The overall picture emerging from the Hogg Robinson Group (HRG) 2009 Hotel Survey shows room rates falling by between 3-4% on average between 2008 and 2009, a graphic indication of the worst year for the global economy since 1946. World GDP fell in 2009 for the first time since demilitarization after the Second World War. However, the survey also illustrates the different pace of recovery across economies and highlights long term global economic trends that have been accelerated by the global recession - with the economic ‘balance of power’ shifting from West to East.
The Asia Pacific hotel market suffered a turbulent 2009 due to the global economic downturn, according to the annual hotel survey. Across the world, all regions reported falls in average room rates in local currency terms, with double digit falls seen in Singapore, Hong Kong and Dubai. The survey also reflects a challenging year for the hotel market, a common theme throughout the business travel industry.
Signs of increasing occupancy are a promising indicator as the effects of the recession begin to ease off in certain markets. Corporates should look to renegotiate rates and consolidate hotel programmes to reap benefits from these unusual trading conditions.
Top 10 Most Expensive Cities Worldwide: 2009 v 2008
Despite having the highest average rates globally, all the cities appearing in the top 10 saw a backward movement in rates when measured in local currency. Clearly the weakness of the UK Pound against many foreign currencies has had a strong effect on the prices paid by the UK corporate traveller.
Moscow retained its position as the city with the highest average room rate for the fifth consecutive year - reflecting its maturity as a business destination. Nevertheless, Moscow’s average room rate has declined because of a fall in demand from within the banking and finance sectors and an increase in supply from new openings in recent years.
Abu Dhabi is the second most expensive city surveyed, having moved into the top 10 at fifth position in 2008, emphasising the lack of supply there. In neighbouring Dubai, where supply outstrips demand, the rates continued to drop in 2009 taking it out of the top 10 into 16th position.
Mumbai, which was ranked fourth in 2008, fell dramatically out of the top 10 this year to 27th. Its rapid decline can be attributed to the terrorist attacks in November 2008.
Key Global Focus Cities: 2009 vs. 2008
Major Asian business destinations like Singapore, Hong Kong and Dubai fared poorly in 2009, recording double digit falls in average room rates in local currency terms compared to 2008.
Dubai saw high quarterly fluctuations in rates, evidence of the country’s current over supply of hotels rooms.
Global Focus Cities: Quarterly Average Room Rate Movement: January - December 2009
HRG’s data shows that Hong Kong was the only one out of six key global cities surveyed which failed to achieve average room rate growth in the final quarter of 2009. There were other cities in the survey that appeared to show signs of recovery or in some cases an increase, in the final quarter. However, any comparison with the final quarter of 2008 must be viewed with caution as there was considerable weakness in the last quarter that year when rates fell dramatically.
New York’s success in the fourth quarter was not so much down to exchange rates, as they were relatively stable at that point, but more likely to be from increased demand after a weak third quarter and possible resurgence in the banking and finance sector at that time.
Average Room Rates by Region: 2008 v 2009
When measured in GBP, HRG’s data shows a mixed picture for the health of the hotel market in these global regions. Despite the global nature of the economic downturn, the Middle East and West Asia (MEWA), Africa and Americas reported average rate increases in 2009 from 2008, although year on year exchange rate fluctuations need to be taken into consideration.
The Middle East and West Asia (MEWA) region was turbulent reacting to the banking and finance sector, but overall saw slight regional growth. Cities in the region that saw average rate increases included Abu Dhabi (17%), Manama (11%), Riyadh (11%), Oman (33.7%) and Qatar (31.1%). The limited supply of hotels - primarily dominating the top end of the market - combined with high demand and upgrades of existing hotels in the region have helped to stabilise the prices.
The highest regional growth (11%) was in Africa, as it continued to be the target of investment from multinational organisations engaged in sectors such as oil and gas, banking and finance as well as telecoms. Strong performances were seen in the likes of Cairo and Johannesburg.
Quarterly Average Room Rates by Region: January - December 2009
There were significant fluctuations through the year in the regions, particularly in the Middle East where average rates fell significantly during the first three quarters, only to grow by over 30% in the final quarter.
The UK remained relatively stable across the year with quarters three and four virtually flat.
Conversely, quarterly rate movements in Europe were more stable despite the Pound weakening against the Euro, again suggesting a slowdown in real terms in certain European cities.
Global Hotel Star Ratings - 2007 - 2009
Hotels battled to maintain their share of the corporate market as clients downgraded star ratings in response to the economic climate. The average rates have decreased by approximately 5% in the 3 and 4-star markets as a result. The budget sector, with its fixed pricing strategy, managed to stay stable with 2008, increasingly however it felt the competition from the 3 and 4-star hotels.
Budget hotels have been squeezed due to an inability to respond more rapidly and at short notice in terms of flexible pricing to offer more competitive rates to suit market needs. Corporates are also coming to the realisation that in certain cities budget hotels are more expensive than their three star rivals. In a similar fashion to budget airline pricing, it is not always straightforward to get the low rates advertised.
Continuing the findings from HRG’s six month survey, the five star sector fared surprisingly well in 2009, experiencing a relatively low average rate decline of 3.5%, suggesting five star hoteliers are holding out for rates at the expense of lower occupancy levels. This sector has also remained somewhat stable in the MEWA and AsPac regions, where the properties are prevalent and increasing.
