APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT Occupancy Rate Projections A summary of historic and projected demand and supply of hotel rooms is shown in the table below: Demand and Supply of Hotel Rooms, 1998-2008E39 1998 1999 2000 2001 2002 2003 2004 2005 2006E 2007E 2008E (1) Total Visitor Arrivals (’000 persons) 9,575 10,728 13,059 13,725 16,566 15,537 21,811 23,359 25,251 27,800 29,400 (2) Overnight Visitors (’000 persons) (1) x 0.65 from 200739-1 7,137 7,837 8,814 8,878 10,689 9,676 13,655 14,763 15,832 18,130 19,173 (3) Average Length of Stay (Nights) Average between 1998 and 2005 from 200639-2 3.4 3.4 3.0 3.08 3.62 4.06 3.73 3.66 3.49 3.49 3.49 (4) Average No. of Guest per Room Average between 1998 and 2005 from 200639-3 1.61 1.56 1.46 1.48 1.36 1.31 1.43 1.43 1.46 1.46 1.46 (5) Hotel Rooms Occupied 23,318 25,454 27,466 26,580 29,003 23,126 30,109 31,348 36,727 42,694 45,152 (6) Estimated No. of Hotel x (3) נ (Guests (5) x (4 365 before 2005 (2) x (7) from 200639-4 4,030 4,263 4,879 4,662 3,977 2,724 4,213 4,471 5,583 6,490 6,863 (7) As % of Overnight Guest (2) נ (6) Average between 2001 and 2005 from 2006 57% 54% 55% 53% 37% 28% 31% 30% 35% 36% 36% (8) Total Hotel Rooms 32,714 32,871 36,749 37,132 38,949 38,133 39,128 43,866 47,128 54,211 56,348 (9) Total Number of Rooms Available for Sale per Day40 30,676 31,954 32,923 33,630 34,395 32,928 34,256 36,522 42,215 48,560 50,474 (10) Occupancy Rate41 76% 80% 83% 79% 84% 70% 88% 86% 87% 88% 89% Note: Projected numbers in Italics Source: HKTB, PATA, Savills Research & Consultancy 39 Key Assumptions on Projections: Due to the limitations of data availability, our projections were made based on historic findings from 1998. Data from this post-handover period, when Mainland Chinese visitors started to dominate the tourism industry in Hong Kong, should be of greater relevance. In projecting demand, we have adopted the total visitor arrivals numbers forecast to 2008 by PATA and assume: 1. 65% of all visitors are overnight visitors from 2007 to 2008, the average ratio between 1998 and 2005. 2. The average length of stay is assumed to be 3.49 nights from 2006 to 2008, the average between 1998 and 2005. This assumed figure is lower than the figures for 2002 to 2005, commensurate with the changing travel patterns of Mainland Chinese visitors. A shorter average length of stay will also yield a more conservative occupancy projection. 3. The average number of guests per room to be 1.46 from 2006 to 2008, the average between 1998 and 2005. It is noteworthy that this figure fell from 1998 to 2003 but rose again in 2004 and 2005 and the assumed figure of 1.46 represents another rise from 2005. This higher figure assumes that more visitors would be willing to share rooms in view of the expected tightening availability and higher accommodation costs. A higher number of average guests per room will also yield a more conservative occupancy projection. 4. 36% of overnight visitors to be hotel guests from 2006 to 2008, the average between 2001 and 2005. For this assumption, we purposely shorten the length of historic reference as this ratio prior to 2001 was a lot higher and did not reflect the increasing number of travelers visiting friends and relatives in Hong Kong. 40 Total number of Rooms Available for Sale per Day equals Total Hotel Rooms excluding those under repair or being refurnished. 90% of Total Hotel Rooms are assumed to be Rooms Available for Sale per Day from 2006, based on the average between 1998 and 2005. 41 Calculation of occupancy rate is based on rooms occupied against rooms Available for Sale per Day. — 485 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT Projections of the estimated number of hotel guests are made based on PATA forecasts of visitors arrivals and the assumptions on overnight visitors and hotel guests as a percentage of the number of overnight visitors listed above. For example, in 2007, hotel guests are projected to reach approximately 6.5 million. With this projected number of hotel guests and the assumptions on average length of stay and average number of guests per room, the number of rooms occupied can be projected and approximately 42,700 rooms are projected to be occupied by the expected 6.5 million hotel guests daily. Based on this projected number of rooms occupied of 42,694 and the projected number of rooms Available for Sale per