Taiwan Hotel Sector Faces Day of Reckoning

The RSL Resort in Suao bills itself as the only hotel in Taiwan with water from both cold and hot springs in guest rooms. (Photo: Matthew Fulco)

The boom of the last eight years is coming to an end as Chinese tourists decline and hotel oversupply grows more severe.

Former President Ma Ying-jeou sought closer relations with China as a way to expand Taiwan’s economy. While the results of the various initiatives undertaken by the Ma administration remain open to debate, in the hotel sector Ma’s China-first approach has borne fruit. His administration signed an agreement with Beijing in 2008 to permit Chinese tourists to visit Taiwan in tour groups and another in 2011 allowing them to visit Taiwan independently.

The ensuing deluge of Chinese visitors invigorated the sleepy tourism sector and spurred a construction boom that over the past eight years has added more than 800 new hotels to Taiwan and seen the renovation of an additional 1,500. Occupancy rates have increased considerably, boosting hotel profits, while average room rates have risen as well.

About 85% of the guests at RSL Cold & Hot Springs Resort are local, while 15% come from Japan, Korea, Hong Kong, and mainland China. (Photo: Matthew Fulco)

Furthermore, unprecedented competition caused established top-tier properties like the Grand Hyatt Taipei, Regent Taipei, and Shangri-La’s Far Eastern Plaza Taipei to invest millions of dollars in refurbishing. The renovations have improved the overall standard of five-star room supply and food and beverage (F&B) outlets in the nation’s capital.

In 2015 Taiwan attracted a record 10.44 million visitors, about 40% (4.3 million) of whom were Chinese. The Ma administration hailed those numbers as proof of the success of its tourism policy, noting that foreign arrivals have more than tripled from the 3.71 million yearly average prior to Ma taking office. In April, speaking to a delegation from the Monte Jade Science Association, Ma attributed the surge in Chinese tourists to “cross-Strait peace and liberalization” during his presidency.

At the same time, however, the focus on the China market has left Taiwan vulnerable to Beijing’s political machinations. When it became apparent in late 2015 that Tsai Ing-Wen of the pro-independence Democratic Progressive Party (DPP) would likely win the January presidential election, rumors began circulating that China would cut tourists to Taiwan by 95% from December 15 to January 15.

Tourist numbers did dip slightly during that period, but nowhere near 95%, and they recovered after the election ended. Political observers speculated that Beijing may have been testing Tsai Ing-wen’s resolve. Still, as Tsai took office, ominous signs began to emerge. From March 23 to April 5, applications for Chinese tour groups to visit Taiwan fell 30% and “free independent traveler (FIT)” applications declined 15%, according to Taiwan’s Tourism Bureau. Overall, group permit applications fell 23% in April and 18% in May.

In May, then-Vice Transportation Minister Wu Men-feng told the Legislative Yuan that the number of Chinese arrivals this year might decrease by 30% from 2015. Based on that estimate, experts say about 1.2 million fewer Chinese would travel to Taiwan in 2016 than in the previous year. According to Taiwan government data, overall Chinese tourist arrivals in May fell 15% year-on-year, while tour group visitors dropped nearly 32%. Chinese FITs, however, increased 12% in May.

In June, the Chinese-language United Evening News reported that Beijing has a multi-part plan to reduce Chinese tourist arrivals to Taiwan this year which could cause the total number of Chinese visitors to fall below the 2 million mark. In the first stage, which ran from March 20 through June 20, Beijing sought to reduce Chinese visitors to Taiwan by 50,000 monthly from the current quota of 150,000. That figure will be further reduced by 25,000 in July and another 25,000 in October, the report said.

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The luxurious RSL Cold & Hot Springs Resort in Suao, where rooms start at more than NT$8,000, has seen its business grow steadily in recent years. (Photo: Matthew Fulco)

In an interview with Taiwan Business TOPICS, Tsai Ming-ling, chief secretary of the Tourism Bureau, declined to specify the amount of decrease the government expects in Chinese tourist arrivals this year, saying only that “arrivals will fall.” Since many of the Chinese tourists in tour groups tend to be frugal spenders, the overall effect of the drop will be mitigated to some extent, she added.

Joseph Lin, Taiwan managing director of property-services firm CBRE, notes that Chinese tourism has been growing at a decreasing rate since last fall. “Now, the slowing effect is clear,” he says. “First quarter arrivals represent applications that had been approved previously. We’ll have a better idea of the extent of the slowdown after observing arrivals in the second and third quarter.”

