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The problem of oversupply will continue to persist for a while
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By Robert McIntosh

Rapid improvements and easy access to capital, led to the creation of significant levels of supply but today there is fear of oversupply and declining demand says Robert McIntosh

Much has been written on the falls in tourism demand due to the current global economic crisis. Declining visitor arrivals, occupancy levels and RevPAR across Asia driven by the global economic crisis have already severely impacted the performance of the hotel and travel industry in recent months. Unfortunately, many markets in Asia have been further affected by security concerns and political unrest. 

At the same time the global financial crisis has reduced the availability of capital for the purchase of hotels.

Global hotel sales in terms of total volume declined by 75% in 2008, to reach just US$31 billion (down from US$127 billion in 2007). The Asia Pacific region alone declined by approximately 67% in 2008 to reach a total of US$3.6 billion (down from US$10.8 billion in 2007).

The previously rapid improvements in hotel performance in many markets, as well as easy access to capital, had led to the creation of significant levels of new supply in several markets

CBRE Hotels researched supply changes in the cities of Singapore, Bangkok, Hanoi, Ho Chi Minh and Kuala Lumpur and found that over 23,000 four and five star hotel rooms are presently expected to enter these markets by the end of 2012. China and India also have a significant number of hotel properties in the pipeline.

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However, according to Lodging Econometrics, the construction starts for new hotels across Asia Pacific has decreased by 82% over the last four quarters, primarily due to difficulty in accessing finance. Furthermore, the number of cancellations and postponements in the region has reached an all-time high and new project announcements have declined by 73% from the peak in Q4 2007.

Despite the likelihood that a number of projects will be cancelled, the additional supply, combined with declining demand, will present a challenging period for hotels in some markets in the short to medium term.

Looking forward, there are few signs of the global economic crisis abating, and a high degree of uncertainty regarding the future remains. So what does this mean for hotel investment in the future?

Investors globally are rethinking their investment models. One of the key issues for the last few years has been the focus on the level of return and the consequential under-pricing of risk.

This was being opening questioned in the market well before the current crisis. We believe that the re-pricing of risk is going on now. Certainly, required returns on equity have increased in the last 12 months.  At the same time risk is being priced even more expensively. When this is combined with the reduced availability of finance the pressure on yields to rise increases.

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