HONG KONG—By most measurements, the luxury segment has spurred the hotel industry’s rapid growth in Asia during the past decade. Now, the economy segment wants its turn.
Speakers during the “Branded select service hotels (formerly known as budget hotels)—coming soon to a corner near you” panel held during last week’s Hotel Investment Conference Asia Pacific at the InterContinental Hong Kong were optimistic the segment will see substantial growth in the region during the next 10 years.
“This is a segment of hotels that don’t provide what a huge segment of guests don’t require and don’t want to pay for,” said moderator Eric Levy, managing director of Singapore-based hospitality investment firm TSI. “What’s really happening is the industry is institutionalizing (the segment) through brands. In China, the top 10 budget chains represent 60% of the market.”
“You’re in a sector that tends to be more standardized,” said Gaurav Bhushan, chief development and investment officer, Accor Asia Pacific, which the executive said has three levels of its Ibis brand in Asia: standard Ibis, Ibis Budget and Ibis Styles. “What’s going to make the difference is delivering consistent product. That then drives revenue through the distribution of the brand.”
“There is a great deal of standardization,” said Paul Macpherson, president and managing director, Whitbread PLC, which owns and leases the Premier Inn hotels portfolio. “It’s the balance sheet every day that everyone’s thinking about. Profitability is unbelievably important.”
“Very sophisticated developers are now getting into this segment,” added Paul Logan, senior VP of development-Asia, Middle East and Africa for InterContinental Hotels Group.
Jonas Ogren, area director-Asia for STR Global, told conference attendees that approximately 44% of the 436,740 guestrooms in the active pipeline in Asia fall into the upper-midscale, midscale and economy segments, which loosely is where “select service” properties fall in the hotel industry’s hierarchy. STR Global is a sister company of HotelNewsNow.com.
Budget hotels in Asia have varied widely, with developments costs, excluding land, ranging from as low as $30,000 per key in tertiary markets to $125,000 in developed markets, the panelists said. The costs also differ dramatically based on the country.
The financing front
The panelists agreed financing is available for projects. The secret is finding a lender eager to get into a specific country or market.
“Financing is readily available,” Bhushan said. “This sector is getting more and more institutionalized. Some banks take a much more positive view financing this type of product than full-service or luxury hotels.”
Tim Hansing, CEO Red Planet Hotels, which owns 17 operating Tune Hotels in Asia, said overleveraging is a death sentence when it comes to budget hotels. Hansing and the other panelists agreed an owner should rarely exceed 55% to 60% financing when building a property in that sector.
A key argument for the additional interest in budget hotels is the cost to build—which directly relates to a building’s footprint and the size of individual guestrooms. The size of the rooms of the brands represented on the panel ranged from 12.5 to 13.5 square meters (Accor’s ibis budget level) to 14 square meters (Tune Hotels) to 15 square meters (Pop Hotels) to 20 square meters (Premier Inn) to 19 to 21 square meters (Holiday Inn Express).
The average room count for the brands in Asia were equally as diverse:
- Ibis: 100 rooms to 150 rooms;
- Tune: 167 rooms;
- Holiday Inn Express: 150 rooms to 200 rooms;
- Premier Inn: 150 rooms; and
- Pop Hotels: 150 rooms to 250 rooms.
“We wouldn’t go smaller than 120 rooms because it starts eating into building efficiencies,” Hansing said.
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Paul Macpherson Whitbread PLC |
Marc Steinmeyer Tauzia Hotel Management |
Gaurav Bhushan Accor Asia Pacific |
Operating environment
Operating efficiencies also come into play. Many of the brands outsource key operational functions such as housekeeping and security.
The fine line between offering guests what they want and want they want to pay for is always in the forefront of economy executives’ minds. That’s no different in Asia, where an emerging middle class has more people traveling and determining what they expect from a hotel.
From a hotel ownership and development perspective, that sometimes can mean adopting a trial-and-error process.
“We’ve learned from mistakes when we drifted from the core model, especially in Asia when we were putting in more onsite facilities,” IHG’s Logan said. “We don’t do that now.
“We do have flexibility within brand,” Accor’s Bhushan said. “We do believe one size doesn’t fit all. The trick is to not deviate from the business model.”
Macpherson agreed. “You have to adapt to the business environment or you say goodbye to returns,” he said. “And you have to be sensitive culturally as well.”
Appealing to guests
The cultural aspect comes into play as brands try to lure guests in a highly competitive market.
“The markets that are really growing are defining themselves,” Bhushan said. “There’s a new consumer that didn’t travel much before that’s coming to these properties. A lot of low-fare carriers are bringing new people.”
“Select service is appealing to a much more independent traveler that doesn’t want to pay for frills, the fixtures and facilities of a full-service hotel,” Logan said.
“It’s anybody who’s been pissed off or ripped off by a hotel,” Hansing said. “People that are just looking for a value connection … a safe comfortable place to stay that’s clean. That appeals to everyone.”
That means the sector has a bright future as the global hotel industry and economy become more unpredictable, according to the panelists.
“Given the price point, they absolutely tend to be more resilient to cycles,” Bhushan said. “They’re not going to defy the cycle, but the volatility isn’t going to be as strong.”
“There’s a greater dependence on regional traffic than long-haul traffic … It’s more recession-proof,” Logan said.
Marc Steinmeyer, president director of Tauzia Hotel Management, said his company’s three brands—including the Pop brand in the select-service segment—don’t rely on long-haul traffic. The Jakarta-based company has approximately 75 hotels with more than 12,000 guestrooms open or under development.
“At this level, you don’t need to depend much on network worldwide,” he said. “We don’t depend on international market. We are born locally but will expand nationally.”