Myanmar: The next investment destination for global hotel chains?

On the back of the easing of sanctions, Myanmar is poised to witness an influx of foreign investors, especially from the West, competing to be the first to tap unique opportunities. Leisure travellers eager to experience the country for the first time will experience cultural enrichment and iconic attractions, supported by nearly 2,000 licensed tour guides nationwide who are fluent in English, as well as a good number of French and German speakers.
Plans to host the World Economic Forum in 2013, the SEA Games in the same year and the Asean Summit in 2014 will be important stepping stones for Myanmar to further enhance global awareness of its readiness to open up the country to foreign visitors.

The continued strength in international air arrivals, especially through Yangon Airport, bodes well for the hotel sector, but even stronger growth is anticipated. More arrivals by air, as opposed to overland tourists, will translate into demand from deeper-pocketed visitors for higher-quality hotel accommodation.

In the first quarter of this year, Myanmar saw a 30% year-on-year jump in Yangon Airport arrivals. This was before even more positive developments in the second quarter including the increased availability of kiosks selling kyat at an official rate, the easing of travel restrictions and the business visa on arrival programme.

With many more reforms on the agenda directly and indirectly drawing both business and leisure travellers into this newly opened country, it is reasonable for Myanmar officials to expect international arrivals this year to double from 2011 to 1.6 million.

As a result, investment in the hotel sector appears an attractive proposition, especially given the current supply constraint and sharp increases in room rates. Myanmar has a limited supply of hotel rooms that are considered suitable for tourists.

Fewer than half of the 8,053 hotel rooms in Yangon have facilities considered adequate for foreign visitors. Currently international arrivals through Yangon Airport average 1,500 a day. Should this number double next year as predicted, more than 2,000 additional hotel rooms would be required to accommodate visitors just for short two-day stays.

However, the capacity in Yangon is not growing fast enough. Before mid-June this year when a four-storey mid-range hotel was added, there had been virtually no new hotels in Yangon for more than a decade. As a result, the hotel occupancy rate in Yangon has soared from around 60% at the end of 2010 to 90% today. Even hotels in Thailand’s southern region, which is highly attractive to international tourists, would be thrilled to have 70% occupancy in the peak season.

Room rates that used to average about $60 per night for upscale hotels in Yangon before 2011 have now skyrocketed to about $200.

Myanmar is also welcoming foreign investment to help fill the missing supply, particularly four- and five-star accommodations more suitable for tourists. Nearly all of the 700 locally run hotels are rated three stars and lower, and have struggled to survive in the past due to high operating costs and low occupancy rates. This has had a major effect on maintenance standards, service quality and human resources development.

Limited capital has also resulted in locally owned hotels having, on average, only 30 rooms each. On the other hand, the 31 foreign-owned hotels now in operation, while accounting for just 4% of all hotels in Myanmar, each offer an average of 170 quality rooms and altogether make up 20% of total rooms. Eighty-five percent of these hotels have been open for at least 10 years.
Several initiatives by the government should entice additional foreign capital in the hotel sector, but why have the clearly attractive opportunities not translated into an instant influx of investment?

Apart from revising the foreign investment law to provide more tax incentives and allow 100% foreign ownership, Myanmar early this year began offering many land plots in prime locations in Yangon for investors to bid on for hotel development. First movers in this sector should gain a significant advantage in commanding higher prices before the next influx of hotels arrives.

There indeed has been interest shown by existing and new Singaporean and Thai hoteliers plus large global chains such as Marriott and Sofitel; however, no real foreign direct investment (FDI) has flowed in yet. The bulk of the $1.1 billion in FDI in this sector was made before the 2000s. The latest year in which that there was any FDI in this sector was 2009.

We see two challenges in Myanmar’s hotel sector. One is unclear and complex government regulations and the other an investment environment that is still very limited. On the government front, land ownership and profit repatriation policies are still unclear and changing from week to week.

Complex rules and regulations from the decades-old hotel law will also continue to create barriers for new entrants. The contractual requirement for build-operate-transfer (BOT) agreements with the government will be less appealing to some investors, as well.

Investors may also face limited access to cheap financing from their home countries given the high country risks involved in Myanmar and the nature of the hotel business, with huge up-front capital required and a long-term investment horizon.

High land lease costs, which have doubled over the past two years in key tourism cities such as Yangon and Mandalay, will further deter investors. The high risk of kyat appreciation will result in higher operating expenses and a lower-than-expected return on investment.
In addition, while local workers can be quickly trained for unskilled or semi-skilled positions, there is still a lack of infrastructure such as international schools and quality hospitals to attract middle- to senior hotel managers and their families to move to Myanmar.

If the government does not make swift reforms, the constraints on hotel supply may hurt the tourism sector in the near to medium term as leisure travellers will be more affected by the sharp rise in room rates than business visitors.

From the hoteliers’ point of view, new investment now is a high-risk, high-return decision. The well-established players in Myanmar, including Thai hoteliers, could take advantage to expand their business on the back of exclusive market knowledge, before the investment environment markedly improves and the competition becomes fiercer.

EIC, a unit of Siam Commercial Bank Public Company Limited, offers in-depth macroeconomic outlook and sectoral impact analyses. For more information, please visit www.scbeic.com or contact [email protected]

Sourced: bangkokpost