Short-term pain but longer-term gain was the message heard by senior hospitality executives who gathered at Singapore's Ritz--Carlton Millenia hotel for the First Annual Asia-Pacific Hotel Industry Investment conference held in late March. Co-hosted by Arthur Andersen, JLW TransAct and Salomon Smith Barney, the event provided a forum for some 200 hotel investors, operators and owners from Southeast Asia, the United States, Australia and Europe to debate the future of an industry that faces major challenges in the near term. 

An international panel of speakers comprising economists, leading industry consultants and major hotel owners and investors updated delegates on the latest industry thinking. Global and regional economic trends were also discussed and the impact of these factors on hospitality investment in the region was analyzed. 

Prolonged Economic Slowdown Likely 

Guonan Ma, regional economist at Salomon Smith Barney, warned that the combination of high currency risks and high interest rates will lead to a pronounced slowdown in economic growth this year and maybe next. 

"The corporate sector across Asia will come under considerable pressure as a result of high currency risks and interest rates. Consumer spending will be weak over the next 12-24 months, as unemployment rises. 

"Regional economies will have no choice but to rely more on providing services at lower prices in order to improve their current account balances and stabilize their currencies, he added. 

A More Competitive Marketplace 

There was general agreement that over the past five years Asia-Pacific has become an increasingly competitive marketplace with many new "flags" entering the region to gain a foothold. Although local brands have achieved considerable success in many hotel markets throughout Asia-Pacific during this period, speakers acknowledged the continuing pressure to establish and grow an internationally recognizable brand. 

The industry has experienced the twin pressures of increased competition in an environment where hotel operations have also been hard hit by the regional financial crisis. As a result, some speakers saw the need to focus on reducing the cost per customer. Long admired for its orientation to personalized service, the Asia-Pacific hotel industry now faces the prospect of rationalizing its workforce and operational processes to enhance efficiency and profits, according to Alex Kyriakidis, the partner in charge of Arthur Andersen's Worldwide Hospitality & Leisure industry team. 

Increasing Importance of Overseas Tourists 

Tom Sturgeon, head of Arthur Andersen's Hospitality and Leisure Services team in Asia-Pacific, took the view that increasing the spend-per-visitor and attracting more visitors from outside the region would be key to remaining competitive during the next few years. "Hoteliers will need to ensure they can attract a larger slice of the overseas tourist's travellers cheque in order to make up for the loss of the previously strong intra - regional business and leisure travel market he said in commenting on the impact of these factors from a different angle. 

He also predicted that current conditions would lead to significant changes in reservation and distribution Systems in Asia-Pacific.. "The increasing dependence on overseas visitors will result in a scramble by hoteliers to build relationships with travel agencies and airlines in order to pull in the high spending tourists," said Mr. Sturgeon. "If you consider that 70 percent to 80 percent of hotel bookings in Asia-Pacific are currently made by fax or phone, this change in market focus represents a significant development. For the first. time we will see hoteliers in Asia-Pacific investing in central reservations and global distribution systems. 

Asia - Pacific Still the Fastest growing Region for Tourism 

Intra-regional recessionary pressures notwithstanding, many speakers saw evidence to remain bullish on prospects for the industry in Asia-Pacific going forward. Citing competitive pricing of room product and beneficial exchange rates, Mr. Kyriakidis expressed confidence that growth in tourism into the region will continue to outpace that of Europe and the United States. He also predicted that international hotel chains seeking global representation were likely to step up their interest in pursuing acquisitions at bargain prices from owners who default on debt repayments. 

Regulatory Obstacles 

With the exception of Australia where a good regulatory infrastructure is already in place, regulatory difficulties have so far restricted the level of activity in hotel transactions in Asia-Pacific. The lack of foreclosure and bankruptcy laws in particular was identified as the primary obstacle. For example, foreign ownership of real estate is limited to minority stakes in countries such as Thailand, Indonesia and the Philippines. Given the currency volatility and risks currently in these hotel markets, this adds up to a formidable challenge to investors. Equity investors, which bear 100 percent of the downside, but only 49 percent of the upside, were advised to align themselves with strong local partners to assure a return on their investment. 

The fact that the Thai government had taken steps to address these regulatory concerns meant that Bangkok would be the first city to see a significant increase in hotel transactions, according to Antony Karp, regional director (Asia) of JLW Transact. Bangkok is on the verge of recovery and the gap between buyers' and sellers' asking prices is the lowest of all Southeast Asian cities. 

"Bangkok expanded first, experienced oversupply first, was the first to free up its currency and will be the first Asian city to recover profitability," he said. 

Investment in Hotel Expansion to Continue 

Another speaker to take a positive view of prospects for the industry in the short term was JLW TransAct's Peter Barge. Fears that the Asia-Pacific region would benefit from increased overseas tourist arrivals in the short term, but suffer from a lack of investment in the long-term tourism infrastructure were unfounded, he said. 

"Aggressive expansion plans by international hotel chains are already in motion and are unlikely to stop because of the current economic difficulties," said Barge. "More than 300 three-, four- and five-star hotels were under construction before the economic collapse. A 32 percent increase in hotel rooms is anticipated in Hong Kong by the year 2000, and the number of four- and five-star hotel rooms in Kuala Lumpur, Jakarta and Shanghai is set to double over the next three to five years," he added. 

"However, we are likely to see ownership of hotels and hotel developments changing hands as assets are adjusted down to current market values,," Barge said. "Many owners may find it difficult to maintain repayments on the cost of capital, opening the door for overseas investors to acquire hotels at bargain rates. 

"In a new twist," added Barge, "we may also see the expansion of international two- and three-star hotel brands into Asia-Pacific markets, buying hotels cheaply to service the influx of overseas tourists." 

A Question of Timing 

In order to acquire quality hotel assets in Asia-Pacific, the time is ripe to start gathering information on markets and assets, and establishing the connections with sellers that will make the difference in obtaining the right asset for the right price. The next three to six months will see a significant increase in the level of transaction activities in the region, most panelists agreed. 

(Andreas Flaig is a Manager in Arthur Andersen's Hospitality Practice, directing consulting services to the industry in Asia-Pacific. Geraldine Hay is Communications & Operations Manager in the firm's Asia-Pacific Real Estate Services Group. They are based in Hong Kong.) 

©Arthur Andersen