Taiwan’s Hotels Grapple with Oversupply

Although market demand is flat, additional new hotels continue to be constructed.

A thousand new hotel rooms have been added in Taipei during 2018 – and many more new hotel projects are in the pipeline both in the capital city and around the island. Unfortunately, they are coming onto the market just as the growth rate in international tourism is softening due to the decline in visitors from China.

After a steep increase in recent years from 3.8 million international tourist arrivals in 2008 to 10.7 million last year, last year’s growth rate slowed to just 0.46%. The number of Chinese visitors fell from a peak of over 4 million in 2015 to 2.7 million due to Beijing’s restrictions on visits to Taiwan by tour groups.

Japanese tourists doing duty-free shop-ping. Photo: Don Shapiro

The situation so far this year has showed just modest improvement. In the first three quarters of the year, the number of international visitors rose by a somewhat healthier 3.6%, and the volume of Chinese tourists showed a positive growth rate of a slim 1.87%. With cross-Strait political relations in a deep freeze, Chinese group tours can’t be expected to come back in droves anytime soon.

Chinese tourists, primarily independent travelers, account for 15% of business at Shangri-La’s Far Eastern Plaza in Taipei. That five-star property has never catered to Chinese group tours, but it is not immune to fluctuations in the tourism market that they have caused. “Weakening demand affects the market as a whole, regardless of where it comes from,” says Randy Zupanski, general manager of the Far Eastern Plaza and a 40-year veteran of the hospitality industry. “It drags down room rates.”

The growing discrepancy between hotel-room supply and demand is largely a function of the lengthy time-frame needed for a hotel project to go through planning and construction. Harvey Thompson, general manager of the W Taipei, says that many owners and operators “committed themselves when numbers were growing strongly” in the period between 2012 and 2015. “They still have to open the hotels, even though the market doesn’t look as promising anymore.”

That’s a key reason, but not the only one. “Some property developers have their eyes on capital gains,” says Chen Ming-ming, founder and chief executive officer of travel-activities platform kkday. Given the low-interest rates of 1.5-1.6%, developers can obtain attractive lending terms from banks. In addition, some local hospitality management companies, like Cathay Hospitality and Fubon Hospitality, are part of large financial conglomerates that that own prime plots of land in downtown Taipei.

In the past, property developers might have built luxury apartments on that land. But Taipei has even more empty luxury apartments than it does hotel rooms. Hotels are a good option, Chen says, because even if the venture loses money, if it occupies a prime location the property value will steadily appreciate.

“A lot of owners are thinking, ‘I want to eventually sell the building for a big profit, and I can always convert the hotel into something else – office space or luxury residences –when the market recovers if I think it will make me more money,’” says C.K. Cheng, founder and chief executive officer of AsiaYo, an online booking platform for licensed vacation. “Some people are just trying to make a fast buck,” says Cheng, a former investment banker.

Building hotels as part of a real-estate speculation strategy might earn the developer a handsome profit, but dumping more supply onto an already crowded market won’t benefit the hotel industry. As occupancy rates fall, room rates will go down, hitting all the hotels’ bottom lines.

Still, new properties are continuing to open as if the Chinese tourism boom had never ended. In Jiaoxi, the Yilan County resort town known for its hot springs, four new properties – Maison de Chine Jiaosi, Hotel Valletta, Yamagata Kaku Hotel & Spa, and Kilin Jiaoxi – have opened in the past year. In September, Hilton – returning to the Taiwan market after a 14-year absence – opened a 400-room Hilton Taipei Sinban Hotel in the Banqiao District of New Taipei City.

In Taipei City, the 104-room Renaissance Shihlin, a brand in the Marriott portfolio, opened in August. In October, the Leofoo Group and Marriott launched the 465-room Courtyard by Marriott Taipei in the city’s Nangang District near the Nangang Exhibition Center, Nangang Software Park, and Neihu Technology Park. (At the same time, Leofoo has announced the closing at year-end of its 288-room Westin Taipei on Nanjing East Road due to unwillingness to accept a rent increase).

The Taipei Sky Tower, joining Taipei 101 in the city’s skyline, will house two different Hyatt hotels.

A second Courtyard by Marriott with 227 guest rooms – a project of Cathay Hospitality Management located at the corner of Minsheng and Jianguo Roads – is scheduled to open this month. And before the end of the year, local brand Caesar Park Hotels and Resorts plans to open a new property in the Neihu District.

Meanwhile, Hyatt announced in May that in 2021 it would open two hotels – a Park Hyatt and an Andaz – in the same building, the Taipei Sky Tower in the Xinyi District. Those projects will add to that neighborhood’s concentration of high-end hotels. The Taipei Sky Tower will be within walking distance of three existing five-star hotels – the Grand Hyatt, W, and Meridien.

Loyalty Lobby, a hospitality-industry news website, quoted one of the investors in Taipei Sky Tower as saying that Hyatt aims to tap demand for accommodations that are more interesting than a conventional hotel but more reliable than home sharing.

