Curbing Thailand's Hotel Pipeline Enthusiasm
The following is an article I wrote for the industry publication Hotel Management Asia – November Edition about the current state of overbuilding in the Thailand hotel market.
"Lately I can't help but feel like I'm back in the early or mid 90s when Asian hospitality came of age. During those years, Southeast Asia virtually burst at the seams in new built properties in primary, secondary, or tertiary hotel markets.
Bolstered by strong stock markets, appreciating currencies and the resulting boom in property markets, a whole new generation of high net worth individuals, budding entrepreneurs and strong balance sheet conglomerates enjoyed the home field advantage of access to deep levels of debt, connections to land and the political wherewithal to get developments through the cycle.
Sure there was the unexplained phenomenon in the field of dreams scenario which saw massive new projects in places like Surabaya, Jakarta or Kuala Lumpur. The welcome mat cried with joyous optimism "build it and they will come." Then came 1997, the Asian contagion, where many came and many more went.
If this all sounds familiar, welcome to 2010. Round two in the hotel version of the epic 'Thrilla in Manila' heavyweight fight between Mohammad Ali and Joe Frazier.
As Asia has led the world out of the 2008 global economic crises, for many the question is: Are the good times here to stay? Or, more aptly put, has the region learned from its mistakes during its first bout of being down on the mat for the count?
To a large degree we live in a completely different world than we did in the past. While the West led by the US compulsion to fund a Godzilla like war machine and overgrown man child of Government Inc. with Europe's growing EU footprint causing it to teeter, the East is at the gateway, anxiously poised to host its own superpowers of China and India.
Luckily for Thailand, despite a series of political hi-jinks which have been all too well documented in the media, the coat tails of Asia's roaring economic tigers have propelled them along some strange bedfellows.
The high watermark in the mid part of the last decade circa 2005 saw vast hospitality investment influxes of petro dollars in from the Middle East, private equity and institutional money from Europe and the US and more than a few hedge fund plays.
Then came sub prime, decreases in oil prices, a hedge fund Houdini act and plunging UK and Euro currencies.
Oddly enough Thailand saw a reverse trend with a skyrocketing domestic property market, massive liquidity for SET (Stock Exchange of Thailand) listed firms, a rubber band effect of recovery and even growth in high net worth individuals' personal holdings.
Further traction came as groupings of Thai Indian families who were entrenched in the textile industry were attracted to what they perceived to be long-term recurring property based investments. As their export models flattened with the US economy, they looked to what was considered at face value to be sustainable financial models of moderate income.
Today as we start what looks to be a new cycle, the effects of a sustained period of overbuilding primary in Bangkok is hitting the bottom line of both established properties and new ones which carry significant amounts of debt.
A trickle on effect is seeing supply hitting speed limits in resort destinations like Phuket, Koh Samui and Chiang Mai. The hospitality food chain is continuing to go further with more and more local entrepreneurs developing even more hotels in virtually every market in the country.
Thailand as it struggles to recover its tourism momentum is also faced with the likelihood that a mass model has to be adopted in order to tap into new demand and increase volumes. It's a tricky issue as growth for growth's sake can even be sustained for long periods of time.
The most profound effect of the domestication of hospitality investment is that business decisions on development are not based on sound financial logic. Prospective hotel owners want a property as a showpiece or legacy. Emotion and logic are severed and while in the end old racehorses get put out to pasture, what can you do with so many empty hotel rooms?
As other growing tourism markets like Singapore have continued to invest in mega demand generators like the integrated resort or Universal Studios, Thailand's investors have taken a narrow view of only filling beds without considering what will drive number to the destination. In retrospect, the country's largest success story was the Bangkok sky train which was intended to lessen traffic more than attract visitors.
So we arrive at the crux and have to start asking the question how much is enough and how much is too much. Curbing Thailand's enthusiasm for new hotels is not going to be easy but it is and must be on the Government's agenda. Greater incentives for redevelopment, zoning and tax incentives for upgrading of existing properties are a logical starting point.
While 1997 seems like a very long time ago, it remains a painful memory of just how wrong things can and often do go."