"The current painful situation triggered by COVID-19 is, in the long run, an opportunity to reorganize the disorganized value chain of the hotel industry. Those who took out assets and maximized mobility during the high growth period will look again at the financial structure, and the trajectory revision of online distribution channels and sharing platforms, which have been overheating competition, will become more active."

Hotel Industry and Black Swan

According to STR's February 2019 vs. February 2020, China decreased from 89.9% to 14.0%, Singapore from 93.3% to 46.4%, Korea from 72.7% to 42.7%, and Japan from 87.1% to 64.7%. As a whole, Occupancy decreased from 78.9% to 41.2%, ADR increased 1.9%, to $107.35, and RevPAR decreased 36.5% to $44.27. Until now, the influence of COVID-19 had not appeared in earnest in the hotel market in the United States or Europe.

In the United States and Europe, in March, when COVID-19 began to spread in earnest, a full-fledged impact began to appear on the hotel market. According to statistics from the U.S. hotel market in March 2020 compared to March 2019, Occupancy decreased 42.3% compared to the same period last year, ADR decreased 16.5% to $110.66 and RevPAR decreased 51.9% to $43.54. In Europe, Occupancy decreased by 61.6% to 26.3%, ADR decreased by 8.1%, and RevPAR decreased by 64.7%, to 2525.27, down 64.7%. At the same time, the destructive power of COVID-19 did not subside in the Asian market. Occupancy decreased 59.5% to 28.3%, ADR decreased 17.6% to $80.82, and RevPAR decreased 66,7% to $22.85.

In fact, even before COVID-19, the global hotel industry has continuously experienced various "Black Swan" (it seems unlikely to occur because it is extremely exceptional, but once it occurs, it means an event that brings tremendous shock and ripple effects, including the 9/11 terrorist attacks and the global financial crisis. There have been economic crises such as the oil shock and the global financial crisis, and the outbreak of infectious diseases like SARS and MERS has already been experienced. Looking back, however, most of the events, although they affected a wide range of markets, were intolerant. Still, there were places around the world that continued to grow freely and stably, and those markets provided basic strength for the recovery of the global hotel market.

For example, in 2003, when SARS devastated Asian markets, the RevPAR showed a 9.6% decline in Japan, 11.4% in Hong Kong, 17.2% in Singapore, and 20.4% in Korea, while the United States, the world's largest hotel market, showed a 0.5% growth. Originally, in the case of Japan, where the proportion of domestic demand is absolutely high, the fluctuation was not large, while in the case of markets with a high proportion of foreign demand, the fall was large. In particular, in the case of Korea, the demand for foreign demand, which used to account for an absolute proportion, plunged immediately after the 2002 World Cup, which was hit relatively harder.

On the other hand, according to the 2009 RevPAR, when the global financial crisis swept the world, the U.S., Japan, Japan, Hong Kong, 23.2%, and Singapore decreased by 27.8%, while Korea showed a solid growth of 6.7%, and Seoul in particular recorded a phenomenal growth of 12.4%. While other countries struggled with a sharp drop in demand, Korea's hotel market was so booming that it was difficult to find empty rooms for foreign tourists visiting Korea following the Korean Wave that swept through Asia.

Market Cycle and Quantitative Easing

COVID-19 shows greater destructive power than any "Black Swan" in the past across the global hotel market, and so far, nowhere else in the world has it been seen showing a momentum of reversal. In other words, the aftermath of COVID-19 can last longer than expected, and the impact can be unprecedented. The biggest reason is that the disastrous numbers shown by the global hotel industry now do not simply seem to be influenced by COVID-19.

Like other real estate, the hotel industry, where real estate accounts for most of its assets, has a cycle due to the time difference between supply and demand. If hotel demand shows a sharp increase, many people have increased their supply by building new hotels or reusing other facilities to hotels. However, it takes about three to four years for new supplies to appear on the market. In other words, when supply growth became a reality, demand stagnated or rather decreased in most cases.

Of course, this pattern did not always appear the same. Encouraged by the rapid growth of the hotel market following the Korean Wave, the government inflated the supply of hotels beyond the market's capacity through the Tourism Accommodation Act in 2012. Since then, by 2018, the number of hotel businesses nationwide has increased by 14.1% annually and the number of rooms has increased by 9.8% annually, while RevPAR has decreased by 2.5% annually, and the hotel market has begun to bottom out.

