We're striving to become the leading hotel management company in Russia by 2005," said Boris Averyanov, Lazurnaya general director, at the Park Hotel opening in late July. "We expect to have eight hotels under our management by then."

That seems to fit well with the Brussels headquarters' plans. Company officials said they are looking to expand inside Russia in particular and the Commonwealth of Independent States in general.

Part of the Radisson SAS's strategy is to develop a mid-range hotel chain. "Three-star hotels are what the market needs, both here in Moscow and in the regions," Antel said.

Averyanov said RSL is eyeing a 50-room property that Stary Kvartal is constructing in Pskov, the seven-year-old Quality Hotel in Tyumen, the Gorizont Hotel in Sochi, a projected hotel in Krasnodar and an existing hotel in Tuapse. He did not specify which hotel in Tuapse; a Gazprom subsidiary, Zapsibgazprom, already own hotels in the area.

RSL has signed an agreement of intention with Stary Kvartal to manage the Pskov hotel upon its completion, Averyanov said. He said RSL is still negotiating with the other hotels.

Gazprom owns part of the Quality Hotel in Tyumen, but hotel officials did not state its stake. Yashar Yildirim, general director of the newly opened RSL Park Hotel, formerly managed the Tyumen Quality Hotel.

Regional Prospects

Interest in the regions is heating up, industry insiders say. There are still no hotel chains outside of Moscow, St. Petersburg and Sochi, but deals are reportedly in the works.

"There's a lot of potential in Siberia thanks to the oil and gas business," said a manager at an international hotel chain in Moscow, who asked not to be named. "I frequently ask myself why we aren't there."

Konstantin Selivanov, director of the Rosa Vetrov travel agency, which specializes in southern Russia, said another RSL hotel in Sochi would not generate much new business for the company.

But he said RSL could do well in other cities, especially those along the Black Sea.

"There are better prospects in Tuapse, Gelenzhik and the Moscow region," he said. "Russians are moving around more, and they want to find the same level of high service and comfort wherever they go."

Antel said development of the brand at Gazprom hotels on the Black Sea coast could generate economies of scale through such things as shared advertising and accounting.

Word From Above

How quickly RSL expands will depend on Gazprom management. The company got started under former Gazprom chief Rem Vyakhirev, but the new management might be cool to the idea.

"I am surprised that they are planning expansion when Gazprom has been trying to spin off its non-core assets," Aton analyst Steven Dashevsky said. "This isn't in line with their current behavior. They have been seeking ways to dispose of some of their non-core assets."

Gazprom has talked about unloading its media assets and did not participate in a recent share emission at one of its banks.

A source close to Lazurnaya said he was unaware of concrete expansion plans. He said the company is still waiting for signals from the new Gazprom management.

CentreInvest Securities analyst Alexander Blokhin said the issue to expand RSL could come down to whether the hotel management company can outperform other Gazprom assets.

Called to Perform

Lazurnaya has spent $85 million over the last decade on its various projects in Sochi, including hotel development. The company also owns a bread factory, restaurant, gas station and store in Sochi. Lazurnaya officials said their businesses were profitable but refused to provide any further information about their revenue.

Lazurnaya was created in 1991 as a joint venture between Gazprom, Turkish construction companies Gama and Enra and the Sochi city administration to complete construction of and manage the Lazurnaya Hotel, which had been sitting partially built for years on Sochi's coast. Gazprom and the Sochi administration each took a 33 percent stake in the company, while the Turkish companies split the remaining 33 percent share.

The Sochi administration later sold its share to Gazprom to pay off gas debts. Enra also got out of the deal, but Gama, which owns and manages the five-star Renaissance Hotel in Antalya, kept its 16.6 percent stake. Part of Enra's shares ended up with Gazprom. Lazurnaya officials did not say who owns the remaining 5.6 percent.

Gazprom has worked with Gama on a number of projects over the years. It tapped the Turkish firm to build its headquarters in Moscow. Gama also built the gas giant's housing units around Moscow and several of its hotels and resorts, including the Lazurnaya Hotel, the Peak Hotel, the five-star Nadezhda in Gelenzhik, the Tyumen Hotel and a hotel in Tuapse. Gama and Gazprom both own stakes in Turusgas, a joint venture formed to sell gas through the Blue Stream project to Turkey.

Posh hoteliers return to Sri Lanka

An operator of hotels for the super rich is reported to be preparing to invest $750m (£482m) in resorts in southern Sri Lanka as the prospects for peace improve.

Aman Resorts International scouted locations in Sri Lankan sites earlier this year and recently bought the rundown New Oriental Hotel in Galle.

"Aman Resorts Chairman Adrian Zecha has selected two sites in Tangalle and Galle and has expressed interest in investing in Anuradhapura, Polonnaruwa, Kandy and Nuwara Eliya," Sri Lankan Tourist Board Chairman Paddy Vithana was quoted as saying by the local Daily News.

A peace deal between the government and the Tamil Tigers in the north of the country has resulted in Sri Lanka's tourism industry slowly recovering from almost two decades of civil war.

Peace prospects

"The request by Aman Resorts is undoubtedly one of the biggest investments in this sector since the peace initiative of 2001," Mr Vithana said.

"It augurs well for the country and the investor confidence placed in Sri Lanka," he added.

Mr Vithana also indicated other tourism-based investors were showing interest in Sri Lanka.

