Aided by easier and cheaper travel, global tourism has experienced two decades of almost uninterrupted growth. According to the World Bank, the number of international departures more than doubled between 1997 and 2017, from 687m to 1.57bn per annum. With the global middle class estimated by US-based think tank Brookings Institution to expand by as many as 160m people per year until 2021, it is perhaps unsurprising that almost half of the growth in tourist numbers was accounted for by departures from low- and middle-income countries, which increased from 121m in 1997 to 564m in 2017. Significant growth was also recorded in the number of arrivals to low- and middle-income countries, increasing from 163m to 515m over the 20-year period, underlining the rapid development of their tourism industries.
With more people on the move than ever before, there is a clear need for sufficient tourist infrastructure. Notwithstanding the rise in accommodation-sharing platforms like Airbnb, most travellers still choose to stay in hotels. Speaking at a November 2017 conference in Florida, Douglas Quinby, senior analyst at Phocuswright, an international travel market research firm, announced that the global travel industry reached $1.6trn in gross bookings in 2017. Additionally, STR Global, an international hotel market data and benchmarking firm, reported in 2018 that the number of hotel rooms globally had risen by 17.7% since 2008 to 17m in 2018. These rooms were provided across more than 184,000 hotels, a rise of 8.4% from 2008 levels. The fact that the rate of expansion in the number of rooms is more than double the rate of expansion of hotels indicates that the average hotel size has been growing.
According to the “Hotel Investment Outlook 2019” report by global real estate consultancy JLL, in 2018 cross-border hotel investment accounted for $9.6bn, some 14% of the global hotel investment total of $67.7bn. Europe received the largest amount of cross-border investment that year, with a majority of the $4.9bn coming from Asia and the Middle East. North America received the second-highest amount of investment, with $3.1bn. Cross-border investment is expected to increase in 2019, driven in part by rising inflows to Europe, North America directing its attention towards Asian markets, and investors looking to expand their asset portfolios and invest outside of primary markets.
In addition to the traditional approach of direct hotel acquisitions, new channels for investors to gain exposure to the hospitality sector have become more prevalent in recent years. There have been notable increases in both debt financing and merger and acquisition activity. This has opened up the sector to more non-traditional players, such as insurance companies, pension funds and private equity firms. These actors have been attracted by the relatively high yields on offer, given the low interest rate environment that prevailed for much of the past decade. Such generalist investors accounted for approximately 70% of total hotel sector investment between 2014 and 2018, and JLL expects this figure to continue trending upwards.
Middle East & Africa
According to JLL, hotel room construction across the Middle East and Africa picked up in 2018, with the number of rooms under construction as a proportion of existing supply increasing by about 2% on the previous year. This positive development can be attributed to notable economic growth in the region and the rise of the middle class, leading to increased demand for travel. Sub-Saharan Africa has experienced rapid expansion in hotel room supply, which has heightened competitive pressures in the region’s hospitality sector. JLL forecasts hotel investment in sub-Saharan Africa will hit $1.7bn in 2019, with investment volume expected to reach $400m.
In North Africa, Morocco has been leading the charge both in terms of visitor numbers – with more than 12m in 2018, up 8% on the previous year – and hotel infrastructure. In Marrakech, a number of new high-end resorts and hotels are offering luxury accommodation, encouraging visitors to prolong their stay. M Avenue, for example, is a new $100m multi-use development project close to both the airport and the Palais de Congrès, which will include a 168-room hotel run by Portuguese company Pestana as well as 88 private residences operated by the Four Seasons. The project is slated to open at the end of 2019. Other new hotels in the city that are planned or under construction include global brands such as Ritz-Carlton and Park Hyatt.
The Asia-Pacific region (excluding mainland China) experienced the second-highest rate of growth in hotel room construction in 2018 after the Middle East and Africa. Overall hotel transactions in the region are predicted to expand by 15% in 2019, likely to be driven by an increased investor interest in Japan with the 2019 Rugby World Cup’s final in November and the 2020 Summer Olympic Games in Tokyo drawing nearer.