Day of 48,560, the occupancy rate in 2007 is estimated to be 88%, higher than 2006 levels. The same methodology is applied to forecast occupancy rates in 2008. The same methodology can also be applied to generate longer term occupancy forecasts for 2009 and 2010 by adopting longer term visitor arrivals forecasts provided by the Hong Kong 2030 Study. Long Term Visitor Arrivals Forecast, 1998 to 2010E HistoricPATA Interpolation HK2030 Growth Rate % ’000 persons 40,000 50 35,000 40 30,000 30 25,000 20 20,000 10 15,000 0 10,000 -10 5,000 0 -20 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007E 2008E 2009E 2010E Source: HKTB, PATA, HK2030, Savills Research & Consultancy However, the resulting projected occupancy rates of 93% in 2009 and 101% in 2010 do not appear realistic. This exceptional forecast result, nevertheless, implies that longer term supply of new rooms (2009 and 2010) known today will fall short of future demand. Under this scenario, operators of existing hotels may delay room renovation work so as to fully utilize their stock on hand. Developers and investors, in view of the tight availability situation, will be encouraged to either speed up their current hotel development plans (if any) or initiate more hotel development. For analysis purposes, we assume occupancy rates in 2009 and 2010 to be 89%, the same as the projected level for 2008. — 486 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT Although future new supply cannot be broken down by class, projections of occupancy rate by hotel class can still be made by referencing the historic relationship (1991 to 2006) between occupancy rates of hotel classes and the market overall. Summary of Average Occupancy Rate Projections, 2007E to 2010E Year All Hotels High Tariff A High Tariff B 2007 88% 86% 90% 2008 to 2010 89% 87% 91% Source: Savills Research & Consultancy Again, 91%42 occupancy levels for High Tariff B hotels in 2008 to 2010 appears high. Nevertheless, these high occupancy levels remain in our forecast summary to highlight that High Tariff B hotels occupancy rates are generally higher than the market as a whole. Average Room Rate Forecast In the hotel industry, occupancy and average room rates typically move in a cyclical fashion in response to various factors. Perhaps the most important is the relatively inelastic nature of hotel room supply either during an up-cycle or a down-cycle. Development activity is triggered once recovering room rates reach levels at which new rooms become economically viable and gathers momentum until the peak of the up-cycle. Once the peak has passed, there is little or no incentive to initiate new projects while some existing projects may overrun. In Hong Kong, we observe relatively stable supply conditions from 1991 to 2004 while arguably, higher than average levels of new supply in 2000 and 2002, especially in the High Tariff B and Medium Tariff markets, may have slowed down average room rate growth in those years. Occupancy and average room rates can also be affected by exogenous events which have a significant impact on tourism demand. Over the past decade or so, such events have included the Gulf War in 1991, the Asian Financial Crisis in 1998, 9/11 and the start of the Iraq War in 2001 and SARS in 2003. Those years witnessed steep falls in occupancy levels and lower room rates. On the other hand, the relaxation of travel restrictions on Mainland Chinese from 2003 has had a powerful positive impact on the market and resulted in rising occupancy and rising room rates. Hong Kong’s hotel industry’s room rates have reflected these demand and supply dynamics. From 1997 to 2006, ten year average occupancy stood at 81% for all hotels and 78% for High Tariff A hotels. Once these levels are breached, in either a rising or falling market, room rates are adjusted to maximize returns as demand rises or support occupancy as demand falls. Room rate rises during an up-cycle typically dominate RevPAR growth. The turning points of these cycles are very difficult to predict - either the occurrence of external shocks or the point at which over-supply becomes critical. 42 The highest monthly occupancy rate achieved — 487 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT We believe that the projected strong demand for and tight availability of rooms provides a solid foundation for further room rate rises over the next few years.