Mid-Year Phuket Hotel Market Update Part 2

This week we'll wrap up the hotel benchmark for the first half of 2009, a period which saw hotels heavily discounting in order to increase occupancy, resulting in volatility of average room rates. Having spoken to hotel operators on the island, there continues to be an emphasis on rate strategy, hence the trend is expected to continue. One of the key competitive destinations, Bali, saw occupancy performance surpass that of Phuket on the back of visitor redirection, which has been widely attributed to the high-profile Thai political events in late 2008 and early 2009. Both Vietnam and Malaysia were beneficiaries of Thailand's woes as well. The important MICE (meetings, incentives, conventions and exhibitions) market has evaporated during the sustained economic crises and Phuket has now reverted back to a seasonal trading trend.

Currency depreciation in countries such as Korea and Australia has meant travel into these markets has been on the rise. The appreciation of the Thai baht against major currencies has restrained demand. New hotels entering the supply stream at all tiers during the year are having an impact on supply and demand fundamentals. For hotel managers, forecasting business trends has become markedly challenging. With media and external events influencing travel, there is now a shorter lead time in bookings together with a rise in internet reservations made close to arrival dates.

Certain risk metrics continue to impact the travel industry, including the H1N1 virus, political instability, the unresolved Thaksin Shinawatra situation, a continued global economic downturn, volatile oil prices, a regional hotel oversupply, currency machinations, and last but not least, terrorism after the recent Jakarta hotel bombings. Just turning on your television and seeing those words 'breaking news' now makes everyone's heart skip a beat.

On the island's hotel development pipeline side, a substantial number of projects have now been delayed or are on hold despite a relatively small amount of leveraging. This situation may be self-correcting as financial markets become more accessible, and the materialization factor of the pipeline is expected to remain largely intact. Clearly a shift has occurred, with Thai investors now moved to the sidelines, joining international institutions' concerns over political risk and government instability. Debt and equity continue to remain at low volumes. For now a 'status quo' approach to project positioning has become common, with many developers going into a holding pattern similar to an airliner trying to land in bad weather.

Some hotel developments are now tapping into the offer of 100 percent foreign ownership under BOI (Board of Investment) incentives, such as Jumeirah Private Island and the Taj Exotica projects. Over the bridge in Phang Nga, growth in the number of new hotel projects appears to be severely limited due to specific government restrictions constraining hotels to 79 keys. The once-popular residential pre-sales strategy employed as a funding tool for hotel components of mixed-use projects now risks becoming an obsolete operating model for developers, given the sustained property market decline.

Going forward towards 2010, there will be greater pressure on transactions of existing or partially developed projects versus greenfield opportunities. Institutional buyers are being replaced by Asia-based family conglomerates, private equity and high net worth individuals. With the current pipeline slowdown, mid-term equilibrium is set to enter into the supply and demand dynamic. As a result the absorption of new products into the market in the longer term will represent strong underlying fundamentals.

At the beginning of 2009, there were 37,884 hotel rooms in Phuket's registered tourism establishments. The new inventory will increase exiting supply by 17 percent and represent 6,455 rooms comprising 6,231 in the pipeline and 224 following openings in the first half of 2009 at Cape Sienna and Outrigger Serenity. This year is set to see the largest surge in supply with 1,904 new rooms scheduled to open in the second half of the year. Roughly 48 percent of projects over the last six months have incurred delays. Most developers now cite the political instability and global economic slowdown as contributing factors.

This wraps up year-to-date performance for the first part of the year and more importantly sets the tone for how the greater world is now affecting the Phuket tourism market. We are keeping our fingers crossed after a successful Asean Foreign Ministers Meeting and hope that current Prime Minister Abhisit Vejjajiva can give the country its much-needed stability. In the meantime tourism in Phuket looks to continue to be affected by a number of external factors, and for hotel operators and owners it's set to be a rollercoaster ride.