Sun, sand and sea are believed to be the main elements that have attracted visitors to Sabah. Malaysia’s second largest state is rich in nature, with islands, mountains, rainforests and wildlife.

According to Zerin Properties group CEO and founder Previndran Singhe, Sabah has become a popular tourist destination over the past few years and has seen an increase in domestic and international arrivals.

Also known as the Land below the Wind, the state was selected as “Malaysia’s Favourite Destination” at the 47th edition of the Malaysian Association of Tour and Travel Agents (MATTA) Fair 2019, he says.

In 2016, Sabah saw a resurgence in the number of visitors, which had declined after the earthquake in Ranau and high-profile abductions on and off the east coast of the state, says Knight Frank Malaysia Sdn Bhd (Sabah) manager Welton Edward Chin. Visitor arrivals have been increasing steadily since then.

Last year, the state’s tourism industry recorded its highest receipts in history at RM8.342 billion and saw record-high arrivals of 3.87 million, up 6.6% and 5.3% respectively from the year before, according to the Sabah Tourism Board (STB).

The overall gross international arrivals was 1.36 million in 2018 against 1.23 million in 2017 — a double-digit increase of 10.2% — while domestic arrivals increased 2.8% year on year to 2.51 million.

Statistics from STB show that there were 371,311 international arrivals in January to March this year, up 1.7% from 365,212 in the previous corres­ponding period. Meanwhile, there were 662,560 domestic arrivals in the first quarter of the year compared with 582,409 last year, an increase of 13.8%.

Thus, the total number of arrivals in January to March was 1.033 million, an increase of 9.1% from 947,621 last year.

The rise in visitor arrivals may be attributed to factors such as an increase in promotional activities, diversification of tourism offerings and enhanced air access, say property experts.

“This is the result of years of a partnership between the private and public sectors aggressively putting Sabah as a top-of-mind destination as well as embracing digital marketing,” says Chin.

“The addition of 19 direct international flights, including the reinstatement of the Kota Kinabalu­-Bangkok flights the Thai arm of AirAsia last year, led to the significant increase in arrivals,” says Previndran.

He adds that the Kota Kinabalu International Airport (KKIA) and Sandakan Airport welcomed a total of 343 non-scheduled flights last year compared with 215 in 2017. These flights brought passengers from China, South Korea and Japan.

According to STB, domestic visitors made up 65% of total arrivals last year. As for international arrivals, those from China accounted for the highest percentage at 44% — thanks to the 15-day visa exemption for tourists from the country — followed travellers from South Korea at 25%.

About 84% of the visitors last year were in Sabah for a holiday and 54% were free independent travellers (FIT). In terms of accommodation, 45% stayed in hotels.

This year, Sabah is targeting to achieve four million visitor arrivals. Previndran says the state government would like to see more balanced tourist arrivals from China, Europe, the US and Oceania as well as the domestic market.

However, he thinks that the state’s tourism industry may, to a certain extent, experience a slight drop in performance. “This is due to increased competition from regional countries for tourists as well as the issuance of travel advisories countries such as Japan and the US telling people to avoid Sabah’s east coast for security reasons.”

Kota Kinabalu, the gateway to the state

Kota Kinabalu, the capital of Sabah, is bounded KKIA on the south, the mountain ridge on the east and the South China Sea on the west.

Statistics for visitor arrivals to Kota Kinabalu are not available, says CBRE | WTW (Sabah) director Cornelius Koh. However, most visitors arrive in Sabah via its capital city as it is the gateway to the state with the KKIA located there, he adds.

The KKIA is the second busiest airport in Malaysia, after the Kuala Lumpur International Airport.

Agoda’s booking data reveals that Malaysians still prefer to travel within the region to celebrate the Lunar New Year and Kota Kinabalu is ranked ninth on its list of favoured destinations.

Its attractions include cultural and heritage landmarks such as the Kota Kinabalu City Mosque and Sabah State Museum, the natural scenery, wildlife, beaches and islands, and the food.

Recently, the Sabah government announced plans to launch five new projects to attract more tourists to the state, says Previndran. Three of them will be in Kota Kinabalu while the rest will be in Tawau.

“The new projects in Kota Kinabalu include a war memorial pavilion at the World War Two memorial site and a cultural centre to showcase all 35 ethnic groups living in Sabah,” he adds.

The vibrant tourism sector and increased visitor arrivals have benefited tourism-related sectors and the hotel industry, according to the Asia Pacific Real Estate Market Outlook 2019 report CBRE | WTW.

Data provided property experts show that there are about 82 hotels of wide-ranging classifications star rating in Kota Kinabalu, excluding chalets and villas on the islands and highlands. Their estimate of the number of hotel rooms in the capital city ranges from 11,784 to 14,586.