“Previously hotels could deny bookers access to corporate rates in favour of more lucrative options. In 2009, the playing field levelled and this trend reversed as occupancy levels decreased and corporates gained greater access to negotiated rates. Hoteliers have tried to maintain rates and therefore corporate travellers have increasingly been able to secure value-added services as part of their negotiated rates such as internet access, parking, and breakfast,” said Margaret Bowler, Director Global Hotel Relations at HRG. “Many of our clients are focussing on the opportunity to save money that their hotel policy presents. Corporates have always seen hotels as second to air. In the difficult trading conditions in 2009 they realised that hotels hold the potential for significant savings in their travel programmes so the role of travel management firms such as HRG has become more important than ever to guide clients through the market.”
Douglas McWilliams, Chief Executive of cebr (the Centre for Economics and Business Research ltd.) added, “We have just been through deepest recession since the 1930s and the recovery remains at a relatively early stage. The latest Hogg Robinson Group hotel survey vividly illustrates the effect of the downturn in demand on the hotel market. But it also shows signs of recovery across the globe, particularly in dynamic emerging economies. In the United Kingdom, 2009 was a tough year but the weak pound offers hope for the UK economy in 2010, as illustrated by the London market faring better than other UK cities. Looking ahead, we expect the recovery to continue in 2010 but this will not be without challenges as the unprecedented policy stimulus across the globe is gradually withdrawn.”
HRG’s full year survey is based on a combination of industry intelligence, actual room nights booked and rates paid by its UK clients during January to December 2009 compared to the same period in 2008.
The GBP exchange rate is based on the average for the period 1 January to 31 December 2009 versus the average during the same period in 2008. VAT - Value added tax (VAT) in the UK increased from 15% to 17.5% from 1st January 2010. However the effect on UK average rates is likely to be minimal as the rate changes are more down to market conditions.
The resource-based economies of Middle East and Africa, which have shown strong recoveries from the bottom of the commodity cycle in early 2009, have also seen the strongest performance in average room rate growth in 2009. However, fast development is also a ‘double edged sword’ in relation to hotel room rates. Both India and China bucked the global trend by posting GDP growth of around 6% and 9% respectively in 2009 - despite this room rates fell over the year. This reflects the substantial increase in supply over the year - a consequence of such strong economic growth.
Weak economic performance in Europe was mirrored by a weak performance in Eastern Europe in particular. The continued strength of the Euro, despite a relatively weak economy, has also dented prospects across the European Union.
Most economic indicators across the globe point to growth in Q4 2009. These signs of recovery are mirrored in the HRG Hotel Survey with all global regions posting growth or a flat performance. Going forward, we expect a ‘two speed’ recovery with relatively sluggish growth in Europe and the US, whilst much of the developing world will power ahead.
Margaret Bowler of HRG said, “The turbulence in the hotel sector in 2009 was evident across the year as the global economy struggled with the effects of recession and ongoing turmoil in the financial markets. The fluctuating exchange rate has had a significant impact on the UK corporate traveller and there has been a noticeable shift in business practices. Back in 2008 we saw average hotel rates rising across the board but by our 2009 mid-year survey, rates were already noticeably levelling off or falling so in many ways the full year results for 2009 were to be expected. In some parts of the world demand still outweighs supply and we can see pockets of growth as some regions respond to the recession better than others.
“Our clients are reviewing and consolidating their programmes to secure lower rates because there is more availability. Whist occupancy levels remain comparatively low, contracted corporate rates can be viewed as the benchmark and the highest that should be paid. Corporates should be aware that on many occasions best available rates on the day have proven to be lower than a clients’ negotiated rate. HRG has the ability to access exclusive distressed rates not available through other booking channels.”
Margaret Bowler continues, “With a greater focus now on long-term stable relationships, hotels are opening up availability on corporate rates once more. They are adjusting pricing structures to meet market expectations and to make rates appear more attractive. The majority of hotels have adopted sensible long-term pricing strategies to offer value rather than significant price cuts to customers in order to maintain their share of the market. This is a more sustainable approach in order to avoid rate cuts and price wars, which offer no long-term competitive advantage and often dilute their corporate business.
“Those willing to guarantee booking volumes, with fewer preferred suppliers, are likely to be able to negotiate lower pricing and value- added items within their rates such as food and beverage discounts, free wi-fi access and reduced parking charges - items that represent a “real” cost in terms of total cost of stay.
“Fenced rates remain now, and for the foreseeable future, widely available. They may contain hidden costs, most often through requiring advance purchase and being non refundable in the event of cancellation - however these can still deliver cost savings when travel on a given date is essential.”
Margaret Bowler concludes: “The patterns in this hotel survey would suggest that the industry has some way to go before rates stabilise in 2010. Whilst indications are that rates will remain flat in most markets globally, there are signs of increasing occupancy as the effects of the recession begin to ease off in certain markets. Corporates should continue to look to renegotiate rates and consolidate hotel programmes. Those who have yet to get back to the volume levels they once had have the opportunity to grow their policy compliance, either through the auditing of bookings prior to arrival or through post-travel reporting. HRG advises clients to regularly benchmark and consolidate their hotel programme to reap benefits from these unusual trading conditions.”