The W’s Thompson says that the entry of a Park Hyatt will be good for Taipei City’s brand. “Park Hyatt is a premium brand,” he says.  “Having it here shows that Taipei can be a destination for high-end travelers.” At the same time, Thompson says, the addition of 500 new rooms in the two Hyatt hotels will put pressure on the W and other properties nearby.

More sustainable development

Some hoteliers are taking a more cautious approach to expansion. Benjamin Liao, chairman of the Forte Hotel Group, which manages 10 properties in Taiwan, says that the company has no immediate plans to open new hotels. “We have always pursued an organic growth strategy,” he says. “We already have a good number of hotels and it’s very expensive to open new properties.”

Currently, hotel occupancy rates for the whole of Taiwan are about 61%, according to research by property-services firm CBRE. They are highest in Hsin-chu (73%), Taipei (71%), and Taoyuan (68%), which all benefit from steady business-traveler demand. In eastern Taiwan, which has been battered by the drop in Chinese visitors, occupancy rates are much lower – just 45% in Hualien and 49% in Taitung. In Chiayi in the south-west, just 39% of hotel rooms are filled.

Eastern Taiwan formerly benefited from Chinese tour groups’ 8-day, 7-night trips, says Joe Y. Chou, director general of the Taiwan Tourism Bureau. “The typical Chinese tour group would always visit both Hualien and Taitung,” he says. But with the sharp drop in Chinese arrivals, “many hotels in eastern Taiwan are changing their business models.”

In some cases, that means abandoning the hotel business. Ping Lee, head of research at CBRE Taiwan, says that the fall in Chinese tourism has caused some properties in eastern Taiwan that focused on Chinese tour groups to shut down. To be sure, eastern Taiwan attracts other tourists – especially domestic visitors – but there is no obvious replacement for the Chinese.

“Eastern Taiwan is lovely, but it’s remote – it’s not very accessible for the typical FIT [free independent traveler], says kkday’s Chen. He notes that Hong Kong is the only city outside of Taiwan with direct air links to Hualien. “So the growing tourism markets – South Korea, Southeast Asia – they usually just come to Taipei.”

The strong earthquake that struck Hualien County in February has also depressed tourism there, if only temporarily. When this writer visited Hualien in March, I had the beaches to myself. Locals told me that some people were scared to visit because of the earthquake, which left 17 dead and 285 injured.

In October, the Tourism Bureau announced it would offer NT$90 million in subsidies for lodgings and transportation to independent travelers in the final two months of the year to support tour-ism in eastern and southern Taiwan. Ranging from NT$1,000 to NT$1,500, the subsidies are available to independent travelers who visit Hualien, Taitung, parts of Yilan (not the hot-springs resorts), Kaohsiung, and Pingtung.

Some hotels in those areas are also offering big discounts to drum up business. Reportedly, the Chateau de Chine Hualien, Formosan Naruwan Hotel and Resort Taitung, and the Grand Hotel Kaohsiung are regularly offering discounts of up to 70% on certain rooms.

Meanwhile, the archipelago of Kinmen, governed by Taiwan but just off the coast of mainland China, has been an exception to the decline in Chinese tour-ism. In the first half of the year, 250,000 Chinese visited Kinmen, compared to 230,000 Taiwanese, making it the first time that visitors from China exceeded those from Taiwan.

Both geographic proximity and politics play a role in Kinmen’s attractiveness to Chinese tourists. The ruling Democratic Progressive Party (DPP) does not control the Kinmen local government and is not an influential force in local politics. Since the election of President Tsai Ing-wen in 2016, Beijing has sought to court local governments unsympathetic to the DPP.

Another relative bright spot is that Chinese FIT travel to Taiwan continues to be stable. Through September, more than 2 million Chinese tourists visited Taiwan, primarily independent travelers.

Taiwan Business TOPICS spoke to several Chinese FITs about their reasons for visiting Taiwan. Hattie Shi, a Shandong native who works in Shanghai at a private school, has visited Taiwan three times, including one trip all around the island. She says that she enjoys Taiwan’s mountain scenery and tasty, inexpensive food.

“It’s a beautiful place and I love all the different snacks,” she says. “I prefer to come in winter when the weather isn’t so hot.”

Li Chen, a Liaoning native based in Hong Kong, has been to Taiwan three times as well. Besides the food and friendly people, he cites the traditional Chinese culture as a draw. “It’s a kind of Chinese culture you don’t see elsewhere in Greater China – something older and more authentic,” he says.

In addition to Chinese FITs, the Southeast Asian tourist market is showing stable growth, attributed by industry analysts to a relaxation of visa policies and more direct air links between Taiwan and ASEAN destinations. About 1.2 million Southeast Asian tourists visited Taiwan in the first half of 2018, up 20% year-on-year. The Philippines (60%) and Vietnam (39%) posted the strongest growth, the Tourism Bureau says. This was the first full year in which visa waiver was in effect for Filipino travelers, and there has been discussion of extending the program to Vietnam and Indonesia.

Overall, however, hoteliers remain cautious about their 2019 forecasts. “The impact of all the new room supply in 2018 isn’t going to be fully felt until 2019, because many of the new properties opened late this year,” says Shangri-La’s Zupanski.

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