AN OVERVIEW OF THE HOTEL INDUSTRY IN SINGAPORE

Abstract

The story of Singapore's hotel trade seems to be one of boom alternating with doom. While tourist arrivals soared, the number of rooms remained stationary thus driving occupancy rates and room rates upwards. The result was a rush of new construction that, unfortunately, outstripped demand so that occupancy rates were again at a record low of 60 to 70 per cent. Potential new rooms were not materialised and once again the supply of rooms lagged behind demand and the cycle repeats itself!

The adverse disparity between the two growth rates of demand and supply of hotel rooms greatly affects an investor's decision on a hotel project. Hence, the question is really - what knowledge should a developer have before he considers a hotel investment?

The aim of this paper goes beyond providing an overview of the Tourism and Hotel industry in Singapore. Developers usually base their decisions on the various forecasting models provided by STPB. However, forecasting is at best a practised art rather than a science. Developers should not be over reliant on forecasting (demand) results because the room rates depend on both demand for and supply of hotel rooms. Hence, supply-side arguments should also be taken into consideration when evaluating a hotel project.

The time lapse between demand and supply is inevitable due to the fact that hotel projects take a few years to complete. Therefore, there is a need to modify the traditional investment theory for the hotel industry. Should investors, because of bullish figures, rush in to make sure that none of the expected bumper crop of tourists would escape their hospitality net? Or should investors wait for more information before making a decision? Is there a "value of waiting" that is large enough to induce investors to postpone their investment plans to a later stage?

Lastly, the future prospects of the Hotel industry and the application of the option value will be assessed. It is hoped that developers can gain better insights into the nature of the industry before making any decisions.