SPECIAL REPORT : CHINA
of an advantage , as they can set up in the new towns without cannibalizing business from the aging city centers .
Developing in new towns is , in many respects , an act of faith . Ken Greene , Wyndham Hotel Group ’ s president and managing director for Asia Pacific , is routinely signing deals for openings in markets that lack physical or demographic infrastructure . “ You have to have some vision ,” Greene says .
Resort markets hold great potential for upscale and luxury development as Chinese 20-somethings are showing an appetite for leisure travel . Plus , state efforts to curb inflation in the housing market are making mixed-use urban projects less attractive , driving cash-flush developers to explore resort opportunities . “ Certain markets have oversupply because the rate of growth in terms of rooms supply outstrips the rate of demand ,” says Adeline Phua , a Shanghai-based associate director for consultancy HVS . “ With [ the state ] trying to chill the real estate market a bit , it ’ s probably good for certain markets because it gives some time to absorb the new development .”
Beach resorts like Xiamen and Hainan as well as the mountainous regions of Yunnan and Sichuan are
Shangri-La focuses on F & B at its new Kerry hotel in Pudong ,
Shanghai .
receiving substantial attention from developers . The leisure segment is the China hotel industry ’ s most vibrant submarket , Summers believes . “ People are willing to pay a lot for leisure , and business is pretty strong ,” he says .
Midscale will catch up The hotel pipeline across China overwhelmingly favors the luxury segment , with the midscale and upper-midscale segments accounting for only 35 % of new supply , according to STR . China ’ s supply-driven expansion has biased high-end projects , leaving plenty of competitive space for midscale and limited-service product down the road . However , the country ’ s challenging operating environment is suppressing rates at the top end , making midscale investment a dicey proposition for now .
Still , luxury hotels have elevated various Chinese markets ’ prestige , making them ripe for downmarket development , Langham ’ s Young says . “ While luxury is still growing , the new battleground is midscale and select-service ,” Young notes . “ Arguably , these profitable segments haven ’ t lagged at all .”
Most international groups active in China operate on management deals , and the master franchisor model is also popular . Wyndham , with more than 460 hotels open in the market across five brands , is unusual in China as both a manager and a straight franchisor . Greene believes the midscale segment will gain traction in China once hotel companies become comfortable employing the traditional franchising model there as the market matures and more owners are qualified to keep management in-house .
When midscale development does come to China , look for the major cities to once again lead the way . “ I know people think Shanghai is overbuilt , but that ’ s a temporary issue ,” Greene says . “ Tier-1 opportunities still exist , and I think you ’ ll see a trend toward the 4- and 3-star segments there .”
The bottom end of the market is actually China ’ s most active , and looks to stay that way for several years . China ’ s upscale and luxury segments are dominated by international players , but the economy segment overwhelmingly features domestic companies like 7 Days Group , Shanghai Jin Jiang International Hotel Group , Home Inns & Hotels Management and China Lodging Group , and all are engaged in staggering growth . Guangzhou-based 7 Days Group , China ’ s second-largest domestic economy hotel chain with more than 800 properties , expected to open 360 hotels in 2011 , placing it among the most rapid expansion programs in industry history .
Economy segment growth may even accelerate . Eric Wu , chief financial officer for 7 Days Group , estimates more than 90 % of China ’ s downscale hotel inventory is unbranded , leaving tremendous space for market consolidation and flagging of old properties in need of rehabilitation .
In the third quarter , 7 Days Group posted 85 % occupancy , while Home Inns — the largest domestic operator of economy hotels — boasted 94 % occupancy across 1,004 properties . “ We believe we are still at least several years away from reaching that ( saturation ) point ,” Wu says . “ The demand in the lodging industry — especially the economy hotel segment , which represents a very wide customer base — will continue growing in the future .”
32 HOTELS January / February 2012 www . hotelsmag . com