Travel agencies starting to build own hotels

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Travel agencies starting to build own hotels

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Travel agencies in Korea are expanding further into the hotel industry by building affordable hotels as they hope to enjoy the combined effect of their interests in the tourism and hotel industries.

Hana Tour, the No. 1 travel agency in the country, is taking the most aggressive action as it plans to open this year a 260-room business hotel in the capital, according to Kwon Hee-seok, vice chairman of the company.

Seoul has long had an accommodation shortage, and with more tourists flocking to the city and international businessmen arriving as local enterprises increasingly go global, there is a growing niche for hotels that offer close to five-star standards at a cheaper price.

Kwon unveiled the company’s plan to embark on construction in April. Gwanhun Building, in front of Hana Tour’s headquarters in Jongno, will be renovated into a new business hotel in late September, he said.

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Hana Tour ITC, a subsidiary of the travel agency, joined forces with real estate company Shinyoung Asset, which owns the building, to make inroads into the sector by investing 5 billion won ($4.4 million) each in what will be their first hotel.

“In three years, we will build even bigger hotel with 750 rooms, giving us a total of 1,000 rooms in the capital alone,” Kwon said.

Mode Tour has also jumped into the hotel business by acquiring a 24.4 percent stake in real estate investment company Aventree last year. The realtor is renovating the 10-story Cheonma Building, also in Jongno, into the Aventree Jongno Tourism Hotel. The 160-room hotel is slated to open on Aug.1.

The primary reason why travel agencies are trying to broaden their reach is the rising number of foreign tourists in the country.

According to the Korea Tourism Organization, a record number of 9.79 million foreigners visited last year, up 11 percent from 2010. The number of Chinese tourists, in particular, posted 41.5 percent growth on-year in 2010 and 17.4 percent growth in 2011.

Seoul is currently short of about 15,400 rooms, the tourism department at the Seoul Metropolitan Government said.

“The average room occupancy rate stands at higher than 95 percent in the country, even higher than 75 percent in the United States,” said Oh Ik-geun, a professor at Keimyung University. “Not only foreigners, but also native Koreans living in provincial areas find it hard to get a room when they come to Seoul,” he said.



Correcting the imbalance

Domestic travel agencies are striving to plug the shortage in available rooms. An industrial official told the JoongAng Ilbo that it is more difficult to find rooms than customers these days. The situation is much tougher for smaller travel agencies, as some hotels abruptly cancel the reservations made by them to provide rooms in favor of larger agencies with more clout, according to the official.

“We sometimes pay extra money, or wine and dine hotel officials to get rooms,” the official said. This is why the travel agencies decided to build their own hotels instead of lobbying hotel people.”

Adding the hotel business to their portfolio also helps the travel agencies balance sources of revenues. Hana Tour and Mode Tour derive about 90 percent of their profits from sending Korean travelers overseas, while a mere 10 percent comes from bringing tourists into Korea. The two agencies, therefore, plan to increase the proportion of their inbound tourism business by diving into the hotel business.

It is important for them to focus more on the services they offer domestically as it helps shrink their vulnerability to risks such as foreign exchange fluctuations, which directly affects their overseas operations.

When the number of Koreans going abroad has plunged unexpectedly in the past, for example due to outbreaks in other Asian countries of SARS in 2003 or bird flu in 2005, the travel agencies had to try to fill the shortfalls in revenues by attracting more foreign tourists into the country.

“We need to be careful about building hotels, because we will have to compete with existing ones,” an official at Hana Tour said. “However, we need the hotel business for growth.”



Investments abound

Numerous owners of old buildings and realtors are proposing that travel agencies cooperate with them in the hotel business. The Hana Tour official said his company is receiving numerous calls from investors including building owners.

The reason for their developing appetite is that such moves drive up the prices of their properties and enhance their prestige.

“While the average returns on investments in commercial buildings, including office space and studios, stands at less than 5 percent, the figure for business hotels is higher than 10 percent,” an official at Shinyoung said.

However, the official expressed concern about the abruptly accelerating growth in the number of new business hotels. “They are increasing too quickly. There is a worry that, later on, many rooms could remain empty during off seasons,” he said.

Experts stress that newcomers in the hotel industry will have to accumulate know-how on hotel management, adding that smaller players that forgo subsidiary facilities and services may leave customers unsatisfied.



Shopping mall makeovers

Shopping malls in central parts of the capital are also undergoing makeovers.

Migliore and Mplaza, famous malls in the central shopping hub Myeong-dong, are currently under renovation and will reopen as hotels.

A few apparel stores are now operating on the first and second floors of Migliore, while the rest of the 17-story building is being transformed into a hotel.

Mplaza, 200 meters (656 feet) from Migliore, has recently been approved to be used as a business hotel. The 22-floor building will transform into a 315-room hotel within a few years.

By Chae Seung-ki [ssh@joongang.co.kr]

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