Financial Crisis Dampens Global Development Plans

<B> Financial Crisis Dampens Global Development Plans</B>

By Maria P. Vallejo

The Asian financial crisis, Russia's ruble devaluation and other international problems are extending their reach into Europe, Latin America and Asia. Skepticism about the financial stability and adequate supply to meet demand are the primary reasons why analysts are predicting a hotel development slowdown in international markets for the next few years.

The constant ring of announcements of new property openings and developments internationally is expected to dull until Japan straightens out its financial problems and Russia resolves its political instability.

Although there may be bargains on the three continents, analysts are recommending that hoteliers wait for the areas to begin recovering before investing time and money in an unstable marketplace.

"There are very good buys out there, but it's a time for very careful strategic acquisitions, rather than a time to rush in," said analyst Bjorn Hanson, global hospitality industry leader of PricewaterhouseCoopers, based in New York.

<B>Euro Slowdown </B>

Europe, once the primary target for international development, has fallen silent because of slower economic recovery rates and political uncertainty that abounds in the region. Although the Soviet bloc countries, such as Russia and Poland, and Germany, are showing a demand for hotel development, they are restrained by international laws, analysts said. Governmental approval is possible, but often too time consuming and difficult to pursue. Large amounts of equity are needed to invest in these regions.

Political changes are transforming some European regions, causing the countries to refocus their efforts on other businesses outside of hospitality. For instance, portions of West Germany indicated some growth, but more activity has been detected in the East. The seat of the national government is being moved from Bonn to Berlin this year, causing a political and corporate stir in the area. More long-haul business travelers are visiting Berlin because of new corporations opening in the area, said Stefan Simkovics, general manager of the Four Seasons Hotel in Berlin.

"A lot of activity has been shifted to development and economic growth in the East," said analyst Ted Mandigo, president of T.R. Mandigo in Chicago. "A lot of focus in Germany has been internal and a lot of cities in Europe have not rebounded as well as the United States and England."

Hoteliers contradict the analysts forecasts by continuing to make development plans throughout Europe. Four Seasons, based in Toronto, has six hotels currently open in Europe and 13 in the Asia/Pacific region. A hotel is slated to open in Dublin in late 1999, marking its first introduction to the Irish market. The company plans to reopen the Hotel George V in Paris in 1999 as a Four Seasons with 249 guest rooms and suites, despite the belief of some analysts that the French market has not successfully rebounded in most provinces.

Similarly, Hyatt International has not been deterred from the Parisian market, where it has a 205-room hotel slated to open in the second quarter of 2001.

While other European countries do not have fertile enough soil to grow a healthy international hotel industry, England is still a safe bet for most hoteliers, analysts said. The incoming supply in the country easily will be absorbed.

As Europe is shaken by Russia's political uncertainty, most of the Asia/Pacific region is struggling against a financial crisis that has rocked once-stable economic giants like Japan. When the crisis began to make its first mark last year, most hoteliers said they envisioned the region as a bargain basement free-for-all.

"There is a lot of inertia in Asia, and it's very challenging to develop there," Mandigo said. "The level of business travel and tourism in the market is not at the strength that puts products in the market."

Until recently, Southeast Asian companies could develop their own hotels and only desired U.S. brand names to boost their image for long-haul travelers, Mandigo said.

Declining occupancies, which were once attractive buy incentives for developers, will begin to make hoteliers rethink expansion into those areas, analysts said. Average occupancies in some cities, such as Kuala Lumpur, have dipped to 50 percent.

"There is an overabundance of hotel rooms having been constructed and built before the crisis. You have this huge supply, and demand that has been cut in half," Drake said. "Businesses in the United States have taken a wait-and-see attitude."

Other areas of Asia are withstanding the beating of devaluation and political uprisings. Bangkok has rebounded recently, resulting in some hotels with up to 80 percent occupancy.

One of the strongest cities for occupancy is Hong Kong. The city dropped about 10 percentage points, to 73 percent occupancy, this year, but last year's high levels are attributed in part to the great international travel draw of the British hand-over of the city to China (<I>BTN,</I> Aug. 7). Hong Kong's strong global business ties are expected to bring 30 new hotels to the city by the end of 2000. "Hong Kong Island has been less affected by the Asian crisis in occupancy because it is a business center," said Kent Maury, Marriott International's vice president of sales and marketing for Asia/Pacific.

Despite its strength, though, Hong Kong too is feeling the power of the crisis, and hoteliers in the area do not expect to see significant improvement until after next year. "It's going to take a while. We won't see a change up the road until the end of 1999," said Joanne Watkins, spokesperson for Shangri-la Hotels & Resorts, based in Hong Kong.

The domino effect that started in Thailand on July 4 of last year and swept across the continent not only left declining occupancies and stifled development, it created delays in projects that could not be left unfinished. "There was a delay by owners in completing projects because of a cash flow reduction due to the crisis," said Ronald Drake, corporate director of marketing and sales for Pan Pacific. "The crisis that started a year ago has slowed down the opening of some hotels."

Of the six hotels Pan Pacific expected to open this year, more than half have been delayed. The Pan Pacific Kuala Lumpur International Airport Hotel opened 10 months late, while the Manila Hotel will open in January, rather than the expected opening in October. A Borneo hotel will open this fall.

Partial openings also are becoming more common, with additional floors opening as they are completed. A property in Malacca, Malaysia, opened ontime in September, but with only three out of seven floors operational.

In Latin America, meanwhile, a possible slowdown in hotel development because of international impacts on its economy may well take the industry by surprise. Until recently, Latin America was considered a "very strong emerging market" that "made a lot of sense," said Mack Koonce, Wyndham's executive vice president of marketing and strategic planning.

Easier accessibility than other continents has helped Latin America, and chains continue to place franchise sales executives in Central and South America. Choice Atlantica Hotels plans to have 140 hotels in Argentina, Bolivia, Brazil, Chile, Ecuador, Peru, Paraguay and Uruguay, said Manuel Escalante, Choice's national sales director.