Accessible Tourism

TRAVEL IMPACT NEWSWIRE โ€“ Edition 14 (2010) -- 10 March 2010

1. Beware The Rosy Forecasts, Industry Warned

BERLIN: The managing director of a consultancy company who has been proven right in his warnings that the economic boom of the past few years was unsustainable, has again cautioned the hotel industry as well as the wider travel & tourism industry to be wary of rosy scenarios about the recovery now claimed to be under way. Setting the stage for the debate and discussions sure to emerge at the ITB Berlin beginning today, Roger Bootle, Managing Director of Capital Economics, urged delegates at the International Hotel Investment Forum to be cautious about future growth prospects, noting that there were far too many underlying systemic and regulatory problems that were responsible for the recent economic crash, and which had not yet been dealt with.

Indeed, his talk reflected the IHIFโ€™s conference theme, โ€œCharting the Course for Intelligent Growth.โ€ The injection of the word โ€œintelligentโ€ in that theme itself indicated how unintelligent the hyped up growth of the past few years has been, and how it may need to change.

In line with industry trends, this yearโ€™s IHIF conference saw a rebound, with a delegate count of 1,600, including 500 delegates who had not attended last yearโ€™s conference, according to Jonathan Worsley, Chairman of Bench Events, the conference organiser. As the IHIF is a meeting place for the deal-makers, by far the overarching subject of discussion was the pursuit of investment opportunities, including distressed inventory affected by the recent crisis and now available for sale, the emergence of new products and new cities and countries where hotels are still emerging, being redeveloped or changing hands. It was generally agreed that this was a good time to buy in many parts of the world. However, while there is still plenty of money looking for a parking space, the herd-mentality of the past is no longer an option.

Mr Bootle reinforced this in his talk, noting that the atmosphere of โ€œalmightinessโ€ created by excessive debt had not only raised questions about the principles of capitalism but threatened both globalisation and democracy. Citing his recent book called "The Trouble With Markets", which traces the origins of the recent crisis and its consequences, he said that this was a good time for people like him who had been forecasting gloom and doom because they are being proven right.

He said in the blame-game now under way, even the former chairman of the Federal Reserve Alan Greenspan was not being spared. Once considered a hero, Mr Greenspan is now considered a villain. Said Mr Bootle, โ€œSome people say itโ€™s the bankers. some people think itโ€™s all about monetary policy, markets or governments. My own view is that all these particular villains have played a part.โ€ At the end, Mr Bootle blamed the economists โ€œbecause what went wrong is the failure of ideas. It was the ideas that were in people's heads that brought us into the mess.โ€

He said it is difficult to understand why regulators were so useless, why monetary policy was conducted the way it was. If the regulators believed the system was fundamentally flawed, the system would not have been doing the things (it was). "The regulators believed that the fundamentals were fine. Thatโ€™s why it was so useless.โ€

He added, โ€œWe have learnt that greed is not good. It's downright stupid. The problem is that this goes right down to the basics of economics. There are parts of the economic system which are not and should not be driven by greed. What we have discovered is that actually you canโ€™t leave bankers and markets to the pursuit of their own interests. They are human after all. The assumption that the system will come up with something that is good for all of us is pie in the sky.โ€

He forecast that the banking industry will be radically transformed. Comparing it to casino capitalism, he noted that it was the collapse of the investment bank Lehman Brothers which had set off this crisis. โ€œI suspect what will happen is that the big banks will have to broken up by size to get more competition so that we donโ€™t have an institution of enormous size whose failure could imperil the entire system. That will make a healthier banking system overall.โ€

Mr Bootle noted that there were bread and butter issues involved too. Consumers are heavily indebted and in no position to increase spending. Although the worst of the recession may be said to be over, the problem has been transferred from one part of the system to another -- from bankers and borrowers to governments. But now even in places like the U.K., governments cannot bear the burden any more and they are about to shift to burden back to private sector and taxpayers, he said. In the past, governments had a relaxed attitude about regulation. But now the pendulum is swinging and the result could be a massively over-regulated system that will squeeze the energy out of it and make the finance system more expensive.โ€

At the wider level, Mr Bootle posed the question: โ€œWhat will be the attitude of people to capitalism? What are people saying about bankers and bonuses as taxpayers are forced to take out more money to bailout bankers?โ€ Stressing that there was a โ€œprofound angerโ€ about this, he warned, โ€œIf we are not more careful heaven knows where that will lead us.โ€ He noted that the huge current account surpluses in Asia โ€œwould mean deficits for usโ€ in the West. This could trigger calls for protectionism.

