The Chinese Hotel Market

Asia, especially China, is progressing at an amazing speed in all areas. According to the 2007 Hotel Development Report published in China, it is estimated that there will be 1,079 four to five stars hotel projects opened in the year 2008 worldwide offering 131,517 rooms. Asia is taking a substantial share of this worldwide development with 386 four to five stars hotel projects. Of the luxury hotels being developed in Asia, 188 projects are in China representing 71,964 rooms. Further, 70 percent of the properties opening in China are stand alone four and five star hotel, as opposed to a part of a mixed use complex.

The SARS outbreak in 2003 caused a setback in China tourism as a whole. However, the Chinese hospitality industry rebounded quickly with increased foreign and domestic travel both in business and leisure sectors. In 2006, the Chinese lodging industry enjoyed increases of 11 percent and 9 percent in ADR and occupancy respectively. The general consensus remains optimistic for 2007 and 2008 while China readies herself for the Beijing Olympics in 2008 and Shanghai World Expo in 2010. China is also poised to be the largest travel destination in 2015 according to a UN forecast.

Since 2004, China’s high end lodging has seen a steady average increase in revenues of 9 percent as a result of continuous increases in ADRs. Domestic travelers, with their rising spending in MICE, as well as increased F&B consumption, now constitute a much larger market mix in top tier establishments. There is also much speculation that the Chinese currency will further appreciate and become more freely convertible in the not too distant future. These favorable conditions, along with the rising spending power of general Chinese citizens, have attracted a flood of interested parties to China’s real estate market and the hospitality industry.

In some Chinese cities, there are some early signs of overbuilding, but developers are still constructing new hotels hoping that, “if we build them, they will come”. Many of these developers are building the hotels as part of mixed use complexes because they believe that having a luxury hotel in the complex will add “value” to the overall development. Such assumptions are often true. Therefore, many hotels in China are built not purely from a demand driven perspective. Many luxury iconic hotels are also built because local officials believe that having a signature property in their jurisdiction will put their city/municipality “on the map”. If the money is not used, it will have to be handed over to The Central Government anyway, so what else is better than having a luxury hotel built?

In Beijing alone, there are about 100 new higher star rated hotels lined up for operation in 2006 and 2007. Based on room count, 3 to 5 Stars hotels will increase 17.6 percent from 85,000 rooms in 2007 to 100,000 by mid-2008 before the Olympics. Visitation to the city is projected to increase 15 percent per annum from 2006 to 2008 which is less than the increase of hotel room supply.

There is much speculation on how the Beijing hotel market will fare in the future. After the 2008 Olympics, most industry experts believe that the market will suffer, but most are hopeful that the downturn can soon be reversed by increased demand.

The Shanghai market experienced robust growth in number of visitors and ADRs as well. One hundred and three million visitors came to Shanghai in 2006. The 2010 World Expo Year is estimated to attract 140 million of which 70 million will visit Expo. It is estimated that there will be about 15,000 five-star rooms coming into the market the years right before and after Expo, doubling the supply of 2007. There is a general concern among hoteliers that Shanghai will have an oversupply of deluxe hotel rooms after 2010.

Most of the major brands have already started operation or plan to start operation in China. Well known international hotel management groups in China include: Starwood, Marriott, Hyatt, Accor, Four Seasons, Intercontinental and Hilton. One very interesting player in the field is US brand Howard Johnson. The company has completely rebranded itself in China managing mostly four and five star establishments. In US, the Howard Johnson brand is better known for its motel type of properties.

Facing international competition, China’s own operators are also carving out their own markets and territories. Some have become quite successful and are well recognized. Currently, there are three tourism related corporations listed among the 2007 China Top 500 companies in terms in competitiveness. They are China OCT Group listed at 150th, Beijing Capital Tourism Group at 172nd, and Jinjiang International Group at 284th. None of the companies were listed in the 2006 Top 500 list. Jingling Group, the first domestic hotel operator, is also expanding its territory rapidly. These Chinese companies, often with governmental support and better knowledge of local market, have been able to secure their foothold in the industry.

The hotel market in China is rapidly maturing, and the Central Government aspires to create an even field for domestic and foreign investors alike by allowing free market forces to play out. However, one cannot ignore the fact that China is still much of a “controlled economy” and “Rome was not built in one day”. So despite how much the Chinese Government promotes and portrays China to be an international investment center, there are still several political and business practices that foreign investors should be mindful of. It is always wise to think locally. Like Sun-Zi, the ancient China military strategist said, “Truly know yourself and your opponent. You will win every war.”

For more information on hotel markets in China, or the rest of Asia, please contact Ms. Wingsee Auyeung, Managing Partner of the PKF Consulting, Inc. office in Shanghai (www.pkfchina.com). She can be reached at wingsee@pkfchina.com, or +86 (21) 6288 2077.