Myanmar…the next investment destination for global hotel chains?

ผู้เขียน: SCB EIC | Economic Intelligence Center

Myanmar's hotel sector has huge potential from the booming of both business and leisure international tourists. On the back of easing of sanctions, Myanmar is poised to witness influx of foreign investors especially from the West competing to be the first to tap unique opportunities. Leisure travelers eager to experience Myanmar for the first time will be culturally enriched with iconic attractions, supported by nearly 2,000 licensed tour guides nationwide who are well-conversant in English, and a good number of French and German speakers. The plan to host the World Economic Forum in 2013, the SEA Games in the same year and the ASEAN Summit in 2014 will be an important stepping stone for Myanmar to further enhance global awareness of its readiness to open up the country to foreign visitors.

The continued strength in international airport arrivals, especially through Yangon airport, bodes well for the hotel sector, but an even stronger growth is anticipated. The recent surge in international airport arrivals, as opposed to cross-border tourists, indicates a healthy progress in hotel demand from deeper wallets. In the first quarter this year, Myanmar saw a 30% y-o-y jump in Yangon Airport arrivals, which is already a robust growth ahead of the positive national developments in the second quarter including the increased availability of kiosks selling Kyat at an official rate, easing of travel restrictions and the business visa on arrival program. With many more reforms on the agenda directly and indirectly drawing both business and leisure travelers into this newly opened country, it is reasonable for the Myanmar officials to expect a double of last year's tourist figure of 0.8 million by the end of 2012.

 
As a result, the investment in hotel sector appears attractive especially given the current supply constraint and a sharp increase of room rates. Myanmar has limited supply of hotel rooms that are considered "suitable for tourists". Less than half of the 8,053 Yangon hotel rooms have adequate facilities to hold foreign visitors. Currently there is a daily average of 1,500 international arrivals through the Yangon Airport. Should this number get doubled at the start of next year as predicted, more than 2,000 additional hotel rooms would be required to accommodate Yangon visitors just for short 2-day stays. Yet, the capacity in Yangon is not growing fast enough; before mid-June this year when a 4-storey mid-range hotel was added, there have been virtually no new hotels in Yangon for more than a decade. As a result, the Hotel Occupancy Rate (HOR) in Yangon has been unrivalled-soaring 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 get a 70% HOR in a peak season. Without a doubt, the room rates that used to average about USD60 per night for upscale hotels in Yangon before 2011 have now skyrocketed to about USD200.

Myanmar is also welcoming foreign investment to help fill the missing supply, particularly for the large gap of 4 and 5 stars which are more suitable for tourists. Nearly all of the 700 local-run hotels are rated 3 stars and lower, struggling to survive in the past due to high operating costs and low occupancy rates. This has had major effect on the hotel maintenance standards, the services quality and the development of human resources. Limited capital has also resulted in these local-owned hotels having, on average, only 30 rooms each. On the other hand, the 31 foreign-owned hotels currently in operation, while account for just 4% of the total hotels in Myanmar, each offer an average of 170 top-quality rooms to the market and altogether make up 20% of total hotel rooms across Myanmar. 85% of these foreign hotels have been opened in Myanmar for at least 10 years.

Foreign investment in hotel industry in the past has been vital to replenish constraint in quality hotel rooms suitable for tourists in Myanmar

Several initiatives by the Government should entice additional foreign capital in the hotel sector; yet, why have the 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 is offering many land plots in prime locations in Yangon for investors to bid for hotel development since the beginning of this year. With strong hotel demand, first movers into this sector should gain a significant advantage in commanding higher prices before the next influx of hotels arrive. There indeed have been interests from existing and new Singaporean and Thai hoteliers plus several large global hotel chains such as Marriott and Sofitel; yet, no real foreign direct investment (FDI) has flowed in. The bulk of the USD1.1 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 limited conducive investment environment. On the government front, the policies on land ownership and profit repatriation 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 on a Build-Operate-Transfer (BOT) basis with the Myanmar government will be less appealing to some investors, as well. On the investment environment, investors may also face limited access to cheap financing at home given the high country risks involved and the nature of business with huge up-front capital required and 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 put investors under pressure. The high risk of Kyat appreciation will result in higher operating expenses and lower-than-expected return on investment. In addition, while local workers can be quickly trained for unskilled or semi-skilled positions, there is still lack of infrastructure such as international schools and quality hospitals to attract middle-to-senior hotel management levels and their families to move to Myanmar.

If the Myanmar government does not make a swift reform move, the constraint in hotel supply may hurt the tourism sector in the near to medium term as leisure travelers will be more affected by the sharp rise in room rates than business ones. From hoteliers' point of view, the new investment in hotel sector now is rather a high-risk, high-return decision. For the well-established ones in Myanmar, including Thai hoteliers, they 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.