Hotels: A market-sizing exercise (part 6 of ???)
/Over the past few days (weeks?!?!), I have been estimated potential hotel needs in Vietnam. The goal was to get a few estimates: Guests, hotel rooms needed for those guests, and now, the subject of today’s post, how much will it cost to build these hotels?
The first step is to take my estimates for new hotel rooms, between 350,000 to 500,000, and figure out how many are going to be in each class. Now this is hard and involves some strong assumptions. Based on data that we have from 2013-15, 5-star hotel rooms made up 5.9% of all hotel rooms, 4-star 7.3% and 3-star 8.7%. This leaves the remainder at 78.1%. If we apply this to our figures, we get the numbers in the table below.
Now, I need to figure out how much these are going to cost. I would say this has been some of the harder data to find. I did find an old CBRE presentation from 2011 (CBRE is a real estate advisory company) that says that upscale hotels in Vietnam cost about $10m for a 100-room hotel and that midscale hotels costs about $5m for the same size hotel. If I take these figures, that works out to $100,000 and $50,000, respectively for hotel rooms. But we need to account for inflation, so I used a 7% CAGR (reflecting growth and inflation) to come to around $175,000 per upscale room and $85,000 for the midscale room. These figures don’t include land or FFE (furniture, fixtures, and equipment), just the construction itself.
I also saw a news report from early 2017 about a Japanese company building a large upscale hotel that worked out to about $160,000 per room, which jives with our estimate for upscale hotels.
The thirst for land in central business districts and the escalation of the land price in HCMC have led to a higher investment rate in the hotel sector. Twenty years ago, the rate was $120,000 per room, but the figure now is $150,000.
It is unclear if this is including the land price or now, but seems like it has to not include the land, based on our other estimates.
VIETECON.COM ESTIMATES
So, at the high end, let’s assume $175,000 per 5-star room, $125,000 for 4-star, $85,000 for 3-star and just make a wild guess at the rest at $40,000 per room. That would still mean that a low end hotel with 50 rooms could cost $2,000,000, quite a lot for Vietnamese entrepreneurs. But that average can hide a lot of variation – rooms could cost $20,000 or $60,000. Here I think it makes sense to do a sensitivity around the non-starred hotels, so see how high or low the estimates could go.
Putting this all together, I get between $20 billion to $30 billion in hotel investment (not counting land or FFE) over the next 7 years. And if lower-end hotel rooms cost just $20,000, then the overall spend would be $15-21bn, quite a bit difference from our current estimate but still a large number.
Either way, it’s a lot of investment and spread all around the country (although lots in HCMC and Ha Noi). Some of it is already in the works. This investment would buy us 350,000 to 500,000 rooms, more than sufficient supply for all the visitors to Vietnam. Remember, our assumptions included an occupancy rate of 70%. If it was 80%, then hotel needs would be about 50,000 less.
Next, we will look at specific hotel markets in Ha Noi and HCMC.