Throwing up graphs showing how dramatic the economic contraction has been, he asked, โ€œAre we on the cusp of a strong recovery? I very, very much doubt it.โ€ He said the sources of collapse had dissipated for a variety of reasons, and a resumption of trade and manufacturing meant that there will be growth in many parts of the world, but โ€œwe will have to be relatively cautious about the pace of it.โ€ He said even the U.S. recovery is more about stocks and demand from abroad.

Mr Bootle said that the banks have been very badly hit. Having suffered as a result of property assets, โ€œthey will be pretty leery about financing new property investments.โ€ However, he said, โ€œAsia is an exception, especially emerging Asia and China. He also noted the continuing problems in places like Greece which was once one of the best economic performers, and Ireland which he said was embarking on deflation and will suffer for years to come.

He also expressed concern about the UK where he said there was โ€œa bit of unfinished businessโ€ to attend to and where there still be some significant adjustment yet to come. UK policymakers โ€œwill not be able to raise interest rates for a very, very long time and consumers will bear the brunt of the downturn.โ€ He urged caution about the forecasts for both the U.S. and the Eurozone because there is โ€œtoo much debtโ€ in the system, as well as the prospect of currency volatility.

He concluded, โ€œSure, gloom and doom is a time to buy but I would urge everyone not to be factoring in too rosy scenarios.โ€

Mr Bootleโ€™s arguments were also reflected in the presentation by Arthur de Haast, Global CEO, Jones Lang LaSalle Hotels, who highlighted the precipitous state of the slump as well as the changes that have accompanied it. He noted that global hotel investment volume had risen from a mere US$ 10 billion in 2002 to US$ 120 billion in 2007 and then fallen off the cliff to plunge to 2002 levels in 2009, an unprecedented peak and trough in such a short period of time.

The worst hit had taken place in the Americas, where investment volume had risen from about US$ 3.5 billion in 2002 to US$ 48 billion in 2007 and then plunged to only about US$ 2 million in 2009. Regional investment volume in Europe had gone from about US$ 5 billion to US$ 27 billion to US$ 4 billion in the same period.

Significant shifts have also taken place in the profile of buyers and sellers. Private equity which had been among the big buyers in the 2007 had also fallen of the map. One of the biggest changes has taken place in the sources of investment. Global investors such as the investment banks and private equity which had been responsible for about 39% of the investment in 2007 did not even figure on the map in 2009. By contrast, domestic sources of investment which had been responsible for about 42% of the investment in 2007 had risen to 61% in 2009.

Mr de Haast forecast that there would be a very slight pick up in investment globally.

On the equity side, he said there was a โ€œweight of moneyโ€ still available but that there would be no buyer type and the geographic sources of investment would be more diversified. On the debt side, he said the availability of new debt was still limited. An overhang of existing loan portfolios still had to be cleared and that the industry could expect some tight underwriting standards.

2. Still a Big Vote for New Ideas And Concepts

In spite of the slump, there is a clear indication that new ideas and concepts will always find takers. The Yotel, a property being built in what used to be a basement area under the central terminal of Londonโ€™s Heathrow airport, won a unanimous vote for attracting new investors. It beat out traditional properties following the mainstream philosophies of development.

The venue of this unique exercise was a so-called โ€œInvestment Den,โ€ a new kind of โ€œtalk-showโ€ designed to attract investment into promising hotel prospects. Launched for the first time at the International Hotel Investment Forum, it was based on a popular TV series called the โ€œDragonโ€™s Denโ€ in which businesses were invited to send representatives to appear on TV and answer questions from a jury and members of the audience. At the IHIF, three presenters who agreed to come were the Yotel, the Pullman Dublin Airport and the Pyramids Palace at the Museum, Cairo.

Speaking first, the representative of the Pullman Dublin airport said it was a 90 million Euro property that will be attached to Dublin airport which is also due to get a new Terminal Two by the end of 2010. He said that in addition to this location advantage, it -had a well balanced management contract in which both the owner and operator share risk. He noted that it also had the backing of the Accor brand and distribution support machinery.