The country has beautiful jungle landscapes, tropical weather, sandy beaches, a rich history and rock-bottom land prices.

The Aman group operates a chain of "exclusive" luxury hotels in France, French Polynesia, Morocco, Thailand, Philippines, Indonesia, the US, and Mexico.

Tourism Industry Grows Rapidly in Macao

TOURIST arrivals in Macao by group soared a year-on- year 47 percent in the first seven months of this year, led by a skyrocketing increase of tourists from China's inland. The Statistics and Census Services posted Wednesday that the Special Administrative Region (SAR) had 1.25 million group tourists in the seven- month period.

In July alone, 120,300 inland tourists visited Macao, jumping 71.4 percent from a year earlier. Other major tourist sources for the city include China's Taiwan, Japan and Hong Kong Special Administrative Region. As a result, Macao's hotels have improved business so far this year with three-star ones recording best performance, according to the agency.

Tourism authorities note that the industry has benefited greatly from the decision of the China National Tourism Administration to allow more travel agencies to operate the so- called "Macao Tour" business.

Correspondingly, the Macao Government Tourist Office is taking measures to upgrade market order and accelerating training for tour guides to address the tourist boom. Statistics also show that 23,100 Macao residents out of a total population of roughly 440,000 traveled overseas in July, favoring destinations such as China's interior, Taiwan and Hong Kong.

Hong Kong:  Luxury loses out to mainland bargain-hunters

SCMP  -  About half of Hong Kong's 38,000 hotel rooms are still unreserved for the week -long National Day holiday as many mainland visitors have held off making bookings because of a rise in room rates and package tour prices.

Hong Kong Inbound Travel Association chairman Paul Leung Yiu-lam said all rooms had been fully booked last year as hotels and travel agencies were offering substantial discounts following the September 11 terrorist attacks in the United States.

He said reservations for almost 20,000 rooms at three-star hotels had been confirmed this year while the remaining empty rooms were at hotels with four or more stars. Rates for those rooms still available were priced at more than HK$ 800 per night - about 40 per cent higher than last year - as luxury hotels had stopped offering big discounts this year.

The rise in hotel prices would also push up inbound package tour prices, he said.

"Therefore, mainland tourists have decided to defer their bookings to look for cheaper accommodation. But we have a long waiting list from mainland travel agencies with requests for three-star hotels."

Last year, there were about 300,000 mainland tourist arrivals between October 1 and 7. Mr Leung said it was difficult to estimate how many mainland tourists would come this year as most of them might make their reservations just a week ahead of the holiday.

But the Hong Kong Hotel Association does not agree that there has been a significant jump in hotel room rates. Association vice-president Dan Lee said room rates had risen about 3 to 5 per cent compared with standard rates during the peak season. "It is incorrect to compare room rates between the peak season and low season," he said.

Travel Industry Council executive director Joseph Tung Yao-chung said three -night, four-day package tours offered at HK$ 800 per head were reasonable. Agencies charging HK$ 100 to HK$ 200 per head did not include accommodation, he said.

A price war had broke out among travel agencies last year with "zero-fare" tour packages jointly offered by some mainland and Hong Kong tour operators. The tours brought visitors to Hong Kong free but made a profit from commission allegedly earned by luring them to buy over-priced goods.

"We would like to see healthy development in the industry," Mr Tung said, adding that guidelines had been sent to travel agencies to remind them to observe the industry's code of ethics.

New Tourism Authority of Thailand (TAT) Governor unveils policies

Mrs. Juthamas Siriwan, the new governor of the Tourism Authority of Thailand (TAT), has unveiled her visions and policies after being officially appointed today. 

At the press conference at the TAT head office, Mrs. Juthamas delivered her first speech showing her strong intention to develop Thailand as a world-class quality destination and position it as the ‘Tourism Capital of Asia’ within the next three years. 

The event was chaired by the Minister to the Prime Minister’s Office and TAT Chairman H.E. Mr. Somsak Thepsutin and well attended by TAT senior officials and members of press. 

The Governor stressed that tourism would remain the most effective and fastest means to generate foreign exchange revenue for Thailand in support of social and economic growth at all levels. 

She also promised to boost the potential of the tourism industry via better management and stronger partnerships between the public and private sectors to promote inbound and regional tourism. 

The Governor added, “TAT will act as a driving force to implement practical strategies and improve the co-ordination of all tourism- related projects, even while striving to develop ourselves as one of the model government organisations.” 

TAT expects that international visitor arrivals to Thailand will increase by 50% and tourism foreign exchange revenue will double by 2007. International visitors will total 15.3 million and tourism foreign exchange revenue will reach 668 billion baht. 

On the domestic front, Thais and foreign expatriate residing in Thailand will make a total of 71.3 trips in 2007, generating 401 billion baht tourism revenue to the Thai economy. 

Born on May 4, 1947, Mrs. Juthamas has worked for TAT since December 15, 1978. She graduated from the Faculty of Political Sciences, Chulalongkorn University, and completed an MBA in Finance from the US. She initially started her career in the Budget Bureau, Office of the Prime Minister, in 1974. 

In 1978, she worked as TAT’s Chief of the Budget Section. She was later promoted as Chief of the Budget Division, Deputy Director of Investment Department, Deputy Governor for Administration and finally Deputy Governor for Marketing.