Bulls and bears

Some hotels are already feeling the pinch from falling Chinese tourist arrivals. Achim v. Hake, general manager of the five-star Sherwood Taipei, told TOPICS that business at his facility this year through April was down 5% compared to the same period a year ago. “China is not our top market, but we still feel the slowdown at the Sherwood, especially the weekend market,” he says. “The weak domestic economy also is affecting business at our food and beverage outlets. People are eating out a little bit less. They are keeping a lower profile.”

At Le Meridien Taipei, a five-star hotel near Taipei 101 where Chinese guests are the top market segment at 20-21% (but just ahead of domestic guests at 19%), hotel manager Paul Fu says business has only been affected slightly. “We’re near all of the shopping destinations, so we attract a lot of Chinese FITs. We’re seeing a small impact on Chinese guest numbers because visa processing is taking two weeks longer than before,” he says.

The Meridien features nautical decor. (Photo: Matthew Fulco)
The Meridien features nautical decor. (Photo: Matthew Fulco)

Fu notes that hotels dependent on Chinese tour groups – especially those outside of Taipei City – are faring worse. “We are hearing rumors that they’re seeing business fall by as much as 30 to 50%,” he says. “If Chinese tourist arrivals continue to fall, it’s likely we are going to see a number of hotels put up for sale this year.”

Yet some newer entrants to the Taiwan hotel market are undeterred by the fall in Chinese tourist numbers and plan to expand aggressively. According to a March report in the English-language Taipei Times, Fubon Hospitality Management Co., an affiliate of Fubon Financial Holding Co., has developed its own hotel brand, “Folio Hotel,” which will launch its first property in Taipei’s DaAn District this year.

Fubon Hospitality Management seeks to “revitalize idle assets” held by its affiliate Fubon Insurance Co., which has won contracts for urban renewal and public leasehold projects, the report noted. Fubon has a number of projects in the pipeline throughout Taipei City. It plans to build a hot-springs hotel in Taipei’s Beitou District and a five-star hotel on Nanjing East Road, and to jointly develop a luxury hotel with a global partner in the Xinyi District.

Meanwhile, My Humble House Hospitality Management Co., which owns Le Meridien and the Sheraton Grande Taipei, will launch two luxury hotels in the next two years, the Taipei Times reported in April. Last year the company recorded NT$303 million (US$9.4 million) in net income, a year-on-year increase of 6.7%, fueled by strong revenue from its F&B outlets. 

My Humble House will jointly develop a resort hotel in Yilan County with Transglobe Life Insurance Co. and partner with Continental Development Corp. on a mixed-use boutique hotel in central Taipei. The resort, to be located in Jiaoxi Township, could be operational in the third quarter of 2017, while the Taipei boutique hotel may launch in 2018, the report noted.

A spokesperson for My Humble House declined a request by TOPICS for comment on the expansion plans, citing uncertainty about details concerning the launches of the new properties.

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The Grand Mayfull Taipei is exclusively targeting the premium market.  (Photo: Matthew Fulco)

The insistence of some developers to continue building amid the current supply glut can best be understood in the context of Taiwan’s “beehive” (yi wo feng) business culture, says Mark Stocker, managing director of Taipei-based brand consultancy DDG, which worked with many hotels during the recent industry boom. “Yi wo feng is jumping on the bandwagon, rushing to copy a successful business model,” he says, noting the number of lookalike “boutique” or “design” hotels that have sprung up throughout Taiwan. “The atmosphere is similar to thousands of bees swarming around a hive.”

Stocker says that DDG decided to stop working on hotel projects from the beginning of this year despite strong interest from hoteliers. “The likelihood of saturation hitting the hotel market in the next one to two years (the ‘concept to construction’ period for a hotel) is high, and that poses a risk for DDG,” he notes. “Should the market cool, we might never see the end to a project, and as a result risk not being paid for work completed to that date.”

Figuring out Plan B

Given the tougher market conditions than they have faced in more than 15 years, hoteliers are scrambling for a solution. Niche luxury properties are better positioned to weather headwinds. For instance, the Grand Mayfull Taipei in Dazhi, an affiliate of the major Taiwanese foods distributor Mayfull Foods Corp., is exclusively targeting the premium market with rooms starting from nearly NT$11,000 and all high-end dining outlets. Company executives expect the hotel’s food and beverage outlets to drive 70% of sales.

