Promising opportunities for hotel market

Vietnam’s new visa policy and tourism stimulus programs are aiding the ongoing recovery of its hospitality industry from the global headwinds of the last few years. The General Statistics Office (GSO) has reported that the country welcomed over 8.8 million international visitors in the first half of 2024, marking a 4.1 per cent increase compared to the same period of 2019, before Covid-19. Chinese tourists, who represented one-third of Vietnam’s foreign visitor arrivals prior to the pandemic, regained their status as the largest source of visitors as of May.

However, the hotel industry continues to struggle, primarily due to low occupancy rates, even though room tariffs in most areas around Vietnam are nearing 2019 levels. Only a few hotels in Ho Chi Minh City and Hanoi have actually exceeded pre-pandemic tariff levels. Compared to neighboring countries, room tariff increases have been quite modest. Its low occupancy rate is largely due to slow recovery in key source markets such as Russia and China, along with increased supply in coastal destinations since 2020. Many projects that were delayed during the tourism boom are now coming online. According to Savills Hotels, there was a significant addition of 45,000 mid-scale to luxury rooms from 2020 to June 2024, representing a near 25 per cent increase in supply.

Market dynamics and oversupply concerns

“The recovery in demand is nearly complete, but the market still faces challenges, ranging from oversupply in certain destinations, largely due to large-scale projects now becoming operational, to undersupply in places like Ho Chi Minh City, necessitating new and improved products to remain competitive regionally,” said Mr. Mauro Gasparotti, Director of Savills Hotels.

Many developers seized opportunities during the tourism boom but often neglected comprehensive project planning and execution. Consequently, they relied heavily on tourism growth instead of meeting market demand with suitable products. This oversight left several condotel properties in coastal areas vulnerable, unable to progress amid shifting market conditions. This reality compelled developers to reassess investments, while some projects stalled entirely. “We observe a trend towards rebranding and repositioning, with hotels and condotels enhancing competitiveness and market share through brand changes, upgraded food and beverage (F&B) offerings, and other strategic adjustments,” Mr. Gasparotti added.

According to Mr. Christopher Hur, CEO of Lodgis Hospitality, the group’s results have been very positive. “We have been very fortunate,” he explained. “Some of our assets are 30 to 50 per cent above pre-Covid levels on an average basis. But looking ahead, the field seems wide open in terms of brand opportunities and growth, but it continues to be challenging. As an owner and developer, this may be one of the most challenging times, especially when you consider securing government approvals and licensing along with development costs. So, it is challenging to build new products. However, the overall tourism outlook, at least from where I stand, is very positive.”

“One of our best-performing assets is the Fusion Resort in Cam Ranh,” he continued. “When I talk to investors and other stakeholders, I mention that Cam Ranh is an oversupplied market. However, not all supply is created equal. If you lack strong ‘productization’ and location advantages, you might struggle in the sea of new supply. We have been able to carve out a particular niche. Supply considerations and access are key.”

He added that another concern with Cam Ranh, in south-central Khanh Hoa province and nearby the popular beach city of Nha Trang, is that 70-80 per cent of the group’s business comes from South Korea, with limited flights from other major hubs like Hong Kong (China), Bangkok, and Singapore. “As hoteliers, whether you own or operate, it is crucial to understand how access is occurring,” he said. “Ho Tram Strip [in southern Ba Ria-Vung Tau province] is another significant exposure for us, and our property there is doing fantastically. However, infrastructure threats make it easier for travelers to bypass Ho Tram in favor of other markets. So, it is essential to be selective when choosing different projects.”

Market forecasts

Mr. Michael Piro, Co-CEO of Indochina Capital and Co-Founder and CEO of Wink Hotels, believes 2024 is a year focused on occupancy. Looking forward to 2025, the focus will be on room tariffs. “This year, we have been in a bit of a ‘dogfight’, underpricing our products to gain market share, even as demand picked up,” he explained. “I hope to see more tariff growth and improved margins next year.”

Elsewhere, Ms. Thu Le, CEO of the Sovico Hospitality Group, avoided any underpricing. “Our Furama Resort Danang is not participating in the price war taking place in the mid-scale segment, because our positioning has been established for quite some time, and we have found our own way to navigate the situation,” she said. “However, Nha Trang and Cam Ranh are a bit different. Cam Ranh, in particular, is very competitive, with around 20,000 keys in the market, creating a substantial barrier.”

