Hotel Boom in South Korea Sparks Concern; Some Say Hospitality Industry Is Vulnerable to Oversupply

Hotel Boom in South Korea Sparks Concern

Some Say Hospitality Industry Is Vulnerable to Oversupply


Dec. 3, 2013 3:34 p.m. ET

SEOUL—A record number of foreign tourists visiting South Korea in recent years has fueled in Seoul what property developers are calling the biggest hotel boom in the country’s history. But some industry participants say an overreliance on visitors from China and Japan leaves South Korea vulnerable to future overcapacity.South Korea has seen its international profile as a tourist destination rise significantly in the past few years, helped by the splash Korean pop culture has made overseas.

The number of foreign tourists visiting Asia’s fourth-largest economy leapt past 11 million for the first time last year, according to the Korean Tourism Organization, marking the fourth consecutive year of double-digit percentage growth. By comparison, Japan, a neighbor almost four times the size of South Korea with similar climes, took in 8.36 million foreigners last year, according to Japan Tourism Marketing Co., a Tokyo-based tourism industry consultancy.

Last year, occupancy rates in Seoul peaked at about 90%, driving bargain-seeking visitors to accommodations 100 miles away from the capital, according to property analysts.

The historic growth spurt is being driven largely by Chinese tourists: The Middle Kingdom provided over a quarter of all inbound tourists last year, up from 16.5% five years earlier, according to the Korean Tourism Organization. China overtook Japan as the biggest source of foreign visitors for the first time this year.

The optimism for growth has translated into plans to build 15,000 new rooms in the capital in the next three years in a market that had about 30,000 rooms as of October, according to the city’s registry.

“In the next seven to eight years, we’re going to have the fastest growth in hotels in the country’s history,” said Richard Hwang, managing director at U.S. commercial real estate consultancy Cushman & Wakefield. Cushman estimates that the number of hotel rooms in Seoul will rise to at least 50,000 by 2017.

But JoAnn Hong, a director at British real-estate services firm Savills, cautions that supply is on course to outstrip projected demand in the next five years if all construction plans are realized.

Ms. Hong says that South Korea’s tourism industry is too dependent on China and Japan: The two countries combined provided around 60% of its tourist inflow last year, according to the national tourist agency figures.

The vast majority of domestic visitors to Seoul stay with families or friends, making hotels even more dependent on foreign guests, according to Ms. Hong.

The risks were made clear this year as a rising South Korean currency and a flare-up in political tensions between Seoul and Tokyo helped drag the occupancy rate of Seoul hotels down 7.4% in the first eight months from the same period last year, according to CBRE Group, Inc., the world’s largest commercial real estate services firm.

In the first eight months of the year, revenue per available room, an industry measure for demand, declined in South Korea by a bigger percentage from a year earlier than in any country in the Asian-Pacific region, according to CBRE’s survey, measured in local currency.

At the same time, the greater region’s tourism sector was growing. Tourist arrivals to Asia Pacific rose by 7.1% year on year in the first six months of this year, according to United Nations World Tourism Organization.

Continuing to attract Chinese visitors is critical for South Korea’s tourism industry, according to Soo Jin, a hotel-industry analyst and senior manager at Cushman & Wakefield.

Ms. Jin said South Korea should consider heavier promotion and visa-free access to the Chinese to make itself more appealing as it faces stiff competition from the likes of Hong Kong and Singapore. South Korea has increased the number of multiple-entry visas issued to Chinese nationals in recent years.

The race to woo mainland tourists is expected to intensify after Beijing recently enforced myriad restrictions on outbound tourism. The government has cracked down on low-cost group tours that travel agencies sell at a loss and offset by taking commissions from shopping centers where the groups are taken while abroad.

Hong Kong last year received nearly 23.8 million overnight guests—as well as 24.8 same-day visitors, mostly from China—and Singapore took in a total of 14.4 million international visitors, according to the cities’ tourism authorities.

If the future of Seoul’s overall hotel sector is murky, investors remain bullish for the highest end of the market.

“There is more than enough business to go around,” said Chris Hart, president of the Asia-Pacific for Canada-based international luxury-hotel operator Four Seasons Holdings Inc.

The first Four Seasons for South Korea is slated to open in the heart of Seoul’s downtown in May 2015. A branch of the Luxury Collection, the highest-end chain of U.S. hotel group Starwood Hotels and Resorts Worldwide Inc., is opening in a Gangnam business district the following year. Existing luxury hotels, mostly owned by the country’s conglomerates, have undergone or are in the process of renovations.

Choi Chang-hoon, head of real-estate investment at Mirae Asset Global Investments, which manages $58 billion in assets globally and backs the Four Seasons Seoul, said the Chinese demand will keep up. Mr. Choi has also led the $300 million purchase of the Four Seasons Sydney this year because Australia ranks highly in the Chinese preference list, he told The Wall Street Journal.

Mirae Asset Global Investments is the asset-management arm of South Korea’s Mirae Asset Financial Group.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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