There is little doubt that 2016 will be a watershed year for the 10 member states that make up the Association of Southeast Asian Nations (ASEAN), as it will begin with the launch of a new common market, the ASEAN Economic Community (AEC).
The removal of significant barriers, freeing up the flow of people, goods and capital in this region, which has a population of 600 million and an economy worth more than US$2.5 trillion, will unleash new forces and opportunities for all sectors. And at the top of the list of sectors likely to benefit is hospitality.
Hotel Management spoke with Raymond Clement, head of hotels at Savills, in Singapore, to learn more about what to expect from the inaugural year of the AEC.
Hotel Management: What short- to mid-term effect do you see the launch of the AEC having on hotel investment in ASEAN?
Raymond Clement: The main benefit currently may be the optimism of the local population and governments, as well as optimism among investors. Less regulation and transparency will definitely make the hotel investment process more efficient and accessible.
The ASEAN Open Skies agreement, if ratified, will help evolve aviation, which is a key to destination competitiveness. Priority rows for ASEAN passport holders may seem superficial, but given the importance of friendly and efficient airports for customer satisfaction, this is a great benefit for ASEAN travelers and positive for the evolution of tourism in ASEAN countries.
When the European Union came into effect, integration was not achieved over night and arguably the EU had achieved much deeper regulatory integration by their launch date compared to the AEC. In the short to mid term, investors are unlikely to feel the benefits of the AEC as much as they may in a year or two year’s time, as there are so many areas which need to be integrated.
HM: Which ASEAN countries will attract the most interest in terms of hotel investment in 2016?
RC: In Singapore, there is always high interest in hotel investment. Unlike Europe and the U.S. where the profiles of owners are more often institutional corporations who have debt pressure and shareholder dividend demands, Singaporean owners of hospitality assets are less inclined to release properties onto the market. As a result, there are very few hotels for sale in Singapore.
Vietnam’s deregulation for foreign property investment has led to some investor interest. Indonesia is also a relatively active hotel transaction market in ASEAN. Thailand is always a high-interest country for hotel investment as it is a large tourism market and receives the second-most international visitor arrivals in Asia, after China.
For September’s revenue-per-available-room growth, Thailand was up 18.2 percent from a year earlier, followed by Vietnam 6.8 percent and the Philippines was up 4.3 percent. Thailand’s (growth) is due to the low base during the coup last year. Vietnam and the Philippines are gaining momentum.
Trading performance and undersupply does not necessarily lead to transactions in ASEAN countries, since there is very little debt pressure on affluent individual hotel owners to put a hotel onto the market. Furthermore, the difficulty of foreign investors navigating these markets leads to a low number of transactions.
HM: From a growth perspective, Thailand's star has lost some of its luster since the coup. How do you see 2016 working out for hotel transactions in the Kingdom?
RC: There were very few transactions in Thailand this year. The market may be entering a ‘wait and see’ period as investors monitor the political situation. The bombing of the Erawan Shrine in August made headlines and affected Bangkok hotel performance, but Thailand is an extremely resilient market especially compared to other Southeast Asian hospitality markets. After past headline events such as floods, political unrest or terrorist attacks, it has taken less than six months for the market to rebound. One terrorist attack alone will not dampen investor appetite.
The more likely reason for the lack of transactions is the wide gap between purchaser and vendor price expectations. Many overseas buyers are seeking opportunistic deals but land costs in Thailand remain high despite investor concerns. Over the past year, Thai and Singaporean buyers were the most common hotel asset buyers. This is due to their astute and realistic understanding of hospitality asset prices in Thailand.
HM: How would you characterize investor attitudes toward ASEAN's 'frontier economies' of Cambodia, Laos and Myanmar?
RC: The double-digit increases in visitor arrivals and other performance indicators reveal the high rate of growth, but it is from a low base and these markets are still small and volatile.
