How long can Hong Kong hoteliers hold their breath?
HONG KONG – Being at the end of the food chain, the hotel industry is a sensitive indicator to economic activity.
Although leisure travel can offset a temporary slowdown in commercial activity, the global recession is slowly getting reflected in hotel performance.
Booking paces (in Hong Kong) have shortened and some events have been cancelled. Hoteliers will aim at sustaining average rate for as long as possible.
In the last trough of the market in 2002/2003, average rate declined by double-digit figures over the two-year period. However, the period from 1997 to 2001 did not see a nearly as strong growth in average rate.
This leaves room for speculation about a correction in the market wide average rate. The key factor will be how long hoteliers can hold their breath.
In many dire lessons, the industry has learnt that rebuilding average rate is a long process.
While a share of hotels might be more prone to face a downturn, it takes only one hotel’s initiative to start competing in price and the average rates can quickly spiral downwards.
In the end, the duration of the downturn and impact on visitation and demand will determine pricing strategies. At the time of this article, a market wide downward correction in RevPAR of 15–20% is not unlikely, assuming a bottoming of the downturn in two years’ time.
At the individual property level, downward corrections can be exaggerated by a secondary location or dated facilities that deter travellers as choice increases. It remains unclear to what
extent mainland China visitation could decrease in the face of a slowing economy.
The recent correction in the Shanghai Stock Exchange, decline in real estate prices and factory overcapacities are prone to limiting spending power, voluntarily and involuntarily, of individuals.
A decline in industrial activity in neighbouring Guangdong Province has the potential of limiting demand at hotels in Kowloon and Tsim Sha Tsui that typically cater to the large number of sales and sourcing agents from the manufacturing industries, including garments, toys, jewellery and textiles.
The careful management of the IVS could soften a negative impact here. However, Hong Kong is not alone in facing these difficult times.
Hotel markets across the region also feel demand softening. The aforementioned negative impact of the financial crisis on development projects could help to limit an oversupply situation and further depression of the market.
On the positive side, Hong Kong’s location and recognition as a financial and commercial centre are characteristics that
support medium-term and long-term prosperity.
– Extracted from the HVS Consulting and Valuation Services Hong Kong Market Outlook prepared by Daniel J Voellm.
Ian Jarrett
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