Is the Kuala Lumpur Hotel Market about to collapse ?
Published by Henrik, 28 December 2014

Average occupancies in the golden triangle down by 25-50%

Based on inputs from our clients and partners in the city center the average occupancy over the last year is down by 25-50% accross the board. ARR (Average Room Rate) is are also trending down as more hotels compete for the same customer "pie", including in the most sought after areas such as Bukit Bintang or Chinatown.
In the more peripheral areas of KL the occupancy figures now typically fail to exceed 40% on average (!). At these levels, Hotels will struggle to eke out any form of profitability (accounting for allocation to rent or capital amorization of course) and the property can not be maintained to appropriate standards.
Obvisously the main cause for this dramatic situation is the striking overbuilding of budget hotels (in fact all hotel categories) in a relatively stagnant market. That investors continue to this day to develop new hotels at multi-million ringgit cost without the slightest evaluation of the current market capacity to absorb the additional capacity is amazing to say the least.

So what is going to happen ?
The current situation is not sustainable. The slow growth of the Malaysian demand in the city would take years to absorb the current excess capacity. The only possible outcome is a market rationalization in the form of closures of some of the existing establishments. The oldest hotels and the ones with the worst stanrdards (absurdly tiny rooms, absence of windows, poor management, poor staff service and training ... ) will see their occupancy drop further than others as the public has better and newer options at the same price nearby. Eventually these will have to close down.
Hence the title of this post...

The 3 biggest misconceptions when starting a new hotel business in Malaysia (part 3)
Published by Henrik, 22 September 2014

#3 : All I need is a nice design concept and/or a catchy name !

90% of customers want their hotel stay to be straightforward, predictable and logical. We are back to our first point, they are here because they need to, and specifically as a place to rest and sleep. If they have to waste time to unserstand the logic of your brand or get irritated by the idiosynchrasies of your concept they will only be unhappy.
The customner seeks a price, a certain quality and the meeting of his comfort expectations. These are the key elements but their order may vary !

What does this mean for you ? The hotelier ?
Well this means focusing on thoughtful and intelligent design at the construction stage first of all. In every aspect: soundproofing, electrical and plumbing design, air conditioning and so on. What may seem like a great design idea at first can turn into an unintended disaster in customer experience and thus occupancy and revenue for you.
Design over function is not the right ideas in the hotel line and architects - for instance - don't have the operational experience to understand what this means.
And then you need well trained personnel and experienced management of course.

The 3 biggest misconceptions when starting a new hotel business in Malaysia (part 2)
Published by Henrik, 10 September 2014

#2 : Running a hotel is easy !

This is a very common misconception and we have come across numerous owners over the years who thought operating a hotel is something they could easily do on the side, or in retirement. They invariably suffered deeply, due to stress, financial pain or both.
Probably because the concept of a hotel business is quite simple, and does not require complex techniques and science behind it, people think its going to be easy.
The truth is that just like any other competitive business, hospitality has its rules and intricacies you need to understand in order to survive.
You also need to understand a fairly wide variety of trades well if you want to do well: construction, maintenance techniques, web marketing, travel distribution networks, personnel management, customer management etc
You also need to realize this is a 24/7 business with all this entails in lifestyle effects. Personnel turnover and competence is also a major issue as most of the jobs are rathe rlow paying.

The 3 biggest misconceptions when starting a new hotel business in Malaysia (part 1)
Published by Henrik, 28 August 2014

#1 : If I build it, they will come !

There is often an attitude along the lines of - I will create or lease a hotel and it will just fill up naturally like every other hotel in the area. Well the hard truth is; it doesn't...
Hotel demand is by essence inelastic in the marketing layman's terms. Meaning that were you to sell your room at a tenth of the going market rate you would still not create new customers for your hotel. People for the most part will just not forego the comfort of their home and/or drive away for 1h and check into a hotel for no other reason than the fact that it is cheap - it just won't happen.
People go to hotels because they need to, not because they want to. Its crucial to understand this, the need may be a business reason, family, health or simply the need for a vacation, but a need there is.

So there you have it. You need to understand your local market as well as its growth potential before you engage in a new hotel project.
There could be a a more or less rapid growth in local demand because the destination is becoming more popular for all kinds of reasons, or maybe the city's population is growing. For just the same reasons demand could also effectively be in decline - don't forget that.

So what happens when I open my new hotel ?
Well, you will have to share the existing market between you and all the existing (and coming) players. Lets look at the numbers for a minute. If you are in a large city, in a central area, and lets say there are 20 hotels of say 50 rooms serving your particular consumer target group and heir average occupancy is a healthy 70%.
If you open another 50 room hotel in this area, you are increasing supply by 5% and the avearage occupancy for all will decrease accordingly (to 66% exactly) for all hotels. Thus the impact of your new hotel won't be excessively noticeable in practice. You can base your business model on equating more or less to the current market averages of your target area.
HOWEVER, if there are now 10 such hotels opening at about the same time or, say, a very large one of 500 romms in this same market, then the disruption becomes significant ! Supply has now increased by 50% and on average all hotels will see on average a drop of occupancy to well below 50% from its former healthy levels of 70%.
If the existing 70% occupancy was the basis for your business case you are in for trouble...
Does this sound unrealistic ? Actually it isn't and it happens all the time all over the world. It is in fact amzing how often investors lay out their hard earned cash for hotel projects without any serious due diligence behind, in particular in Malaysia !