Korea’s hotel sector continues to experience robust growth underpinned by both favourable demand and supply dynamics in the market. It has already become one of Asia’s top tourist destinations and domestic demand continues to grow steadily. Meanwhile, Korea’s hotel operators have responded by adding brand-new hotel categories and ushering in more luxury brands to the market.

First, looking at the demand front, China continues to be the biggest contributor, representing 34% of all foreign visitors travelling to Korea. The strained relationship between China and Korea due to the THAAD dispute in early 2017 led that number to plummet, but from 2018, the number demonstrated a sharp turnaround, improving almost 30% y-o-y. Korea’s geographical proximity and appeal of K-pop culture and K-beauty would continue to allow Korea to capitalise on the rise of Chinese travellers. However, more importantly, Korea has successfully diversified its tourist base, drawing more people from second source markets  such as Japan, Taiwan, Vietnam and the Middle East. The latest number of tourists from Taiwan and Vietnam more than doubled and tripled, respectively, compared to five years ago while the number of tourists from Middle East rose more than 53% from 2014 to 2018.

Another demand source is the solid flow of domestic travellers, reflected in an emerging trend dubbed “Hokangs”, a newly coined word combining hotel and vacance. In lieu of staying in overseas hotels during their holiday, more millennials are attracted to local hotels, giving a new spur to the Korea hotel industry as young people desire to spend less and avoid the hassles related to an international trip. To accommodate these demands, many hotel chains have launched more stylish boutique hotels featuring entertainment elements in hot spots, as well as developing new product and service offerings geared towards “Hokangs” travellers.

To meet this abundant demand, the supply of hotels has been explosive – the number of hotels operating in Seoul more than tripled from 146 in 2011 to around 440 in 2018. However, a recent slowdown in the number of new completions coupled with the recent fall in Chinese tourist visits has provided stability to the market, leading to fewer rooms added during recent years, a sharp fall compared with the period between 2011 and 2015.

Intrigued by these supply and demand dynamics, many institutional investors are drawn into the sector. However, the sentiment of many domestic players still remains low – affected by not only the past supply overhang and the THAAD trouble, but also their lack of experience in the sector. On the contrary, overseas investors have become keener, as they are betting many top destinations in Asia would benefit from the ever-rising demand from China and the increased affordability of international travel thanks to the arrival of low-cost carriers and online travel agencies. More importantly, tight competition in other sectors and under-allocation to the hotel sector could compel more investors to add to their exposure into the Korean hotel market down the line.

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