Hotel industry in Indonesia and Jakarta: 10 000 rooms in the pipeline

Erastus Radjimin, a successfull hotel entrepreneur and CEO of ARTHOTEL, talks about the outlook for the hotel industry and tourism.

How do you see the sector now that we have spoken about education and skills development which is very important? What are your personal expectations for the sector?

Indonesia has a lot of attractions for visitors. Unfortunately, though there are many diving spots, beaches, mountains and more they have not been fully developed yet. What I mean is that infrastructure might not be complete. Getting from one point to another is difficult. Tourist businesses need many things, from a lifestyle perspective, an ethnic perspective and a pricing perspective as well as logistics and how to maintain that business to sustain it in that sector in such a remote area with minimal infrastructure.

When it comes to a city it depends on whether the government is trying to grow the demand for hospitality in the big cities. For example, Surabaya, which is my hometown, is the second largest city after Jakarta but the cash transactions and money circulation is nothing compared to Jakarta. Indonesia is very much focused on Jakarta at this point and less focused on other major cities.

What is the outlook for the hotel industry in Jakarta?

It has just started to change. Right now a big number of hotel have opened in Indonesia, Jakarta, Bali, Surabaya, Bandung, Sumatra and other major cities and the owners and developers are becoming more modern. They know that there is so much competition in the market so how can their hotel be more competitive than the others. That is where branding comes in. People are starting to realize that branding is important. Concept is important. They believe in differentiation within the market and which market they should be aiming for.

Because right now if you look at the big international hotel chains like the Marriott and the Hilton even they have started coming up with new boutique hotel brands. Why is that? There is no doubt that their R&D efforts are much more than what a local company could do but the fact that they started with this movement of young small vibrant boutique hotels and designer lifestyle show that there is a market for it. In Indonesia I have experienced this myself. Owners coming to us and talking about joining forces or investments or management contracts and when I ask why they would want to do that, after all we are small compared to the big international companies, their answer is simple; because you guys are different. Because you are “human”. Because when you talk to big companies it’s almost like David versus Goliath. The bigger you are the slower you are, the more hierarchies there are and with smaller companies there is more flexibility and you can be more current within the local market. In terms of the customer perspective, people start getting bored with the conventional hotel experience.

They want to experience more and not have it cost them much more. That’s where I see the trend going. Many small independent boutique hotels coming into the market. Some will be good and some will be competitive. Having a hotel is a long-term game and a long-term investment of a minimum 10 year stay back period and therefore time will tell which hotels will be able to compete within the market and which will be filtered out.

What are the returns on investment like in the hospitality industry and especially in the hotel sector and are you happy with it? What is the industry benchmark for the hotel industry?

In terms of return on investment it varies based on how many Stars your hotel has because it’s based on how much you spent on the project and what your rates are. For Artotel our average return on investment would be 5 to 6 years and with the GOP of the performance hotel around 45%. We customise projects so our average return on investment would be 5 to 6 years where the industry average for our Star rating is usually 8 to 10 years.

The reason why we are able to achieve this is that because when we build we do it based on the cost of a 3 Star hotel project and we charge on 4 Star pricing and our image is a 5 Star image. So far that has been a sustainable formula for us. A problem for many people is that they want to build but they don’t have enough investment or they don’t have a big enough piece of land to build on. That is where boutique hotels are finding a gap in the market.

What is the outlook for the hotels in Jakarta? Do you feel that the occupancy rate and return on investment is enough?

To be honest with you, there are many hotels in the pipeline. We are talking about more than 10 000 rooms possibly within Jakarta itself. But as we go along there are always projects that will be delayed or not built etc. So in terms of the supply coming in, it will still match the demand. As I like to say; Jakarta is a combination of Los Angelo’s, the city of entertainment, New York, the city of finances and Washington DC, the city of government all blended into one. In Jakarta you have entertainment, government and finances. We have everything.  Looking from an investor’s perspective if I had to pick a city to invest in within Indonesia I would start with Jakarta. It has the most mature market, it has the biggest buying power in Indonesia, there is more availability of space and it has a bigger population. Therefore I think that Jakarta is a safer investment.

Right now citywide occupancy rates are 60% to 70% but it does depend on which area and which sector of Jakarta you are based in. Jakarta has a lot of traffic which is good for hotels because with the traffic you can’t always finish your work in one day so you have to overnight in Jakarta in a hotel. When your work takes you to a different area the next time you have to book into a different hotel. I think this will spread the growth of supply and demand around Jakarta. Traffic is a problem but for now it is a good problem to have from our perspective.

Which hotel segments are going to thrive in Jakarta?

In Jakarta itself I would say that the growth of hotels would be biggest in budget hotels. 1 or 2 stars. That is the most saturated market because not only are international brands creating these hotels but there are also a lot of ‘mom and pop’ hotels being built. So it is the most saturated but it is being met with a high demand.

5 Star has been very stable in the Jakarta market because of the growth of the economy but we are seeing a lot of new trends in the boutique hotel area because of the availability of smaller pieces of land in prime locations which customers are quite happy to pay more for. Something slightly better than a budget hotel. Something likes a 3 or 4 Star luxury facility with a smaller room size.