Mid-Year Phuket Hotel Market Update Part 1

Negative market sentiment and the media perception that linked Phuket to the wider Thailand political problems heavily influenced the hotel market during the first six months of this year. With the majority of regional Asian markets declining over the same period, and shift in segmentation to lower-paying short-haul travelers, Phuket has, by and large, fallen in line with the wider marketplace, witnessing a softening of room rates and lower occupancies.
Key destination competitor Bali surpassed Phuket in the volume of tourist arrivals thanks largely to the high profile anti-government demonstrations and the series of airport closures that Thailand has been cursed with in recent months. Looking forward, short-term trading will focus on occupancy at the expense of long-term rate strategies. Cash flow is a key underlying consideration in this market with most hospitality assets largely carrying low debt ratios.
Defying the trends are the luxury tier properties which operate in a favorable supply and demand segment and the budget tier hotels which are experiencing a boost in numbers because of a new wave of price-conscious travelers and changing global financial demographics. Mid- and upper-scale properties have been hit by declining numbers. This has resulted in a domino effect, creating substantial rate volatility.
The long-term outlook remains positive due to brand concentration, growing airlift and infrastructure improvements, but in the short-term, a recovery has effectively been written off this year with prospects of Phuket recovering pushed to next.
For the first half of this year, a number of key factors were at play in the market. Tourist arrivals declined by 14 percent (198,946) in the first six months of this year compared to the same period for 2008. The island's hotel occupancy stood at 60.4 percent, with average room rates of US$141 for combined luxury, upscale and midscale segments, and revenue per available room sitting at US$85.
Branded hotels outperformed the non-branded properties by 33.7 percent on average room rates, although in terms of occupancy, the non-branded outperformed the branded by 12.4 percent.
Forty eight percent of projects listed in the hotel pipeline have been delayed due to current economic slowdown. Despite this, the number of projects in the pipeline has increased from 30 to 38, which equates to 6,231 hotel rooms. Non-traditional hotel products – condo hotels, villas and mixed-use properties – now account for 34 percent of the projects in the pipeline.
Looking forward to the rest of the year, we are faced with market recovery expectations now pushed back to 2010, continued economic slowdown, domestic political concerns, the threat of the (H1N1) virus and hotel oversupply. Long-haul numbers are expected to shrink, replaced instead by lower-yielding Asian and domestic visitors as a result of a growing regional network of low cost carrier airlines.
Occupancy versus room rate is set to be the primary concern for hotels along with cash flow concerns for hotel owners and increased destination competition from other hotspots in the region. Long-term rate damage remains a critical issue. As suggested before, luxury and economy/budget segments should continue to outperform upscale and midscale properties due to favorable supply and demand ratios and the current trend of penny-pinching travelers.
Limited leveraging of hotel projects will result in few transaction or business failures, but debt and equity will continue to loom on the horizon, thus constraining new developments. The ever-changing nature of Thai domestic politics, the continued volatility of oil prices and currencies, and rising global unemployment will all play a part in the number of tourist arrivals until the end of the year.
On a positive note, relatively strong regional economies, coupled with favorable door-to-door travel time to regional hubs and rise in seat capacity to destinations, provides Phuket with the opportunity to attract 'volume' markets. Seasonal trends that are creeping back into island's trading patterns require the return of the MICE market, more widespread segmentation and geographic diversification.
Phuket's hotel critical mass, brand concentration and continued growth in demand generators – marinas, golf, shopping, and tourist attractions – all boost the island's recovery prospects. Tourism infrastructure investment should help aid recovery and the approval of a new overseas terminal at Phuket International Airport by Airports of Thailand, doubling the handling capacity to 12.5 million passengers by 2013, is particularly significant and welcome.
Other recent infrastructure developments are set to include a new four-lane bridge connecting the island to the Phang Nga mainland and a new airport road from the north to the bypass intersection near Phuket City.Next week we look at hotel performance by tier and brands versus non-brands.