On the contrary, in the case of the United States, since 2012, when demand recovered before the global financial crisis, demand has not continued to increase rapidly as in the past. This is because investors in the market, who watched the wave of default and bankruptcy during the global financial crisis, shrank. As a result, after the global financial crisis, growth could be maintained for a long time compared to the past.

Another important factor in the long-term U.S. growth was the disappearance of supply growth. As the growth of the real economy began to slow down, most countries competitively cut their key interest rates and released money to the market. And in the case of the United States, the money released for a while led to the consumption of hotel products as planned, supporting the hotel market.

However, so-called quantitative easing is always accompanied by fear of tapering (gradually reducing the size of quantitative easing policies, which means gradually reducing asset purchase measures such as government bonds implemented to expand liquidity). Eventually, as the released money begins to be tied up somewhere, growth slows and the downward trend intensifies throughout the economy. In most countries, including the United States, the hotel market has been at a high point for a long time, and the downward trend has been intensifying as growth has begun to stagnate. In other words, it was a question of where the bomb would explode first, and the accidental COVID-19 served as a catalyst.

Quantitative Easing and Hotel Industry

Since early March, the U.S. has been implementing aggressive quantitative easing policies by introducing large-scale economic stimulus measures every day. The United States is now virtually in the era of zero interest rates, and the Fed has started to print dollars to buy government bonds and MBS (Mortgage Backed Securities). Central banks from each country followed suit, and the Bank of Korea also cautiously joined the ranks of quantitative easing, saying it would supply liquidity to non-banking financial firms. And in the current situation where the value chain of globalization is shaking, it seems difficult for anyone to easily take out "tapering" for a while.

Interest in the hotel industry can also be said to be how much the increased liquidity will revitalize the hotel industry. This can appear in two main forms. One is that increased liquidity leads to increased consumption of hotel products. And the other is that increased liquidity appears to increase the asset value of hotel companies or real estate.

Looking back, it is difficult to find a case where the vitality of the real economy revived as consumption recovered through quantitative easing, while the phenomenon that increased liquidity through quantitative easing leads to an increase in asset value was common in most countries. However, the value of a company or real estate is directly related to the cash flow generated therefrom, so it cannot be completely free from the influence of 'Black Swan'. However, the impact is relatively mitigated compared to the cash flow itself.

Korean Hotel Industry

COVID-19 is expected to leave a trauma to people around the world, and the hotel industry, which presupposes an unspecified number of uses, also seems to be deeply hurt. However, COVID-19 seems to be an opportunity to accelerate changes in the distribution and price system, which were chronic problems in the global hotel industry. A new price system can be formed not by the convenience of transportation and facilities, or the level of service, but by how free it is from force majeure factors such as terrorism, natural disasters, and infectious diseases. In this respect, Korea seems to be in an advantageous situation in the long run. However, in the short term, there is a problem that the imbalance between supply and demand under the Tourism Accommodation Facility Act and the limitation of external demand-dependent market, which must eventually be released by other countries, could hamper it again.

In terms of the value of assets, COVID-19 is likely to be an opportunity for Korea's hotel industry. First of all, the absorption of liquidity into the asset market may be a great opportunity for many hotels to improve their financial structure. In addition, if there is another market cycle in which decoupling with other countries (which means that countries, countries, or economies of one country and the world do not show the same trend, unlike other countries or the universal global economy), global investors' demand for Korean hotel assets could increase rapidly. This is because it proves to be an asset that can mitigate the risks of the global hotel investment portfolio. However, there is a prerequisite that the won exchange rate against the key currency remains stable and that artificial supply changes as in the past do not appear again.

The painful situation triggered by COVID-19 is also an opportunity for the hotel industry to reorganize its disorganized value chain in the long run. Those who took out assets and maximized mobility during the high growth period will look into the financial structure again, and the trajectory revision of online distribution channels and sharing platforms, which have been overheating competition, will become more active. However, the most important part is that considering that "Black Swan" such as COVID-19 may appear more frequently in the future, these homeworks need to be completed not too late.

E. K. Ham

As the CEO of Hotelysis, an AI-based hotel business and investment risk management platform, he worked as the head of the hotel investment division at Mirae Asset Global Investments, and led Mirae Asset's global hotel investment portfolio, and was in charge of new business. He received BA and MA in Architecture from College of Engineering in Seoul National University and MMH from School of Hotel Administration in Cornell University. The publications include a book "Hotel Business Odyssey" and an online content "Hotels in the Life Style Platform Age".

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