Tourism Council of Bhutan

Hotel Bubble: TCB advises people to not invest in new Hotels in Western Region

TCB draft study found Thimphu, Punakha and Paro already had an excess of 35 tourist standard hotels with 232 more cleared for construction from 2016 to 2019

By now even an average Joe on the street would have noticed the excessive number of hotels coming up in Thimphu and Paro, among other places.

Now, a report by TCB shows that there has been a clear herd mentality operating in the Hotel sector which has been building huge over capacities which cannot be sustained even by the large projected increases in tourist numbers in the coming years.

It is clear that something has to give and people who have joined the herd are going to take a hit.

A draft report by the Tourism Council of Bhutan (TCB) has found that if one applied the healthy international occupancy rate of 68 percent in a year, Thimphu, Paro and Punakha already has an excess of 35 tourist standard hotels as the average occupancy rate in Bhutan is 39.5 percent.

Thimphu, Paro and Punakha Dzongkhags have an average occupancy rate of 26%, 53% and 59%, respectively.

As of December 2018, there were 136 tourist standard hotels in the country, which were assessed and certified by TCB.

Thimphu has the highest number with 44 hotels followed by Paro with 29 hotels and Punakha with 15 hotels, accounting for 65% of tourist hotels in the country.

To reach the global average occupancy rate of 68%, as per TCB’s analysis, the recommended number of hotels for these dzongkhags are 17 in Thimphu, 23 in Paro and 13 in Punakha.

TCB says the over supply will continue to grow in the coming years with the opening of new hotels.

From 2016 to October 2019, a total of 232 technical clearances have been issued for hotel construction in the above Dzongkhags.

Of the 232 hotels around 130 are in Thimphu, 77 in Paro and 25 in Punakha.

The numbers show that hotel sector is headed for a hard landing with the largest number of hotels coming up in Thimphu which already has the lowest occupancy rate.

“This would increase the hotel supply by almost 3 times from the existing supply and place immense pressure on hotels to compete for customers,” says the report.

Assuming that 50% of the hotels that took clearance from TCB will become operational by 2022, the supply will increase from 88 hotels in 2018 in the three Dzongkhags to 204 hotels by 2022 creating an excess of 116 hotels even taking into account projected tourist arrival numbers.

This would further drive the occupancy down even after taking into account the projected tourist arrivals.

By 2022 even with the increased arrivals of tourists the occupancy rate would decline to 18 percent for Thimphu, 40 percent for Paro and 57 percent for Punakha.

“Given this scenario, it is not advisable for the investors or the private sector to invest in tourist hotel development in the western region particularly in Thimphu and Paro in the coming years,” says the draft report.

Budget hotels

The report says that apart from the tourist standard hotels, there are also 618 budget hotels in the country catering mainly to regional tourists from India, Bangladesh and Maldives with most of these hotels located in the western Dzongkhags.

Thimphu has the highest number with 88 budget hotels followed by Paro with 80 hotels and Punakha with 25 hotels accounting for 31% of budget hotels in the country.

It says that while it is not clear what the occupancy rate is for budget hotels due to lack of data, it is felt that there could be surplus budget hotels compared to arrival of regional tourists.

The report points out that today there is no check on the issuance of license to operate budget hotels, which also contributes to the over supply of the tourist standard hotels.

TCB says the tourist standard hotels are required to obtain technical clearance from TCB prior to construction. Such a system helps to ensure compliance with the required standards for star rating, whether it is a three-star, four-star or five-star rating.

As such, this regulation does not apply to the budget hotels and so there is no check on the issuance of hotel license. So the number of budget hotels could be also on steady rise which ultimately also contributes to the over supply of tourist standard hotels. Presently, TCB has no mandate on budget hotels.

In 2018, Bhutan received a total of 274,097 tourists out of which 71,807 were international tourists and 202,290 were regional tourists (Bhutan Tourism Monitor, 2018). The average length of stay for international tourists is 7 nights compared to 5 nights for regional tourists. This shows that international tourists come for longer duration than regional tourists.

Implications

The report says that due to low occupancy, hotels may resort to unhealthy practices such as lowering of room rates to attract more customers, which could lead to decrease in revenue, making the hotels financially unsustainable.

Loan repayment is likely to become a challenge when the revenue goes down. This could lead to bad debts and related consequences. As per the data from RMA, the financial institutions sanctioned Nu. 14.8 billion for hotel construction in the country out of which Nu.12.8 billion (87%) was for hotel construction in the three districts.

Due to drop in revenue, the quality of services and facilities could decline as the hotels cannot keep adequate provision for upkeep and regular maintenance, eventually affecting the whole hospitality sector.

Currently there is shortage of trained or qualified workforce at all levels in the hospitality sector. With hotel supply projected to increase further by 2022, the shortage could become worse. This could have negative implications on the service quality and visitor experience

Way forward

The draft report says that given the low occupancy rate, which is projected to drop further with the hotel supply growing faster than tourist arrivals, it is inadvisable to invest in tourist hotel construction especially in Thimphu and Paro Dzongkhags in the coming years.

Punakha Dzongkhag will be in a better situation compared to Thimphu and Paro Dzongkhags with a fairly good projected occupancy of around 57% by 2022.

While it is not possible to work out occupancy of budget hotels due to lack of data, it is felt that there could be excess supply of budget hotels compared to arrivals of regional tourists. Under the present situation, the supply of budget hotels is likely to grow which will contribute to the over supply of tourist standard hotels.

Meanwhile TCB is working on the up gradation and re-classification of the present budget hotels with the objective to upgrade them to 1 and 2 star.  Since early this year, TCB has been already informing the concerned that there is over supply of hotels in Thimphu, Paro and Punakha while issuing the technical clearance on hotel construction proposals.

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