The year 2003 is likely to be remembered in the history books for two major events: the second gulf war and the Severe Acute Respiratory Syndrome (SARS) epidemic. In Asia, the mysterious SARS epidemic has had the most staggering impact on people’s movement across the region. In North and South East Asia, where the virus had the most impact, visitor arrivals declined at unprecedented scale during the second quarter. As a result, demand for transient accommodation plunged, putting tremendous pressure on hotel cashflows.

Probably as impressive as the impact of SARS was the region’s ability to recover once the epidemic was contained. Visitor arrivals across the region improved during the third and fourth quarter of the year. Likewise, demand for hotel accommodations increased, with occupancy levels of many five-star hotels in the region for the month of December 2003 recovered to levels similar to December 2002.

The value of a hotel property is the present worth of its future economic and other benefits. In distressed times, knowledgeable hotel buyers and sellers, whilst concerned with cashflow in progress, will take into consideration future returns. Hence, the market value of a hotel during such times tends to fluctuate in line with the expected outlook of the market.

The HVI 2003 shows that on average five-star hotel values across the key markets in Asia declined by approximately 4%, compared to an increase of 3% in 2002. The highest decline was in Manila where hotel value on average fell 7% given the competitive environment and market uncertainties. On the other hand, average value of five-star hotels in Shanghai remains largely unchanged, supported by a strong hotel investment sentiment.

Five-Star International-Standard Hotel Values per Room 1998-03 (US$)
	1998	1999	% Change	2000	% Change	2001	% Change	2002	% Change	2003	% Change
Shanghai	202,000	177,000	-12%	196,000	11%	201,000	3%	219,000	9%	218,000	0%
Tokyo	633,000	683,000	8%	697,000	2%	665,000	-5%	683,000	3%	671,000	-2%
Taipei	173,000	182,000	5%	184,000	1%	170,000	-8%	165,000	-3%	160,000	-3%
Bangkok	150,000	154,000	3%	167,000	8%	173,000	4%	190,000	10%	184,000	-3%
Seoul	259,000	310,000	20%	326,000	5%	308,000	-6%	330,000	7%	317,000	-4%
Average	215,000	223,000	4%	240,000	8%	229,000	-5%	235,000	3%	225,000	-4%
Hong Kong	383,000	398,000	4%	477,000	20%	441,000	-8%	469,000	6%	445,000	-5%
Phuket	176,000	202,000	15%	220,000	9%	214,000	-3%	204,000	-5%	193,000	-5%
Kuala Lumpur	74,000	75,000	1%	92,000	23%	90,000	-2%	92,000	2%	87,000	-5%
Beijing	166,000	140,000	-16%	147,000	5%	151,000	3%	159,000	5%	150,000	-6%
Singapore	244,000	256,000	5%	281,000	10%	256,000	-9%	260,000	2%	245,000	-6%
Bali	135,000	141,000	4%	161,000	14%	156,000	-3%	133,000	-15%	125,000	-6%
Jakarta	70,000	70,000	0%	79,000	13%	74,000	-6%	65,000	-12%	61,000	-6%
Manila	127,000	116,000	-9%	97,000	-16%	84,000	-13%	81,000	-4%	75,000	-7%
Source: HVS International

Performance in 2003

Despite the war in Iraq, visitor arrivals across Asia were largely maintained in the first quarter of 2003. Except for Indonesia, where the bombing of a popular tourist restaurant in Bali in October 2002 significantly impacted the national tourism industry, tourism arrivals at most Asian markets were relatively stable in the first quarter. As a result, demands for five-star hotel accommodation in the same quarter were at healthy levels in most urban and resort destinations.

What looked like a promising year for most hotel markets in Asia came to an end in an unforeseeable way, when the first victim of an atypical pneumonia, the Severe Acute Respiratory Syndrome (SARS), was identified in Hong Kong in March 2003. The deadly nature of the disease, and its fast spreading to 30 countries around the world brought the World Health Organization (WHO) to issue travel warnings to most countries in the region. As a result, visitor arrivals across Asian countries declined by double-digit figures with many travel operators canceling tours to Asia, many scheduled international meetings, exhibitions and conventions either postponed or cancelled and executives from multinational corporations reluctant to travel to the region. At the peak of the crisis, Hong Kong-based Cathay Pacific, one of Asia's largest airlines in terms of passenger traffic, was almost grounded, whilst other major airlines traveling in the region were operating at significantly reduced capacities. Demand for accommodation at five-star hotels, typically relying on international customers, plummeted on all major segments: Leisure, Corporate and Meetings, Incentives, Convention and Exhibition (MICE). As a result, occupancy of many five-star hotels in Asia declined to below 40% in the second quarter of 2003.

Whilst the SARS epidemic resulted in unprecedented fallout in the travel industry across the region during the second quarter of 2003, Asian countries’ prompt response and efficient cooperation to eradicate the disease was remarkable. As a result of joint efforts in research and global measures to prevent the virus from spreading, the SARS epidemic was contained within months. By June 2003, the WHO had lifted its travel warnings to most countries. Regional travel agents were quick to package together attractive travel packages, thanks to highly discounted rates proposed by airlines and hotels, both in need of business after three months of slow activities. This had a positive impact on leisure-related travels. Similarly, although most meetings and conventions planned in 2003 had either been postponed or cancelled, business- related travels returned as executives were keen to catch up with lost business during the SARS epidemic. As a result, visitor arrivals throughout the region increased during the third and fourth quarter of 2003. By December 2003, visitor arrivals in many Asian markets were in line with December 2002. The nationality mix was however different, with regional feeder markets accounting for a higher proportion of total arrivals and intercontinental feeder markets such as Europe and North America a lesser proportion. Given leisure and business related travels recovering, demand for five-star hotels increased likewise. Occupancy levels of five-star hotels in most key markets across Asia were back to historic levels for December (although for the year-to-date, occupancy of most hotels was well below 2002 levels). However, as most properties offered discounted rates in order to attract demand, and given the increased level of regional demand which were typically lower paying, market-wide average room rates of five-star hotels declined between 10% and 20%.

Outlook for 2004

With isolated cases of SARS and the outbreak of the Avian influenza (bird flu) in early 2004, the outlook for the year remains uncertain. However, the Asian tourism markets have proven to be resilient. Given the region's ability to contain the SARS epidemic, visitor arrival figures are unlikely to fluctuate as sporadically and exceptionally as in 2003. On the other hand, Asian economies are expected to continue to recover, boosted by a stronger US economy and low interest rates. As such, we expect demand for five-star hotel accommodation in the region to recover to levels close to 2002. This should have a positive impact on hotel cashflows.