Important notice: this is a synopsis to the original article by Macy Marvel published at www.hospitalityinside.com. To read the full piece, please visit their website (subscription required).
At the time when any action has been practically rendered impossible and most people are confined to their homes, while businesses are being brought to a virtual standstill, the one thing we can all do is learn from our mistakes and try to understand what the future might hold for the global hospitality industry. For that, we all ought to turn our eyes to China - the first country to have successfully passed the peak of the pandemic and a pioneer in finding paths towards a rapid recovery. What is currently happening there might as well become the new normal for the rest of the globe, hence the heightened interest in the current state of affairs and the projections for the nearest future.
Profits and losses during the uncertain times
According to the STR data, occupancy in China has hit the rock bottom by the week ending February 8th, soon after the end of the Chinese New Year celebrations, when disconcerting single-digit figures were recorded. A couple of weeks before that the occupancy level stood at 21.9% (excluding the hotels that were temporarily shut down), registering a 33.1% decline in comparison with 55% average rate in the past few years during the same period. By the week ending March 21st, though, 25% of rooms were occupied on average throughout the nation.
Nevertheless, such steep unprecedented drops could not have gone unnoticed and were reflected in severe blows to the RevPAR, standing at $6.67 as of February 2020 (-89.4% YoY change) and GOPPAR plunging into the negative realm with indicators at $-27.73 (-216.4% YoY change). However, according to Karen Liu, Senior Director, Head of Project Development Service at Alliance Hospitality, 2019 has already been a relatively disappointing year with average occupancy, ADR and RevPAR declining as compared to the previous year. Moreover, she also mentions that as many hotels were temporarily converted to quarantine centers, their occupancy reached 70% mark in mid-February, followed by a relative downturn in March, when the crisis started to subside.
Pipeline and developers’ options
Meanwhile, the supply side of market may have yet to play its own role in the situation. According to Lodging Econometrics, in 2019 China was estimated to account for a third of all the new hotel openings worldwide, driving a total of 1,038 properties (144,490 rooms) into the market with Chengdu leading the way, followed closely by Guangzhou, Shanghai and Wuhan. Among brands, Hilton seems to take the market by storm with 480 hotels in pipeline. IHG (369 properties), Jin Jiang Holdings (342), Marriott International (335) and Accor (208) do not intent to lag far behind.
Conditional on the success rate in the pandemic mitigation, it may be expected that some projects could be severely delayed, if not cancelled altogether. However, as Karen Liu notes, many of the mixed-use projects are financed by local governments to stimulate the economy, and thus, are likely to follow through. Investors and owners seem to concur: according to an STR survey, two thirds of them plan to proceed with their business activities as projected once the crisis is over. According to Karen Liu, the volume of transactions should also pick up in the coming 3 to 5 years.
Moving forward: forecast and market projections
While the rock bottom in the Chinese hotel performance may have passed, the economy is unlikely to bounce back to the pre-crisis levels as fast as some might hope. Besides the aforementioned oversupply, the demand side may be severely crippled for the time being as well. The slowdown in the manufacturing sector will impede business travel recovery, the denial of entry to foreigners (active as of March 29th to keep the imported COVID-19 cases under the belt) cuts off lucrative incoming business for hotels, and people are unlikely to start spending rapidly on discretionary travel activities once the restrictions are lifted.
However, there is also space for optimism. According to STR, as of March 25th, 87% of China’s hotels have reopened, and major tourist attractions started welcoming guests once again. Moreover, as Karen Liu notes, MICE has always been a demand driver in the country’s hotel industry, and its potential should not be underestimated this time around either. For instance, China’s huge Food and Drinks Fair has already been given a green light to hold a 400,000-visitors event in May.
When it comes to the forecasts, HVS entertains two main scenarios: an optimistic one with a 3.5 percentage points decline in the overall occupancy for 2020, and a pessimistic one featuring a minimum of 5.5 percentage points drop. Nevertheless, practically all the hotel investors and operators believe that the hotel market will fully recover by the end of the year. We shall sure hope their faith is well-placed.