Vietnam is another country where demand for, and supply of, new hotel rooms seems to be continuing at a rapid pace. The country has experienced a surge in overseas tourists since 2010, and in 2018 it clocked a record 15.5m foreign tourist arrivals. Between 2010 and 2017 the number of hotels operated by international chains has more than doubled, from 30 to 79, with more in the pipeline. Global real estate service provider Savills estimates that an additional 30,000 rooms will be delivered by the end of 2019. Despite surging visitor numbers, however, there are concerns that the construction boom could generate fierce competitive pressures in the years ahead.
Concerns have also been raised about oversupply in the hotel market in Thailand, which has emerged as the most popular international tourist destination in South-east Asia, welcoming more than 38m overseas visitors in 2018. This problem has been compounded by the proliferation of unlicensed and unregulated accommodation; in 2016 the National Statistics Office estimated that there were 500,000 rooms offered in illegal hotels and unregulated residences, compared to 457,000 official hotel rooms.
Mexico has the most developed hospitality sector in Latin America, boasting 392,000 hotel rooms at the end of 2017 – ahead of Brazil’s 257,000 and Argentina’s 60,000. Chile, Colombia and Peru are also increasingly on the radar of international hotel investors. Carlos Trujillo, executive president of the Mexican Association of Tourism Developers, told OBG that the range of high-quality products and services in the industry is limited by infrastructure constraints, echoing challenges seen in less-developed hospitality sectors across Latin America. “The Mexico Tourism Board is working on bringing more high-purchasing-power tourists or premium tourism to the country, but infrastructure limitations need to be tackled and overcome to provide the resources that high-end tourism demands,” Trujillo said.
Disruptive Business Models
Hotels have faced growing competition from accommodation-sharing technology platforms like Airbnb as well as more established alternatives, such as timeshares. Research by JLL suggests that the number of accommodation-sharing listings tends to be higher in cities that also have high hotel occupancy rates. An increasing number of cities are imposing restrictions on accommodation-sharing, but in cities where such platforms have already gained a foothold, there has not been a noticeable impact on hotel performance, according to data from JLL. This suggests that hotels and shared accommodation may not necessarily compete for the same market.
Technology has also brought about important gains in the industry. Online booking platforms such as Expedia and Hotels.com allow hoteliers to reach a wider pool of potential customers and boost occupancy by offering discounted rates. Oyo is a pertinent emerging market example: since its establishment in India in 2013 it has developed into South Asia’s largest hotel chain by number of rooms offered. Oyo is a web-based platform that brings together a large number of small, independent budget hotels under a single brand with common standards. Hotels joining the franchise can then access some of the economies of scale enjoyed by the larger hotel chains. On the whole, hotels have been able to offer more attractive rates, and double or even triple their occupancy after partnering with Oyo. By December 2018 Oyo had a network of over 330,000 rooms in 500 cities, having established a large footprint in India and China, while also expanding to Indonesia, Malaysia, Nepal, the UAE and the UK.
Globally, the hospitality sector tends to be cyclical, driven by both macroeconomic trends and its own internal dynamic – strong demand leads to high occupancy and positive financial performance, which in turn triggers a supply response leading to an increase in available rooms. This puts occupancy rates and financial performance under pressure, dampening investment and causing the cycle to repeat. The last major downturn was in 2009-10, in the aftermath of the global financial crisis. In 2018 global occupancy rates rose to around 66% and hotel room construction accelerated, suggesting that the sector is currently in the latter stages of the cycle.
Despite this, JLL forecasts that global hotel investment will remain steady in 2019 at $67.2bn. With the global economy facing headwinds in 2019-20, there could be knock-on effects on business travel and disposable income, feeding through to weaker performance in the hospitality sector. This may cloud the hotel investment picture over the medium term, particularly in markets that have already become saturated. Global trade disputes, higher interest rates and a slowdown in the pivotal Chinese economy are three factors that could curtail transaction volumes in the future.
Reasons for optimism remain, however. The UN World Tourism Organisation forecasts the number of international tourist arrivals will reach 1.8bn by 2030, which would constitute an average growth rate of 3.3% per year between 2010 and 2030. Rising income levels in emerging and developing economies, coupled with further expansion of the global middle class, are likely to underpin longer-term demand for hotel rooms globally, notwithstanding any near-term cyclical headwinds.