The Grand Mayfull, which launched in April, is the only hotel in Taipei to feature dedicated gourmet Cantonese, Taiwanese, Japanese, and Western restaurants under one roof, notes Chairman Chen Chun-tung. “We intend to set the bar higher for Taiwanese hotels – to show that domestic hotels can be on par with international brands,” he says.

Meanwhile, the luxurious RSL Cold & Hot Springs Resort in Suao, where rooms start at more than NT$8,000, has seen its business grow steadily in recent years. As the only resort in Taiwan offering both cold and hot springs in guest rooms, it attracts mostly local bathing aficionados (85%). The remaining 15% of guests come from Japan, Korea, Hong Kong, and mainland China.

Business is down for hotels, such as the five-star Sherwood Taipei.
Business is down for hotels, such as the five-star Sherwood Taipei.

The Chinese guests constitute less than 1% overall. Still, resident manager Lawrence Lin sounded a note of caution in an interview with TOPICS. “It’s true Chinese tourists are not a key market for us, but if the Chinese don’t come to Taiwan, then the overall pie shrinks, and we’ll face more competition with other hotels for other tourist markets.”

In recent years, Taiwan has been successful attracting more tourists from across East Asia – not only mainland Chinese. Last year South Korea was Taiwan’s fastest-growing tourist market, expanding at a rate of almost 25% year-on-year to 658,757 arrivals. Thailand arrivals reached 124,409, an increase of about 19% percent over 2014. Hong Kong visitors grew to 1.5 million, up 10% from a year earlier.

In the first quarter of 2016, Hong Kong was Taiwan’s fastest-growing tourist market as arrivals totaled 372,773, an annual increase of 30.3%. “Hongkongers are attracted to Taiwan’s free society as well as the good value and relative low costs of accommodation and food compared to their home city,” says Lin of CBRE.

Both Hong Kong and South Korea benefit from reciprocal visa-waiver agreements with Taiwan. As Chinese tourist numbers fall, market observers say Taiwan should waive visa requirements for Southeast Asian and Indian visitors to boost arrivals. “I’m all for it,” Lin says. “There is a definite opportunity there given the large population, rising incomes, and proximity to Taiwan.”

 “Hongkongers are attracted to Taiwan’s free society as well as the good value and relative low costs of accommodation and food compared to their home city.”

In November 2015, the government simplified visa-application procedures for tourists from India, Indonesia, Thailand, Vietnam, and the Philippines in premium tour groups, but the results thus far have been unimpressive. From November to March, just 6,000 tourists participated in the program, comprising just 2% of the total visitors from those nations.

The new Tsai Ing-wen administration has signaled that it recognizes the value of visa-free entry in significantly boosting arrivals from India and Southeast Asia. James Huang, head of the new Southbound Policy Office coordinating commercial ties with ASEAN and India, told the Central News Agency on May 30 that his office will give near-term priority to promoting tourism and visa exemptions.

Le Meridien Taipei in the Xinyi district attracts a lot of independent Chinese travelers because of its nearness to prime shopping destinations. (Photo: Matthew Fulco)
Le Meridien Taipei in the Xinyi district attracts a lot of independent Chinese travelers because of its nearness to prime shopping destinations. (Photo: Matthew Fulco)

In the longer term, industry veterans urge Taiwan to make a greater effort to tap the burgeoning business traveler market in Asia. With its relatively low costs, strong infrastructure, strategic location, stunning scenery, and safe environment, the island at first glance would seem to be a natural choice for MICE (meetings, incentives, conferences, and exhibitions) planners.

Yet business-travel arrivals have grown anemically for the past 15 years. To some extent that trend dovetails with Taiwan’s economic slowdown, but it’s also considered to be the result of lackluster government promotion. “Business travelers look for opportunities,” says v. Hake of the Sherwood. “They want to know the benefits of a destination. So when Taiwan is constantly promoted overseas simply as a place for eating, the broader opportunities are not apparent.”

Given the strong competition Taiwan faces from MICE strongholds like Hong Kong, Singapore, and Seoul, the island should revamp its MICE promotion strategy, says the Meridien’s Fu. “If you’re a MICE planner, are you going to choose Taipei over Singapore, Hong Kong, or Seoul because Taipei has the best choice of cheap snacks at the night market?” he asks. “We have to change the way we present ourselves and tailor the message for a global business audience if we expect to win market share.”