Hoteliers should take this time to review business strategies and position themselves
The novel coronavirus (COVID-19) outbreak – now a pandemic - has hogged headlines for a considerable time as it continues to ripple across the globe. Over 100 countries and territories have now reported confirmed cases. As the number of cases continues to climb, governments around the world are scrambling to contain the outbreak.
Travel restrictions and fear – every bit a contagion by itself – have kept the tourists away. Events have been cancelled and MICE venues face significant down times. Make no mistake, the COVID-19 outbreak will inflict pain on the hospitality sector, but probably not amounting to a knock-out punch.
We expect hotel operators, particularly the established ones, to take it on the chin and come out fighting – just like they did after the severe acute respiratory syndrome (SARS) outbreak in 2003. Looking at the SARS episode then, hotels staged rapid recovery once the outbreak cleared.
In our view, a rebound in the hospitality industry in the second half of 2020 is imminent should the COVID-19 outbreak runs its course by June 2020. Of course, all bets are off if the outbreak becomes protracted and creates a massive economic tailspin. We are in unchartered territory from here on.
Lessons from SARS: Light at the end of the tunnel
The situation with the COVID-19 outbreak remains very fluid. Referencing what happened in 2003 during and post-SARS, we estimate the decline in the hotel occupancy rate this time may be of similar magnitude, with a potential for a steeper decline should the COVID-19 outbreak drag on or become more severe. In assessing the SARS experience, care should be taken because things are decidedly different now in 2020: COVID-19 seems to be more infectious and hence more widespread (than SARS); Singapore’s increasing reliance on China for tourism; and China’s growing economic clout on the world stage.
- SARS Period: Following the report of the first SARS case in Singapore in March 2003, the total international visitor arrivals dropped significantly by circa 63.6% month-on-month in April 2003. Corresponding to this, the hotel occupancy rate in Singapore declined significantly from circa 70.7% in March 2003 to circa 34.7% in April 2003 and to circa 34.4% in May 2003.
- Post-SARS Period: On 30 May 2003, Singapore was declared SARS-free. The total international visitor arrivals to Singapore rebounded strongly by circa 78.0% month-on-month in June 2003 and another increase of circa 70.9% month-on-month in July 2003. Corresponding to the increase in visitor arrivals, the hotel occupancy rate in Singapore recovered steadily month-on-month from 34.4% in May 2003 to peak at 79.0% in November 2003. In a similar vein, the hotel room average daily rate (ADR) and RevPAR recovered to pre-SARS levels in October 2003, five months after Singapore was declared SARS free by the World Health Organisation on 30 May 2003.
Source: Singapore Tourism Board
As Singapore and countries worldwide continue to roll out travel restrictions on inbound travellers and actively discourage their citizens from non-essential travel, we are already seeing people turning to staycation for breaks; with this set to potentially accelerate - particularly during the March school holidays. While domestic tourism is unlikely to fully mitigate the sharp fall in international tourist arrivals, it will go some way to cushion the drop in business in the short-term, providing much needed breathing room to the sector.
Meanwhile, the MICE industry may recover during the latter part of the year as some events have been rescheduled to April and beyond. However, given the fixed capacity of MICE venues in Singapore - which have already been booked for events in the second half of 2020 - it is not feasible to accommodate all the rescheduled events. Having said that, any recovery would hinge on whether the outbreak can be contained and mitigated.
"We expect hotel operators, particularly the established ones, to take it on the chin and come out fighting – just like they did after the severe acute respiratory syndrome (SARS) outbreak in 2003."
Irrespective of the near-term challenges, we think long term prospects are still bright as the fundamental growth drivers for the Singapore hotel and tourism sector remain largely intact.
Recommendations: Positioning for the rebound
We believe hoteliers should take this time to review their business strategies and position themselves for the eventual upturn when the COVID-19 outbreak blows over. Here, we outline a few areas that could be of focus:
- Room rates – We do not encourage hotels to drop the room rates as this is unlikely to drive occupancies, given the travel curbs that are currently in place, and it could also take much longer to recover these discounts once offered.
- Diversifying source markets – Hotels should consider diversifying their source markets for hotel guests and establish a wider, more balanced, and sustainable streams of revenue.
- Manpower – Rather than cutting headcount, hotels should tap the Stabilisation and Support Package introduced by the Singapore Government to reskill and upskill their employees so as to better position the hotels for the future growth. This is especially critical given that the hospitality industry is labour-intensive.
- Asset enhancement – Hotels should consider refurbishment works - especially those that have been deferred previously due to the strong demand for hotel accommodation in the recent years.
- Operational review – To review or streamline operations for higher operational and cost effectiveness and efficiency (e.g. via automation, digitalisation and etc.).
- Marketing – Having more targeted marketing activities (such as metasearch, conversion of hot leads, flexibility on cancellation fees, and etc.) that focus on capturing existing demand in this challenging time, as oppose to a branding campaign for instance.
"We think long term prospects are still bright as the fundamental growth drivers for the Singapore hotel and tourism sector remain largely intact."
Find out more about the impact of the COVID-19 outbreak on the Singapore real estate sector here.
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