Confidence in the hotel and hospitality market in Asia Pacific continues to grow as borders reopen and operating performance recovers to pre-pandemic levels, according to a new report by the international property consultancy CBRE.
The recovery is still largely driven by domestic demand, with international arrivals accelerating in markets, including Southeast Asia, that have loosened entry and quarantine restrictions and are now open to all arrivals.
CBRE forecasts tourism arrivals within the region will reach pre-pandemic levels by 2024, with hotel performance to reach 2019 levels in the same period.
Furthermore, given their daily pricing structure and flexibility of rate changes in an evolving economic climate, hotels provide an inflationary hedge for investors, the firm says. Consequently it is forecasting increased investor appetite for operational real estate, such as hotels, as a strategy to enhance and/or maintain portfolio returns.
Domestic travel continues to drive tourism, particularly in North Asia and the Pacific. Tourism Economics forecasts that domestic overnight hotel stays globally will surpass 2019 levels by the end of this year.
Uncertainty remains, however, about the removal of quarantine in mainland China and Hong Kong, which may delay the tourism recovery in Asia Pacific.
As well, a lack of airline capacity because of staff and carrier shortages is affecting the overall international recovery, as are high ticket prices. Available seat kilometres (ASK) for major airlines in Asia Pacific are still approximately 25% below pre-pandemic levels, according to their latest financial statements.
Source markets for international tourists in Asia Pacific have changed considerably as a result of the staggered opening of borders and uncertainty regarding entry into some markets.
The most prominent change is the volume of mainland Chinese tourists travelling within the region. After comprising about 25% of all international arrivals for key Asia Pacific markets in 2019, mainland Chinese amounted to just 4% in the seven months through July 2022. Meanwhile, the US, European and UK markets have seen a substantial increase in their share of arrivals to Asia Pacific.
In the hotel sector, average daily rate (ADR), occupancy and revenue per available room (RevPAR) are trending upwards in all Asia Pacific markets. While overall ADR and RevPAR levels decreased steadily over the past decade (2010-19), occupancy levels remained stable at 68-71%.
ROOM RATES REVIVING
As of July 2022, ADR is only 6% below July 2019 levels, with occupancy (62% vs 73%) and RevPAR ($69 vs $55) closing in on pre-pandemic levels when comparing time periods.
Pent-up demand and increased operator confidence has helped drive up hotel room rates, which is stimulating growth.
Demand-based pricing has allowed operators to drive ADR to combat rising inflation, with the flexibility of changing rates allowing owners a more rapid response to counteract the increase in underlying operating costs and continued labour shortage.
This flexibility in ADR change can also be attributed to the increased market share of frequent international travellers and transient occupants, with corporate group stays usually incorporated at a fixed cost and less influenced by daily rate changes.
With the supply pipeline remaining limited in most markets, the risk of new competition saturating the market will be low, exerting weaker downward pressure on room rates and revenue.
Standout markets are Singapore (75%), Australia (67%) and Korea (67%). Mainland China and Hong Kong are also seeing occupancy levels above 60%, albeit with many hotels still being used as quarantine facilities.
For existing hotels, many operators and investors have taken advantage of the pandemic-induced lull in occupancy to upgrade and refurbish in preparation for the full return of guests. Some are investing in new technologies such as smart systems as key points of differentiation.
However, operators are advised to stay conscious of the increase in construction and fit-out costs, particularly in markets such as Japan, Singapore and South Korea.
The luxury hotel market has been resilient throughout the pandemic and continues to display greater strength in many key countries in Asia Pacific, with ADR growth/recovery outperforming the overall market.
Many markets are still seeing luxury rates at affordable prices. This, in combination with elevated household savings in most advanced economies, should see the luxury market continue to lead from the front as travellers look to spend savings on destinations and hotel offerings that would normally be out of reach to the average consumer.
The strength of the luxury segment has been underlined by the performance of resort destinations, with the Maldives this year registering a luxury ADR almost 1.5 times higher than in 2019.
Cross-border capital flows into Asia Pacific for hotel assets have experienced minimal disruption, with net inflows of US$932 million since the beginning of 2021 driven predominantly by institutional investors.
Asia Pacific hotel transaction volume rose to $10.1 billion as of August 2022, an increase of 17% from a year earlier.
Debt markets, except for those in Japan and mainland China, are significantly affecting investment decisions, with increases in borrowing rates now the most significant factor for investment decisions globally.