As at last year, there were about 10,000 hotel rooms in the three- to five-star category in Kota Kinabalu with the completion of the Mariott KK City Waterfront and ibis Styles Kota Kinabalu in Inanam.

Based on the CBRE | WTW report, the estimated occupancy rate of the three- to five-star hotels in the capital was 74.6% on average in the first half of last year.

Supply and demand

Knight Frank’s Chin and CBRE’s Koh believe that the supply of hotel rooms in Kota Kinabalu is generally enough to cater for demand, but securing a room during peak periods such as festive seasons may be a challenge.

Meanwhile, Zerin Properties’ Previndran says the existing supply of three- to five-star hotels in Kota Kinabalu is inadequate, particularly during festive periods. “There is a need for good-quality international branded hotels to cater for the anticipated increase in arrivals from the international market.”

Nevertheless, he notes that the state government has been proactively attracting hoteliers to increase the number of hotel rooms in the four- to five-star category, in tandem with the flourishing tourism industry.

The tourism boom has also resulted in more shophouses and shoplots being converted into hotels or hostels, observes Previndran. The latest planned conversion is a heritage building that used to be the office of Harrisons Sabah Sdn Bhd.

Koh says five-star hotels or upscale resorts have seen limited new supply over the last decade. “Des­pite the growth in the tourism industry and visitor arrivals to Sabah, the last decade only saw an increase of about 500 rooms for beach resorts within the five-star or upscale category. The increase in the supply of rooms did not match the increase in arrivals.”

There are a number of reasons for the shortage, say the property experts.

According to Previndran, the Kota Kinabalu hotel market is dominated small and medium-sized accommodations such as three-star and budget hotels, and homestays.

The government’s delay in approving applications and granting occupation certificates for new hotels has not helped the situation.

Hotel operators may also have been caught off guard the rapid surge in tourist arrivals. “The various efforts STB to promote the state, coupled with increased flights, have significantly boosted the demand for high-quality hotels, which has led to the shortage,” says Previndran.

Chin says, “Due to the higher capital cost and essential ingredients [needed] such as prime location, building quality, brand standard, level of service and necessary knowledge [to manage and maintain a hotel], the growth in upscale and luxury hotels, whether four or five-star, has been rather gradual.”

Additionally, the majority of global hotel chains have moved away from the “owned” model to an “asset-light” one, where the focus has shifted from bricks and mortar to managing and franchising.

“Unlike other services sectors, the hotel industry is capital-intensive, which is a potential obstacle to equity-based expansion models. As a result, recent international expansion hotel chains has been driven primarily non-equity models of entry, which is through management contract or franchise.

“Hence, it is a hefty process as extensive due diligence is necessary across a range of areas to look for the right partners or investors, and they have to have the capabilities to build up to the standards of the respective hotel chains,” says Chin.

One of the critical criteria for the development of a hotel with a good star rating is prime location. However, prime parcels are difficult to come in the relatively compact city centre of Kota Kinabalu due to its geographical setting.

“Thus, despite being high in demand, many developers and hotel operators are facing difficulty in sourcing the right development land, particularly within the city centre and its fringes,” says Chin.

He points out that the building height restriction due to the proximity of KKIA to the city centre does not help. This has limited the footprint of hotel developments, hindering many centrally located hotels from reaching their maximum potential in terms of design and planning, provision of services, number of rooms and size.

Those are some of the key requirements to be considered when establishing the star rating of a hotel.

The Asia Pacific Real Estate Market Outlook 2019 report reveals that several other branded 3- to 5-star hotels are in various planning and construction, and most of them are business class hotels.

These include Hotel Crowne Plaza Kota Kinabalu Waterfront (367 rooms), Hotel Holiday Inn Express (250 rooms), Citadines Waterfront Kota Kinabalu (222 serviced apartments).

Outside of Kota Kinabalu city centre, the hotels under construction are Pullman Kota Kinabalu Convention City (300 rooms) within the ongoing Sabah International Convention Centre in Tanjung Lipat and Hotel Jen (440 rooms) within the ongoing PACIFICITY mixed development in Likas Bay.

Currently, the only upcoming hotel within the resort category is Alila Dalit Bay Resort Hotel (152 rooms and 74 villas) located in the vicinity of Shangri-La Rasa Ria Resort & Spa in Tuaran.

Challenges

Kota Kinabalu still has a long way to go to be recognised as a top international tourism destination. This, in turn, will affect the tourism and hospitality industries.

The lack of new tourism products in Sabah is one of the challenges for the industries, says Koh. “Some of the existing products or attractions have almost reached their full capacity, and there is a dependence on a single market or sector.”

He suggests that the development and promotion of new tourism products need to take place, as well as the opening up of new and untapped travel markets.

Previndran concurs, adding that more direct flights from European countries, including Scandinavian countries and Russia, would help boost tourist arrivals.