He said that Ireland has got its at together and that now is the time to grasp this opportunity as the hotel market is just recovering from the crisis and construction costs were about 30% lower than in 2007. Plans are also afoot to build large conference facilities. By the time the hotel opens in 2012, the business will have returned.

The representative of the Yotel Heathrow Central said it would be the only hotel located in the central terminal of Heathrow using a basement area that has been vacant for 10 years. When completed in 2012, it would have 199 rooms. The standard room would sell for 25 pounds for four hours and 40 pounds for the premium rooms. There was total development cost of 24 million pounds of which 30% would be debt with a total equity requirement of 7.3 million pounds. It had a 35 year lease of both the shell and core with the British Airports Authority.

The hotel is expecting a return on equity of 33.7% over a 10-year period. The location and Yotel design means that there is virtually no chance of any competition evolving. It would be located right just the under basement of Terminal 3 which has a high portion of international flights, including Emirates and Virgin. It would be three minutes walking distance to terminals 1 and 2. Heathrow is already one of the worldโ€™s busiest airports, and would also have a free train connection to terminals 4 and 5.

The Pyramids Palace at the Museum in Cairo is said to be opening in 2012, a 600-room property built at a cost of 150 million euro within walking distance of the Greater Cairo Museum, being designed as the largest historic museum in the world. It also has stunning views of the pyramids and is located close to a business park where companies like IBM, Vodafone and Xerox have their regional headquarters. It also located on the Ring road which connects Cairo with Alexandria. The Egyptian government was also planning to raise the number of overnight visitor arrivals to 22 million in the next 10 years.

The speaker said that location plus experience plus feasibility means sound investment. He said it would lead to a shift in business from the crowded downtown Cairo and generate a mix of about 50% tourists and 30% business. Although the average room rate was projected at 130-150 dollars but that a sizeable 35-45%c of the revenues would come out of F&B. The area will also get a lot of publicity from the museum opening. A total average stay of minimum four nights was projected as visitors stayed to see both the pyramids and the museum.

Interestingly, the jury did not think too highly of either Egypt or Ireland. They did not feel that the hotel situation in Cairo would be doing well any time soon, and that in Ireland, it would take โ€œanother 10 years before the existing capacity is full.โ€ They voted for the Yotel. The few questions the Yotel faced were about its short-term lease period, the replacement costs, the ventilation and the impact of noise vibration from the trains. It was also pointed out that building things underground also raised electricity costs.

Finally, commented one of the jurors, it was remarkable that โ€œa hotel with no windowsโ€ was now being thought as a good investment prospect. โ€œIt just shows how the world is changing.โ€

In fact, the entire idea of doing these presentations was very well received. One of the British TV personalities behind the original โ€œDragonโ€™s Denโ€ came on stage to applaud the effort. He said it was possible that if the event was broadcast live (such as over a webcast), people would be able to buy shares in the projects live over the internet.

3. Money Set To Move To Asia Big Time

A panel discussion on the prospects of emerging markets featured a line-up of companies, consultants and investors operating in Latin America, East & Central Europe and the Asia Pacific. Each of them presented their outlook for prospects in their respective regions, outlining some of the new developments, policy and regulatory changes taking place. When the moderator asked the participants at the end of the session, which region they favoured as a future investment bet after having heard all the scenarios, a huge majority of hands went up in favour of the Asia-Pacific, leaving the other two regions stone-cold.

The pitch for Asia-Pacific was made by James Goulding of LimeTree Consulting based in Hong Kong. He said his company was investing in beachfront and coastal land in the Asia-Pacific, especially in places like Thailand, Vietnam, Cambodia, Australia and increasingly in Sri Lanka. He noted that the entire Asian region was undergoing a boom in infrastructure development with roads and highways that would provide connectivity to large parcels of land that are suitable for development .