Another observation is that there was a strong focus on operating leanly during Covid, Mr. Piro noted, but now there is a tendency towards complacency, with costs gradually increasing as demand rises. The lessons of tightness and austerity from the pandemic are being forgotten. Retaining those lean operational strategies could have led to better margins. It is important to be cautious about increasing hiring and spending simply because the market is improving, especially since it was proven during Covid that hotels could be run effectively with fewer staff while still delivering excellent service.

There is still not a lot of foreign capital flowing into Vietnam’s hospitality sector this year, he added. “As a merger and acquisition (M&A) advisor, while hotels have been a significant part of our business, I notice there are currently few orders for buying or investing in hotels,” he said. “I expect this to change next year. The approval process is very difficult, so many will likely focus on refurbishments - buying existing unbranded hotels, repositioning them, investing in capital expenditures, and bringing in new brands to add value. I foresee a lot of existing supply being converted within the value chain, rather than through grassroots, greenfield development. These are some of the key trends I anticipate for 2025 and beyond.”

Ms. Thu Le noted that many owners wish to sell their projects because their land leases are nearing expiration, and it is quite difficult to obtain legal approval for extensions due to new government policies. Thus, M&As are very active at the moment.

For a 5-star future

The presence of international hotel brands in Vietnam has grown significantly over recent years. According to Savills, in 2013, fewer than 25 per cent of hotels in the country were affiliated with international brands, but this proportion is expected to reach 40 per cent within the next three years. This trend, particularly evident post-pandemic, includes numerous hotels undergoing brand conversions or upgrades.

Recent market uncertainties have made it challenging for hoteliers to maintain standard profitability levels. Larger-scale operations are especially vulnerable, highlighting the increasing need for enhanced operational efficiency in hotels and resorts, particularly in the face of rising costs for qualified staff.

“We observe two distinct trends,” Mr. Gasparotti noted. “Firstly, a rise in interest towards lifestyle brands emphasizing strong F&B offerings, particularly within mixed-use buildings. Examples include the introduction of brands like Nobu to locations such as Da Nang and Ho Chi Minh City, known for their excellent F&B DNA. On the other hand, there has also been a growing preference for properties offering limited or no F&B services, known as focused-service hotels. These cater well to the rapidly-expanding mid-tier market, a concept highly popular in other destinations but still emerging in Vietnam.”

“For properties located in mature, bustling markets or surrounded by diverse amenities and F&B options, a leaner hotel model focusing solely on accommodation may be considered,” said Ms. Uyen Nguyen, Head of Consultancy at Savills Hotels. “Such hotels rely on the surrounding neighborhood to provide guests with a wide selection of food and beverages. We have observed the expansion of the focused-service model across various locations in Vietnam, particularly in dynamic cities attracting diverse business and leisure guests, such as Ho Chi Minh City, Nha Trang, and Da Nang. However, this model constitutes a smaller proportion compared to neighboring Thailand.”

Among the top 5 international hotel chains, the number of mid-scale focused-service properties in Vietnam is only one-third of that in Thailand. Nearly 60 per cent of those properties in Thailand are concentrated in Bangkok, whereas in Vietnam, only 27 per cent are located in Ho Chi Minh City. “We anticipate that the focused-service model will gain more prominence in Ho Chi Minh City, akin to Bangkok, due to the city’s diverse mix of business and leisure travelers and its evolving market dynamics,” Ms. Uyen added.

A burgeoning middle-class in the Asia-Pacific region has driven sustained demand for intra-regional travel to countries such as Vietnam, propelling focused-service brands, particularly Hilton Garden Inn, said Ms. Jenny Milos, Vice President, Focused Service & All Suites Brand Management, APAC, at Hilton Hotels & Resorts. There is significant interest from owners in the brand, driven by its efficient prototype, tailored offerings, and flexible agreement options, positioning it as a substantial accelerator of its growth within the Asia-Pacific region. “We are on track to more than double the presence of Hilton Garden Inn properties in Vietnam in the years to come,” she added.

Understanding market conditions, site characteristics, and industry trends is crucial in project planning, to align the developer’s vision with market demands. Successful execution from the outset is key to project success. Looking ahead, the recovery of the Chinese market, along with new visa policies and stimulus programs, is expected to accelerate the hospitality sector’s rebound. Vietnam’s hospitality market continues to evolve, enhancing product quality and catering to both leisure and business travelers. By collaborating, industry stakeholders can ensure a bright future for Vietnam’s hospitality industry.