Special Report: Lower tourist arrivals, growth of alternative accommodation worsens hotel glut

This article first appeared in The Edge Malaysia Weekly, on October 15, 2018 - October 21, 2018.
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FOR some time, valuer-cum-real-estate-agent Adzman Shah Mohd Ariffin has had a listing of six hotel assets in the three- and four- star categories for sale, but he has had no luck in getting any purchasers. The hotels — two located in the Bukit Bintang tourist zone — have been on the market for nearly three years.

Sadly, many of Adzman’s counterparts are facing the same predicament.

The attractiveness of a hotel asset to a potential investor hinges on its performance and location. Over the past few years, the country has had too many rooms chasing too few guests. As average occupancy declined, hotels reduced room rates to remain competitive, resulting in lower yields.

But why are there too many rooms?

In line with the Malaysia Tourism Transformation Plan 2020 — which aims to welcome 36 million tourists and fetch RM168 billion in foreign receipts — the government then in 2012 projected a need for 91,000 rooms, of which 37,000 would be in the four and five-star categories.

Tax incentives were accorded, resulting in the mushrooming of hospitality assets across Malaysia as domestic and foreign investors poured money into the sector.

Fast forward to the present. Last month, the new government revised the figures, acknowledging that they were far-fetched because targets for 2013 to 2017 were far from being met.

The new goal is to net 30 million tourists and RM100 billion in receipts by 2020 (see Table 1).

At press time, the tourism ministry had not responded to questions on why a revision was made nor whether it would revise the hotel room requirement figures.

While tourism is the third highest contributor to Malaysia’s foreign exchange receipts, accommodation is the second largest expenditure component after shopping.

What does the target revision mean for accommodation providers? Looking at 2017 statistics, some 25.6% of tourist spending was on accommodation (see Table 2). Consequently, accommodation providers are now likely to rake in about RM25.62 billion instead of the projected RM43 billion — a staggering RM17.4 billion variance to the segment.

Given the current scenario, should we take stock and revise the 2020 room requirement projection to a more realistic figure?

“Yes, definitely,” says Shaharuddin M Saaid, executive director of Malaysian Association of Hotel Owners (Maho), which represents 98 members operating 195 hotels in the three to five-star categories nationwide.

The target revisions aside, Shaharuddin says legitimate hotel operators have been hit and continue to be affected by private or individual tourism accommodation premises such as Airbnb that have emerged over the past few years.

Interestingly, neither the targeted number of hotel rooms nor the data collected and provided by Tourism Malaysia takes into account the additional accommodation provided by vacation rentals and unlicensed premises in the likes of Airbnb.

“At the time (the 91,000-room requirement target was made) there was no such room inventory or additional supply of rooms in operation. But in the last two years, with Airbnb actively promoting and signing up private or individual properties for tourism accommodation, the revision target for hotel rooms should be done,” he tells The Edge.

Malaysian Association of Hotel (MAH) honorary secretary general Christina Toh adds, “Malaysia currently has an excess supply of rooms. Coupled with the Airbnb players, who are not legal in Malaysia, the supply (of rooms) is higher than the demand.”


Competition is good, but …

With the government supporting the building of more hotels, the Klang Valley, where the majority of hotels are based, saw the number of rooms more than double to 87,830 in 2016 from 43,422 in 2010 while the number of guests increased by a mere 5.479 million to 20.72 million over the same period. (see Table 3 and “Hotels and more hotels”).

As more rooms came on stream, average occupancy began to decline. “For the 2010-2016 period, the number of hotel guests grew at a compound annual growth rate of 5.3% versus hotel room supply’s 12.5%,” says Jones Lang Wootton executive director Malathi Thevendran.

Data from market analytics firm AirDNA www.airdna.co indicates that the number of Airbnb listings in Malaysia has been increasing.

Citing data for August, AirDNA PR manager Abigail Long says, “The number of entire home listings [on Airbnb] in Malaysia has increased by 58% (to 28,317) across the country, and occupancy has gone up from 43% to 46%, showing the popularity of Airbnb among both hosts and guests.”

The 28,317 rooms provide 1.28 million room nights. Apart from entire homes, listings on Airbnb include private or shared rooms. At the same time, the number of entire home listings in Kuala Lumpur in August increased by 49% from a year ago to 7,564, providing 263,136 room nights.

Others are jumping on the bandwagon. Take SubHome Management Sdn Bhd, for instance. Launched in 2016, the hospitality company manages a portfolio of luxury serviced suites in prominent locations throughout Kuala Lumpur and Johor Baru, offering hotel rentals and hotel-like services and solutions to developers that have existing or unsold inventory (apartments) that can be converted into revenue generators.