He said that the growth of domestic and growth of intra-regional tourists from a catchment area of two billion people, most of them within three hours flying time from each, was a factor that could not be ignored. Asia will be less and less about Europeans and Americans travelling there as tourists. It will be more about intra regional tourism,โ€ Mr Goulding said. โ€œThere are 50 million middle-class Chinese and Indians. You just compare that to the total population of Europe and it does not take much to figure out that there is enormous growth to come. You cannot argue against demographics. Spending power will be increasing dramatically.โ€

Mr Goulding identified the fastest growing destinations in Asia as being Cambodia, Vietnam, Hainan island in China and Sri Lanka. He said that if one sees the western evolution of coastal development, two โ€œrivierasโ€ emerged, one along the south of France, and the other in southern Spain. But in Asia, he said, there will be three to four such coastlines. These would be the West coast of Thailand form Burma to Phuket, the Cambodian Riviera around the port of Sihanoukville, the Vietnamese Riviera along its entire coast, and Hainan Island, which is already being developed along the lines of Florida. Not only is the Island only three hours flying time from the key cities of china, but the construction under way will convert it into a โ€œMiami in five years.โ€ Some of the villas are already selling for 5-8 million dollars. A 21 kilometre bridge linking the mainland China with the island.

He said Sri Lanka was also a bright prospect. With the war now over, and development aid funding pouring in from international financial institutions, plus its location right next to India would also mean good prospect.

In addition, he said Asian governments are investing heavily in infrastructure, especially new roads, ports and airports. Accessibility is improving and that is ultimately what drives hotel values. When they (Asians) say they will build something, they usually do, and they usually do it on time.

He noted that low cost airlines had dramatically changed the way people move, and gone from 1% of total air passenger movements to 16% within a span of few years and growing rapidly. The Vietnamese government is building 10 new airports. Private aviation growth is also another high prospect. There were 500 private jet landings at Phuket airport last year. Asia also boasts a huge number of small short-runway airports where major runway extensions are under way and will allow them to take on medium-haul jets like the A320s.

He also pointed to the financial factors, noting that domestic currencies are strengthening against the dollar as the countries run budget and current account surpluses. Hence, an investment in Asia will also mean a return on the basis of currency values. Moreover, Asian financial institutions like the Chinese banks are becoming major players on the global stage, replacing the likes of Lehmann Bros and Royal Bank of Scotland which โ€œwere big players but are no longer in the market.โ€ Said Mr Goulding, โ€œLiquidity in Asia is better than in the western world. It is easier and getting better.โ€

4. Recovery Over A Year Away, Say Hotel Executives

Berlin / London โ€“ A survey of 417 European hotel executives by international law firm DLA Piper has revealed weak industry confidence and dealt a blow to hopes of recovery this year. Only two per cent of respondents expect a sustained upturn this year, despite 37 per cent predicting one year ago that 2010 would bring solid growth. These worse-than-expected results are compounded by fears from over half of hoteliers (55 per cent) that room rates will not return to pre-financial crisis levels until after 2012.

The DLA Piper 2010 European Hospitality Outlook Report โ€“ launched on Monday 8 March at the International Hotel Investment Forum โ€“ also shows mixed prospects for new build activity, which stalled dramatically in the recession โ€“ 36 per cent of respondents expect a rise in new developments, but 32 per cent expect a fall.

Large chains are predicted by 80 per cent to continue their focus on small chain conversion and about two thirds (66 per cent) expect large chains to increase their market share in 2010.

โ€œThe largest chains will continue to gain share through greater opportunities to convert smaller chains and the advantages that their operational efficiencies and marketing budgets give them,โ€ said Karen Friebe, global co-chair of DLA Piperโ€™s Hospitality and Leisure Practice.

โ€œBut, while there are signs that occupancy levels have stabilised, there is growing concern throughout the industry that room rates will remain low for years to come and conversions are unlikely to compensate for reduced new build activity.โ€ Growth is expected to be limited in 2010, but over the next three years significant numbers of hotel chains may look to China and India to expand โ€“ 28 per cent of respondents see China as one of the best markets in which to grow their business and 24 per cent point to India.

Karen Friebe commented: โ€œSome chains have focused on cutting their debt and are now reasonably well-positioned to grow through new market opportunities in BRIC countries โ€“ particularly China and India.

Lending conditions have eased a little and we are seeing greater use of joint ventures to spread risk and access capital.โ€ This is recognised in DLA Piperโ€™s report with three quarters of hotel executives currently seeing increased opportunities for these partnerships.

Many executives at well-capitalised hotel chains have been encouraged by the state of the market โ€“ of the 27 per cent who say their outlook for the next 12 months is โ€˜bullishโ€™, the most popular reason is the investment opportunities created by the financial crisis, with the economy/budget sector named as the most attractive investment prospect.

Source: Travel Impact Newswire [imtiaz@travel-impact-newswire.com]

By: Executive Editor: Imtiaz Muqbil
When: 7/2/2014

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