Indonesia's hotel growth rises to meet visitor demand

With tourist arrivals up by over 15% in 2016 and ambitious sector development plans under way, Indonesia’s hotel segment is widely expected to see healthy expansion in the coming years. This follows on from strong performance across the hospitality industry over the past half decade.

Indeed, according to HVS Research, a global hospitality research firm, from 2011 to 2015 the total supply of branded hotel rooms in 12 key Indonesian markets more than doubled, posting a compound annual growth rate of 19%. During this period the total number of branded rooms jumped from around 35,000 to upwards of 71,000.

Today more than half of this supply is composed of midscale and budget offerings, while the upscale segment accounts for 33% and luxury properties make up the remaining 12%. Indonesia’s hotels, like the nation’s tourism industry more generally, are concentrated in Bali and Jakarta, though a number of smaller markets – including Medan, Lombok, Surabaya, Bandung, Mandalika and Palembang – have seen an influx of visitors as well in recent years.

CHALLENGES AHEAD: Despite the generally encouraging economic situation and rising tourist arrivals, the hotel segment faces a number of challenges. As mentioned above, the industry relies to a large extent on the importance of Bali and Jakarta. While these centres remain relatively buoyant, many local and international players alike are working to diversify their business into new areas, which presents a wide range of challenges related to the public relations, advertising, investor sentiment and the provision of infrastructure.

Furthermore, in 2014-15 the hotel market was under pressure primarily due to earlier issues related to oversupply and the eruption of the volcano Mount Barujari in Lombok in November 2015, the latter of which shut down airports in Bali and Lombok for a brief period. In addition, hotly contested gubernatorial elections in Jakarta and elsewhere in the country in mid-2017 put a slight damper on hotel development, as a result of investors exhibiting caution in the face of political uncertainty.

These issues aside, as of early 2017 there were many reasons for optimism among hoteliers and the hospitality industry. Perhaps most importantly, Indonesia’s recent success in attracting a rapidly increasing number of new visitors points towards ongoing growth in demand for new hotel rooms for the foreseeable future. This potential growth is evident in a turnaround in average room rates (ARRs) in recent years. Indeed, while ARRs declined 0.7% across key Indonesian markets in 2014, they grew by 3.3% in 2015, according to HVS. Additionally, despite the recent political pressure, the hotel pipeline remains active. As of August 2016 some 22,000 additional hotel rooms were either under construction or in the early planning stages in the country, HVS data demonstrates, representing expansion of over 30% on existing supply. Some 58% of this new capacity is set to be located in Bali and the capital, Jakarta, which speaks to the continued centrality of these two markets to the nation’s tourism industry as a whole as it seeks to expand elsewhere.

HOTEL INVESTMENT: The bulk of both existing supply and upcoming projects are the result of investments by international hotel brands. Indonesia has been a major investment destination for multinational hotel chains for more than 50 years. Since the country welcomed its first IHG-branded property, the InterContinental Bali, in the 1960s, the world’s largest hoteliers have opened numerous properties across the country in an effort to capitalise on its natural advantages and large population.

In the last 15 years the nation’s tourism market has grown rapidly, driving the development of an enormous number of new properties by international brands and local firms alike. The bulk of this development has taken place in Bali – one of the region’s (and arguably the world’s) most popular leisure destinations – and Jakarta, which has become a major destination for corporate business travellers and, more recently, a slew of other segments.

BALI: It is hard to overstate the importance of Bali to Indonesia’s tourism industry as a whole. The island accounted for 40% of international tourist arrivals in 2015, with more than 4m visitors. At the end of 2015 Bali had 20,810 rooms in total, according to HVS, around 20 times more than any other market in Indonesia, apart from the capital. Between 2013 and 2015 demand for tourist lodging in Bali expanded at a compound annual growth rate of 15.1%, even as other destinations around the country levelled out due to downward pressure across the market.

