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 the US-based think tank Brookings Institution to be expanding by as many as 160m people per year, 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 advanced from 121m in 1997 to 564m in 2017. There was also significant growth in the number of arrivals to lowand middle-income countries, increasing from 163m to 515m over the 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. In 2018 global accountancy firm Deloitte projected growth of 5-6% in gross bookings, to reach an all-time high of $170bn. Additionally, STR Global, an international hotel market data and benchmarking firm, reported in 2018 that the number of hotel rooms globally had increased by 17.7% since 2008 to reach 17m in 2018. These rooms were provided across more than 184,000 hotels, an 8.4% increase on 2008 levels. The fact that the rate of increase in the number of rooms is more than double the rate of increase in hotels indicates that the average hotel size has been growing.
Cross-border hotel investment accounted for $10bn, some 15% of the global total ($62.5bn), in 2017. Of this, nearly 90% was accounted for by hotel investments in Europe ($4.5bn) and North America ($4.4bn), with South America and Asia (excluding mainland China) receiving about $800m each. Asian investors are expected to account for the largest proportion of hotel assets in the near term, even as the flow of outbound capital from China slows. In particular, South-east Asian investors are becoming increasingly important players in the international hotel market.
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. In its “Hotel Investment Outlook 2018” JLL noted that this has opened up the sector to more non-traditional players, such as insurance companies, pension funds and private equity firms. They have been attracted by the relatively high yields on offer, given the low interest rate environment that prevailed for the much of the past decade. Such generalist investors accounted for 71% of total hotel sector investment in 2017, up from 62% in 2014, a trend that JLL expects to continue as the asset class matures further.
Middle East & Africa
According to data from JLL, hotel room construction across the Middle East and Africa picked up in 2017, an acceleration second only to that seen in mainland China. 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 $1.7bn in hotel investment in sub-Saharan African in 2019, with investment sales expected to come in at $400m for the year.
In North Africa, Morocco has been leading the charge both in terms of visitor numbers – with an estimated 12.5m in 2018, up more than 10% on the previous year – and hotel infrastructure. In Marrakech, for example, 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 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. It is slated to open at the end of 2019. Other new hotels in the city are planned or under construction from global companies such as W Hotels, Ritz-Carlton and Park Hyatt.
JLL’s report points to a sharp divergence between hotel room construction trends in mainland China, which accelerated in 2017, and the rest of the Asia-Pacific region, which saw a deceleration, attributed to “emerging regions seeing a slowdown in new development”. However, Vietnam is one country where demand for, and supply of, new hotel rooms seems to be continuing at a rapid pace. With an estimated 15.5m foreign tourist arrivals in 2018, Vietnam has experienced a surge in overseas tourists since 2010. 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, there are concerns that the building boom could generate fierce competitive pressures in the years ahead.
Concerns have 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 35m overseas visitors in 2017. This problem has been compounded by the proliferation of unlicensed and unregulated accommodation; the National Statistics Office estimates that there are 457,000 official hotel rooms, with an additional 500,000 rooms offered in illegal hotels and unregulated residences.
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 Tourist Developers, told OBG that the 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 accommodation-sharing listings tend to be higher in cities which 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. 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. Typically, hotels have been able to offer more attractive rates, and double or even triple their occupancy after partnering with Oyo. By September 2018 Oyo boasted a network of roughly 211,000 rooms in 349 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 also accelerated, suggesting that the sector is currently in the latter stages of the cycle.
Despite this, global hotel investment in the first nine months of 2018 reached $43.3bn, down 5% on the same period in 2017. The slowdown can be seen across all regions with the exception of the Americas, which posted a 9.2% gain. With the global economy facing headwinds in the 2019-20 period, 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.
In the longer term, the UN World Tourism Organisation forecasts that the number of international tourist arrivals will reach 1.8bn by 2030, which would constitute average growth of 3.3% per year between 2010 and 2030. Continued growth in income levels in emerging and developing economies, coupled with further expansion of the global middle class, is likely to underpin longer-term demand for hotel rooms globally, notwithstanding any near-term cyclical headwinds.