He says the major tourism developments that are in the planning stage will be much-needed catalysts to make Kota Kinabalu and Sabah top tourist destinations.

Moreover, he believes that hotels should work with tourism players to offer unique products and experiences to visitors.

Guests are becoming more diverse, both demographically and in their expectations, says Chin.

The future of the hospitality industry will be driven the convergence of an increasingly competitive landscape and a diverse and evolving customer base that seeks out unique and individualised experiences, he adds.

“In order to survive, hoteliers will need to start incorporating big data insights, go beyond segments to provide personalised services, and utilise collaboration and open innovation to maintain an edge in technology and service,” says Chin.

Other hotel categories and Airbnb

Hotels in the budget category are struggling as there is an oversupply as well as competition from Airbnb.

“The majority of operators of small and medium-sized accommodations (three-star, budget and backpackers’ hotels) are also facing issues related to human resources and finance to sustain [their business] or compete with new competitors,” says Previndran.

There is a growing demand for Airbnb in Sabah but it needs to be regulated to a certain extent, he adds. “It needs to comply with local and state laws and requirements in order to ensure that the industry continues to be healthy and to create fair opportunities for all players, particularly within the budget and three-star categories, while safeguarding the interest of the public.”

Property experts opine that the emergence of Airbnb has, to a certain extent, disrupted the hotel industry, especially establishments with a lower star rating and in the budget category.

“Airbnb is relatively new in Kota Kinabalu and it is unclear if demand is on a par with supply. The regulations in terms of licensing and safety requirements are still a grey area and have yet to be established,” says Koh.

However, Airbnb benefits tourists when there is a lack of hotel rooms during peak periods, he adds.

In terms of services, facilities and experience, Airbnb is believed to be able to offer more compared with establishments with lower star ratings and budget hotels, says Chin.

“Although Airbnb presents plenty of opportunities, it also carries its fair share of controversy, particularly with all the uncertainties from the legal perspective. The state government is trying its best to safeguard the interest of the hotel industry but, at the same time, it does not want to neglect the potential of the Airbnb industry,” he adds.

According to Previndran, on Oct 16, 2017, the Kota Kinabalu City Hall said it was illegal to lease residential properties through Airbnb and other home-sharing platforms.

However, properties that are under commercial titles such as serviced apartments are able to operate as such accommodations, provided that they abide the existing Hotels and Lodging Houses by-laws and other regulations.

Chin, in quoting Stanley Chong, director of the city planning department of Kota Kinabalu, says only land zoned for commercial or commercial mixed-use developments may be used as Airbnb accommodations, and the buildings must be designed for commercial use under the development plan.

Additionally, in order for a short-term rental operation to be deemed legal, a licence must be granted the city council to the operator, and the latter must meet safety requirements set the fire department.

Finally, property developers have to clearly state in their sales and purchase agreement if a property is legally allowed for short-term rental.

Calling for more developers and hoteliers

Property experts say the Sabah government is encouraging developers, hoteliers and foreign investors to enter the hospitality market in the state.

“This includes building more hotels in order to cater for the growing demand in the four- to five-star category,” says Previndran.

To speed up the process, Previndran and Koh say the authorities should simplify the procedures and shorten the time frame needed for the application for new hotel developments, conversion of land and occupation certificates.

They note that tax incentives for new developments or expansions, and greater access to the tourism fund for small and medium enterprises to obtain loans with subsidised interest rates, will attract existing and future hotel players and investors.

“Extension of the pioneer status and investment tax allowance beyond Dec 21, 2020, for new four and five-star hotels would be good encouragement as well,” says Previndran.

Currently, Kuala Lumpur-based Ho Hup Construction Co Bhd is developing a 367-room five-star hotel in Kota Kinabalu. To be called the Hotel Crowne Plaza Kota Kinabalu Waterfrount, it will be managed InterContinental Hotels Group (Asia Pacific) Pte Ltd upon completion and is slated to open in 2021.

According to property experts, developers in Peninsular Malaysia with a presence in Kota Kinabalu include SBC Corp Bhd, S P Setia Bhd, Bina Puri Holdings Bhd and Mah Sing Group Bhd.

Meanwhile, Sabah developers in Kota Kinabalu include WMG Holdings Bhd (formerly known as Wah Wei Group), Sinaland (formerly known as Sinar Pembangunan Sdn Bhd), W Group (formerly known as Wong Kwok Group), Grand Merdeka Development Sdn Bhd (formerly known as Payung Niaga Sdn Bhd) and Suria Capital Holdings Bhd.

Looking at the statistics and numbers, it is safe to say that there is potential in Sabah’s hospitality market, especially in the four- to five-star category. However, as property experts have stressed, the state government will need to provide incentives to encourage more developers and hoteliers to enter the scene.