I’ve just relocated to my first base in Asia, Singapore. Although I’ve previously spent more than two years here, my interaction with the city on a professional basis was limited. More effort was spent on finding all the hidden local eateries with the cheapest (and best) local delicacies.
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| Damien Little |
While sipping my morning kopi, I have been contemplating not only the changes to the city, but also its hotel market performance. When I arrived in 2001, the city’s hotel supply was declining in contrast to other Asian markets. Official statistics published by the Singapore Tourism Bureau show that the total number of gazetted hotel rooms had declined from about 30,500 in 2000 to 29,900 in 2003. Over a longer period of time, covering the 16-year period from 1992 to 2008, gazetted hotel supply recorded a marginal annual average growth rate of 1.5 percent. Basically, room supply in Singapore has remained more or less the same for a long time.
It could be expected that in an environment with a very stable supply base, market performance over this period should have been strong, with hoteliers confident to increase room rates given the lack of new competition. Occupancy levels were generally strong throughout most of this period, dropping below 75 percent on only three occasions. But an analysis of average room rates in the market shows there were very few years of growth and quite a few years of decline.
From 1992 to 2008, average room rates recorded an annual average growth rate of 3.4 percent, with most of this growth occurring from 2005 to 2008. In fact, from 1992 to 2004, average room rates recorded an annual average decline of 1.5 percent. Average room rates declined from an average of SGD146 ($US96) in 1992 to SGD122 ($US80) in 2004.
Adjusting these growth/decline rates for inflation to determine real rate growth, the average annual growth from 1992 to 2008 was a marginal 1.8 percent. Between 1992 and 2004, this figure was negative 2.7 percent.
Such numbers help explain why the city’s entrepreneurs avoided hotel development, instead focusing on asset classes that offered higher investment returns.
What is difficult to understand is why it took until 2005 before market average daily rate growth managed to make Singapore rate levels more comparable with other key cities in the region, such as Hong Kong.
Historically, rate growth in Singapore has been moderate in good times and quickly declines when the going gets tough. We believe this is due to a number of issues, one of which is an owner priority for seeking maximum occupancy, typically through severe rate-discounting policies. There also is a long-held belief that government has pressured the industry to keep rates low in order to help tourism arrival growth, although there is nothing to support this. In addition, the city has had no rate champion prepared to take the lead in pushing rate growth at the risk of losing market share.
Occupancy for the market reached a peak in 1994, and momentum in room rate growth was consistently curtailed by a number of factors with the onset of the Asian financial crisis in July 1997, economic slowdown and the 9/11 terrorists attacks in 2001, regional terrorism fears following the Bali bombing in 2002 and finally the outbreak of SARS in 2003.
However, from 2004 through 2008, the market experienced a period of stability and growth. The resurgence of regional travel and economic growth grew room demand by circa 30 percent in 2004 and market occupancy recovered to precrisis levels, reaching 81 percent. Average daily rate did remain relatively moderate in 2004, with a growth of only 5.2 percent, which resulted in a rate of SDG122 ($US80), giving the impression that Singapore may never break out of the low rate environment.
Moreover, while Singapore was subject to low rate growth, other regional markets such as Thailand, Indonesia and Korea, while experiencing currency depreciation, also were witnessing extraordinary gains in ADR.
From 2005 through 2008, the Singapore story changed dramatically. In 2005, demand increased by about 6 percent, slowing to 3 percent in 2006 and to 2 percent in 2007. Meanwhile, occupancy for the city reached 84 percent in 2005, 85 percent in 2006 and a record 87 percent in 2007. This time, Singaporean hoteliers took full advantage of the boom in visitor arrivals as well as the tightening room supply and went about setting record room rate increases.
In 2005, rates grew by 15 percent to reach SGD137 ($US90), still a relatively moderate level. In 2006, room rate growth of 20 percent lifted rates to an historical high of SGD164 ($US107). Singaporean hoteliers pushed even harder in 2007 and achieved an incredible rate growth of 23 percent, lifting rates to an average of SGD202 ($US132), something that would have been hard to believe at the beginning of 2005.
Owners, particularly in the top-tier market, had changed their strategy in favor of maintaining a higher rate. With higher occupancies and an increase of long-haul corporate and meeting, incentive, convention and exposition demand used to paying higher rates in cities like Tokyo and Hong Kong, the top tier has been encouraged to raise its previous rate “ceiling” and prioritize rate over occupancy, in turn allowing the rest of the market to increase rates accordingly.
At the beginning of 2008, the general sentiment of the hoteliers in the market was that rate growth for Singapore hotels had been maximized in 2007, and that there would be a leveling, if not decrease, of rates in the next few years. However, aided by the first-ever night Grand Prix, Singaporean hoteliers again matched the impressive growth of 2007 and posted for the second year running average room rate growth of 23 percent, lifting rates further to SGD248 ($US162).
Results from the recently released Horwath HTL Global Hotel Sentiment Survey indicate that hoteliers in Singapore expect declines in room occupancy and average room rates in 2009, primarily due to the detrimental effect of the global economic situation. About 80 percent of hoteliers surveyed felt that occupancy would decline by at least 5 percent (45 percent surveyed felt it would decline by more than 10 percent), while about 70 percent surveyed felt ADR would decline by at least 5 percent (35 percent thought it would decline by at least 10 percent).
Such results suggest that the market could be in for a rough ride over the next 12 months, and with substantial supply expected in 2010 with the integrated resort properties opening, we can only hope that all the good work achieved in lifting room rates in the past four years is not eroded in the coming 12 to 24 months.
Damien Little is a Director of Horwath HTL based in Asia and spends his time in the Singapore and Beijing offices.