In terms of revenue per available room (RevPAR), Bali continues to be Indonesia’s best-performing destination. According to HVS data, in 2015 the island’s hotels posted RevPAR of Rp1.23m ($92.70). While this figure is down somewhat on previous years – from Rp1.24m ($93.50) in 2014 and Rp1.4m ($105.50) in 2013 – it is significantly higher than RevPAR among hotels in other destinations. Indeed, the next most profitable tourism destination in the country in 2015 was Bintan, with RevPAR of Rp910,000 ($68.60), followed by Jakarta at Rp752,000 ($56.70), Lombok at Rp617,000 ($46.50) and Bogor at Rp455,000 ($34.30). Despite the recent downward trend in terms of RevPAR, Bali hoteliers expect to see improved revenues for the foreseeable future.

The broadly optimistic outlook is being fuelled in large part by the federal government, which has made the tourism industry a point of focus in recent years. In June 2015, for instance, the government rolled out a major new visa policy, whereby visitors from 30 countries were allowed to enter and stay in Indonesia for 30 days on a free tourist visa. In 2015 and 2016 more nations were added, bringing the total number of countries to 174. The policy had an immediate and dramatic impact across the country, and particularly in Bali. Indeed, in 2015 the fastest-growing source markets of tourists visiting Bali were the UK, the US and China, which saw increases of 32%, 20% and 17%, respectively (see overview).

JAKARTA: At the end of 2015 Jakarta had 24,540 hotel rooms in total, according to HVS data. If all the projects under construction or in planning come to fruition, the capital will see an additional 7080 new rooms come on-line by the end of 2018. This is the single largest hotel pipeline in the country. The next largest is Bali, with some 5700 new rooms expected by the end of 2018. By contrast, Jakarta caters largely to corporate business visitors on weekdays and lowvalue domestic tourists at weekends. Global economic pressures have seen corporate customers become increasingly price sensitive over the past four years, pushing down room prices slightly in the capital. Nonetheless, Jakarta boasts the largest number of luxury and high-end rooms in the country, though these remain underpriced by international standards, at below $200 per night.

Despite the security incidents of January 2016, which continue to put a damper on tourist arrivals and, subsequently, occupancy rates in the capital, a handful of major new projects recently opened for business. In 2015 alone Jakarta saw the opening of the Grand Mercure Jakarta Kemayoran with 505 rooms; the Fairmont Jakarta with 380 rooms; the Sheraton Grand Jakarta Gandaria City with 293 rooms; and the Raffles Jakarta with 173 rooms, among other projects. In 2016 the city saw the opening of a new Four Points by Sheraton, a Westin property and a Four Seasons Hotel. In the first quarter of 2017 a five-star, 240-room Harris Hayam Wuruk hotel opened in central Jakarta, and the 102-room Yello Hotel Manggarai opened in south Jakarta.

TRACKING THE PIPELINE: A number of new hotels are also under way in Indonesia, both in Bali and Jakarta, but also across a range of other up-and-coming markets. Major new property developments currently in progress in the country’s capital include a new JW Marriott with more than 200 rooms, scheduled for completion in 2017; the 150-room Park Hyatt Hotel, set to be finished in the first quarter of 2018; the InterContinental Jakarta Pondok Indah Hotel and Residences (2018); a St. Regis property (2019); and a Waldorf Astoria (2019). In Bali, meanwhile, a key upcoming opening is the Westin Ubud Resort and Spa, which is set to be unveiled in March 2018.

Bandung and Surabaya constitute the third- and fourth-largest sites of existing hotel supply in Indonesia. In Bandung, there were 6910 rooms at the end of 2015 and an additional 1570 rooms were either under construction or planned to be completed by the end of 2018. Similarly, in Surabaya, an existing capacity of 5530 rooms will be supplemented with an additional 1780 by 2018. Other key sites of both existing supply and future hotel construction in Indonesia include Bogor, Makassar and Yogyakarta.