Bangkok Dispatch: 4 ways to make #deals coming out of the pandemic

#Thailand 's tourism industry is finally on its way of recovery – for now. After removing quarantine and other pre-arrival requirements, visitor arrival numbers have almost doubled in July over June 2022. This gives the market a much-needed respite after years of battering from the pandemic. Notably, Malaysia has generated the largest number of visitor arrivals year-to-date at close to 400,000 visitors, closely followed by India at around 350,000 visitors. Singapore, the UK and United States rounded out the top 5 at 150,000 to 175,000 visitors.

While the increase in travelers bodes well for a recovery, the big push will only come once China and Russia resume outbound travel and overall the numbers are still far off from pre-pandemic levels. Needless to say, getting to that level may take quite some time. Until then the market will be highly competitive. While rates can only go so low (and more operators realize discounting does not stimulate demand), a changed consumer behavior points towards further challenges for independent hotels. The current mix of source markets and travelers appear to be more brand conscious and members of loyalty programs. Advantage big chains with strong programs. The catch for hotel owners is that not all operators have the same presence in the market. Those with a strong or concentrated presence may not be able to drive as much loyalty demand to any single property. At the same time, OTAs continue to charge high commissions and at times of lower rates that hurts independent properties. Pre-COVID, those properties were able to generate their business from OTAs and tour operators. Coming out of the pandemic, this formula is broken until further notice, posing a major challenge to owners.

The larger independent hotels in the market are usually more than ten or even twenty years old and as classic full-service properties they pre-date the boutique era. They may be well-maintained, yet their appearance is dated and often in need of a refurb. After all, in a hyper-competitive market, location and product are critical, particularly when branding is not available, and the facilities are often one and the same. While finding a brand may be relatively easy, a good one will certainly require a degree of capital expenditures (CapEx).

At the same time, the owners of independent hotels who have made it through the pandemic may have seen their cash reserves reduced and uncertainties about the pace of recovery prevails. This presents a unique predicament in the flavor of “damned if you do and damned if you don’t”.

For these independent hotels, the options are four-fold:

1. Some owners have had enough and are willing to #exit their investment (branded and independent) altogether. The formula used is usually land value plus building value. This can create challenges since land values in core areas like Sukhumvit are already quite high, stretching yield-driven investors. Some properties may present repositioning opportunities where numbers can pencil, particularly if sold out of some form of distress. Sellers beware: Board of Investment (BOI) is required for most foreign buyers. For these and other reasons we have yet to see the hotel #transaction market gain traction in Bangkok.
2. A scenario unique to #Bangkok is a long #lease of the property. This is less appealing to hotel operators given the nature of their balance sheet and the need to capitalize leases under IAS 16. However, some investor groups (who bring in a brand) or owner-operators may find this compelling. In terms of structuring there is usually a sizeable down-payment coupled with the CapEx needs in Year 1 plus annual payments. Notably, long leases would be for the entire property as compared to the more industry-common operating leases (triple net) in other parts of the world. Often, owners would compare their revenues from pre-pandemic days to the future annual lease income.
3. Franchising could be an option, though the need for CapEx remains. While owners may enjoy the freedom that comes from operating a #franchise and added distribution power, cash is king and key money nowhere to be seen. Even if the funding issue can be addressed, some operator may already have a strong portfolio in the market. Usually they will not drive as much demand to a franchised property, given that they will be listed after the managed properties on the brand website.
4. The last option is the #hotelmanagementagreement . Here owners are keen to avoid spending too much on CapEx while asking for a significant key money contribution. Operators seeking to grow their footprint in the current environment, where many independent owners have realized that they need help on distribution, have a rare opportunity here. It will be interesting to watch which operators decide to dip into their coffers and offer more than just a token amount of key money.

AP Hospitality Advisors regularly advises owners and investors on their hotel real estate assets and projects. Should any of the four options above speak to you – on either side of the table – do get in touch with us: [email protected] . We would be happy to have a conversation about your specific requirements.