In Myanmar after the country started liberalizing in 2012, the significant increases in visitor arrivals saw an increase in hotel development. In 2014, visitor exports—foreign visitor spending—increased by 93 percent in one year. However, due to oversupply of hotels in 2015, hotel occupancy has decreased by 29.3 percent, leading to a year on year decrease of 30 percent in RevPAR for YTD September 2015.
Although visitor arrivals will continue to increase, the number of visitors is still low compared to other ASEAN countries. Myanmar was last in the World Economic Forum’s starting a business index in 2014—this gives some indication of how difficult it is to do business there. It took an average of 72 days to open a business compared to 9.2 days for OECD countries.
HM: What opportunities do you see in the faster-developing markets of the Philippines and Indonesia?
RC: Indonesia is full of opportunity, especially in secondary markets and if you know how to navigate the market. Many foreign companies still encounter difficulties when investing in Indonesia. The government is opening up the Batam, Bintan, and Karimun region (BBK) for investments and reducing regulatory constraints for investment. New airports have opened up new areas such as Lombok and Flores. The strong local hotel demand is significant in Indonesia. ADR (average daily rate) growth in 2014 was nearly 10 percent, 2013 it was nearly 4 percent and in YTD September 2015 it has decreased to 3.8 percent. Indonesia’s problem is over supply and low occupancy, decreasing from 65 percent in 2013 to 57 percent for YTD August.
Philippines’ GOPPAR percent (GOP per available room) increased by 13.7 percent in 2014, which was third-highest for Asia Pacific. It is quite popular with Eastern Asian tourists such as South Koreans, Taiwanese and Chinese but like so many Southeast Asian countries, security issues and perception of security is a demand depressor. There was nearly no growth in 2015 YTD September with occupancy of 0.1 percent.
Local developers are consolidating big parcels of land to build self-sustaining, master planned townships. However, this phenomenon also brings some growing pains, which are typical for emerging cities. The poor level of infrastructure and connectivity— aspects that are crucial in building multiple central business districts within cities—remains as the main obstacle to the sustainability of this city growth model. Needless to say, this highlights the importance of the local city government’s active participation in city planning. Apart from Metro Manila, Cebu and Davao are gaining interest from developers.
HM: How would you describe the current environment for hotel transactions in 2016?
RC: Across the world, there is an undersupply of good quality hotel assets available for sale that there are unlikely to be many who lose out from a transactions point of view.
Across the region we are in a wait and see period, there is a lack of quality assets on the market. This is due to the differences in buyer and seller expectations for asset prices and yield. Buyers need a certain yield to enter a market but currently hotels may not match these requirements, this situation is most visible in Singapore and Malaysia. In Singapore, weak visitor arrival growth and decreases in hotel performance indicators and demand not matching supply—in Singapore terms, as occupancy is still extremely high—leads to lower yield.
HM: Which hotel investors are in the strongest position to benefit from a single-market AEC?
RC: ASEAN hotel investors with strong local connections who can leverage their on-the-ground relationships to navigate the difficult investment environments, or investors who are willing to enter joint ventures with locals they trust, are most likely to benefit from the AEC.
HM: Which external factors do you see having the biggest impact upon deal making in ASEAN in the coming year?
Political instability, currency depreciation, debt and a China slowdown are the most serious risk areas. Many currencies have depreciated since the start of this year, including the rinngit, which fell 19.46 percent, rupiah minus13.93 percent, Thai baht minus 9.24 percent, and Singapore dollar, down by 6.71 percent. The other main question about Thailand for investors is its political succession issues.
Hotel demand growth will come from developed countries that succeed in growing middle income economic growth faster than their peers, emerging markets that can maintain high growth and countries such as Myanmar that come out of economic isolation.
The China slowdown is also a concern. Chinese visitors represent high percentages of total international visitation in many ASEAN countries such as Thailand (27.3 percent), Vietnam (21.9 percent), Cambodia (14.55 percent), Singapore (13.1 percent), Indonesia (9.8 percent), Philippines (8.3 percent) and Malaysia (5.9 percent). These countries are not as reliant upon China as South Korea (45 percent) or Macau (66.3 percent), but the importance of China to these markets is still significant.