Hilton Should Open a Hotel

Hilton should open a hotel in Phnom Penh. The market, compared with the major Southeast Asian cities, is low in competitive intensity, particularly among established Western names. Although Cambodia remains a frontier country, it is modernizing rapidly and with this comes a reduction in risk. In addition, a Cambodian operation would help Hilton to build a stronger portfolio in Southeast Asia. As a result, Cambodia is one of the lower-risk growth markets remaining in Asia, and Hilton should seize the opportunity to enter the market.

The level of opportunity in Cambodia is strong. Phnom Penh only has three five star hotels at present and of these only two are from international brand names (InterContinental & Raffles). The remaining competition comes from Asian companies, including the local Grand Lion Group, that have low brand recognition among foreign visitors. Demand for hotels in Phnom Penh is growing, a function of two main drivers. The first is that as Cambodia modernizes, demand for business travel is growing. Phnom Penh is the largest city in the country, and is proximate to both Bangkok and Saigon. Cambodia experiences a significant amount of Western capital inflow, both for economic development and for tourism. In addition to Phnom Penh, there is further opportunity for growth in Siem Reap (home of the Angkor temple complex) and in the beach resort of Sihanoukville.

The current market situation for the Phnom Penh hotel market is favorable. Land prices are down to around $2,700 per square meter as of the end of 2009, compared with over $5,000 a few years ago. This ebb in the highly volatile Cambodia real estate sector comes with the global economic slowdown, which has reduced the flow of foreign capital to the country, especially from hard-hit countries in the region.

Cambodia is a frontier country, so there is significant risk. There is little currency risk, since most business is conducted in U.S. dollars, even at the street level. The local currency, the riel, is not a hard currency but the ubiquity of the dollar means that we would have limited exposure to it. The Thai baht is sometimes used as well.

The economy of Cambodia grew in the range of 10% per annum from 2004 to 2007. Much of that growth was driven by the textiles industry, but Cambodian firms lost their WTO protections in 2005, which has hurt economic growth. The long-range outlook for the Cambodian economy is dependent largely on the development of tourism and the potential of the oil fields that have discovered offshore. Owing to the impacts of the Khmer Rouge era, there is a high degree of demographic imbalance -- most Cambodians are under 21 years of age. This will create pressure on the government to develop competitive trade policies and to spur direct foreign investment. The investment climate, therefore, is likely to improve, triggering a long-term uptick in business travel and in tourism.

There is some degree of political risk as Cambodia, as Cambodia is a Kingdom with only limited democracy. The Cambodian political system is relatively weak, but it is slowly becoming more favorable. The legal system is hodgepodge of codes, but common law is becoming more influential and the vestiges of communist legal codes are being gradually removed. It should be noted that even though Cambodia has what appears to be relatively stable government, the political risks can be hedged through the Multilateral Investment Guarantee Corporation (MIGA), a World Bank affiliate that offers political risk insurance for companies operating in emerging markets such as Cambodia.

However, the foreign investment climate has improved significantly in recent years, especially with respect to hotel development, including in Phnom Penh. A new system for lease registration has been developed that effectively allows for registering land titles, allowing foreign entities to take out 99-year leases on property, which otherwise would be subject to foreign ownership restrictions. Those restrictions on foreign ownership of land have stifled foreign direct investment in the past. As these rules change, Hilton's ability to build out a strong Cambodian asset base will improve. It is recommended that in order to obtain early mover advantages that Hilton get in front of this curve by taking out 99-year leases on properties, something other hoteliers have done already.

The hotel business in Phnom Penh is currently underdeveloped. There are few international players; most hotels are small operations owned by domestic firms either wholly or in partnership with firms from other Asian countries. Standards are relatively low. Business and tourism travel is growing despite the challenges of the past year. As the global economy improves, tourism is expected to revive and there is also a high level of demand for business hotels, in particular from corporate guests from around Southeast Asia. Phnom Penh's first skyscraper opened in 2009, and there are more such projects under way. The result will be an increase of businesses setting up in the city, and this will bring a rise in business travelers to Phnom Penh as well.

Hilton would occupy the high end of the Phnom Penh market. We would not be able to compete on the basis of price with the local hotels, but Hilton's strong brand, decades of experience and high standards of service would allow us to take market share away from the local hotels. It is believed that many of those hotels win business simply because there is so little competition at the high end that it can be difficult for business travelers and Western tourists to find accommodation that meets their standards. As result, a Hilton property in Phnom Penh can be expected to enjoy healthy occupancy rates.