Recently, Tune Plato Ventures Sdn Bhd — a joint venture between Tune Group Sdn Bhd and ECM Libra Financial Group Bhd — acquired a 50% stake in SubHome.

Two weeks ago, SubHome co-founder and CEO Sandeep S Grewal was quoted as saying that it is growing exponentially and targets to have 3,000 units in Malaysia by end-2018 from 417 units at present. This will add exponentially to the market supply.

Johor Corp Bhd chief economist Azrul Azwar Ahmad Tajuddin confirms that there is an oversupply of hotels and hotel rooms but thinks that the glut varies according to geographical location and rating of accommodation.

The situation is worst in Kuala Lumpur as it has 39,719 existing rooms and another 5,915 rooms pending from 20 hotels, Azrul says, basing his analysis on data from the National Property Information Centre.

He observes, “Competition is stiff and bordering on unfair competition from disruptive and even traditional providers of accommodation and lodging services within the hospitality industry with the emergence of Airbnb, tripping.com, FlipKey, HomeAway and other online marketplace providers.”

Other lodging arrangements include homestays and farmstays.


Drastic measures to resolve the oversupply

The simplest solution to the oversupply problem would be to boost arrivals but this is unlikely to happen overnight. “With no proper air accessibility, insufficient flights and no new attractions, the situation could get worse,” MAH’s Toh tells The Edge.

In order to remain competitive in the face of increasing competition, hotel operators have had to look for alternative sources of revenue. Toh says hotels are increasingly depending on domestic and Asean tourists, as well as incentive groups.

And as with hoteliers all over the world, domestic hotel operators are also turning to China — the largest source of outbound tourists. In the first four months of the year, China arrivals to Malaysia grew by 37.2% year on year to 1.01 million.

“Like everyone, we have had to turn to the Chinese wallet for help,” says a hotel operator who declined to be identified. However, margins from Chinese group travellers are razor thin, he says, adding, “We have no choice but to take whatever comes our way.”

Being dependent on the Chinese market has drawbacks. Chinese tourists tend to be very sensitive to any adverse news. Last week, it was reported that during Golden Week (Oct 1 to Oct 7) in China, there was a more than 30% drop in arrivals from the republic from a year ago. Former prime minister Datuk Seri Najib Razak was quick to pin it on the cancellation or deferment of a number of infrastructure projects involving Chinese companies.

In August, Thailand saw arrivals from China — its biggest revenue market — plunge by 12% after a string of misfortunes hit the country. The worst was a tour boat accident off Phuket in July, which resulted in the deaths of dozens of China holidaymakers. A dengue outbreak and a viralised video of an airport guard apparently punching a Chinese tourist exacerbated matters.

Many question the wisdom of being too reliant on the China market. Maho’s Shaharuddin opines that stakeholders and industry players should regularly engage in promotional activities and seek target markets as well as look at new products and services. Arrivals should be reviewed on a quarterly basis and should the numbers decrease, efforts must be made to overcome the shortfall.

Tourism players point to the lag in data provided by the Ministry of Tourism, Arts and Culture. Traditionally, the ministry has been very slow to provide up-to-date arrival statistics — the latest available numbers are for April.

“We must control new hotel developments at destinations where there are already too many rooms, including those offered by Airbnb,” Shaharuddin adds.

Azrul suggests imposing regulatory and physical development limits or other forms of restrictions on the construction of new hotels to curtail the incoming supply and correct the current glut.

Following a Bank Negara Malaysia study on the property glut in the country, Dewan Bandaraya Kuala Lumpur announced last November that approvals for new applications to build shopping centres, serviced apartments and luxury condominiums in Kuala Lumpur would be frozen. However, hotels were not on the list.

Jones Lang Wootton’s Malathi says market research has to be done to ensure the most suitable class of hotels are built in the right locations. This will mitigate the potential of an oversupply in the short term.

“The hotel sector needs to be closely monitored and it is very important to look at increasing the number of hotel guests in the Klang Valley to ensure higher occupancy rates as income from hotel guests helps to drive the tourism sector,” she adds.

Azrul suggests that a way to curtail development is to offer incentives to encourage renovation, refurbishment or retrofitting of hotels or transforming or repurposing buildings (either owned or taken over from third parties) into hotels instead of building new ones.

For decades, Malaysia has had a reputation of having among the cheapest, if not the cheapest, room rates in the world. Even though the push has been for quality tourists, the industry has not managed to gain much ground in raising room rates. With more supply in the pipeline, the average hotel rate is unlikely to see a significant improvement anytime soon.


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