Hospitality

In China, There's Too Much Room at the Inn


For its new Andaz boutique hotel in Shanghai’s bar and entertainment district, Hyatt Hotels (H) spared no expense: Rooms boast color-adjustable lighting and glowing translucent bathtubs that offer a view of the city’s old French Concession area through floor-to-ceiling windows. There’s even a 23,672-square-foot spa and a water-surrounded glass pavilion for weddings and red carpet events.

The month-old Andaz is one of 19 five-star hotels that have opened in Shanghai in the past five years. Many boast eye-popping luxuries. What they lack is enough guests. The city’s hotel occupancy rate stood at 54.4 percent for the first nine months this year, down from 64.4 percent a year earlier when the city hosted the World Expo, says consultant STR Global. (Hyatt declined to disclose its Andaz occupancy rate.) By comparison, more than 80 percent of rooms were filled in Singapore and Hong Kong. Similar overcapacity is a problem across China, with a national hotel occupancy rate of 61 percent through September, the lowest in Asia, except India, among 15 countries tracked by STR Global.

That’s worrisome for the foreign hotel chains rushing into China, which last year overtook Spain to become the world’s third-most-visited travel destination after France and the U.S., according to United Nations World Tourism Organization data. The number of internationally branded hotel rooms in China is expected to surge 52 percent by 2013, after rising 62 percent in the past five years, according to Jones Lang LaSalle Hotels (JLL), which tracks data in 30 Chinese cities. “Hotels in some markets of China are clearly oversupplied in the next three to five years,” says Nigel Summers, Hong Kong-based director at hospitality industry tracker Horwath Asia Pacific. “The question is whether the increase in demand is going to be big enough to handle all the new hotels.”

That worry hasn’t stopped business and luxury chains. Hilton Worldwide says it will have 100 hotels in China by 2014, four times the number of properties it manages there now. At Britain’s InterContinental Hotels Group (IHG), owner of Holiday Inns and Crowne Plazas, one in four new hotel rooms over the next five years will be in China. “There could be short-term bubbles in the real estate market, but long-term, we feel very positive about it,” says Richard Solomons, InterContinental’s chief executive officer. The company says its revenue per available room, an industry benchmark tracking occupancy and room rates, rose 6.4 percent in the third quarter, led by a 10.8 percent increase in Greater China, which also includes Hong Kong, Macau, and Taiwan. It’s developing a still-unnamed hotel brand just for China to be unveiled in 2012.

In the next decade, China will account for 25 percent of hotels managed by Ritz-Carlton, the brand owned by Marriott International (MAR), up from 10 percent now. The Ritz-Carlton in the Chinese resort city of Sanya, opened three years ago, is its most profitable worldwide, says Victor Clavell, the chain’s vice-president for the Asia-Pacific region.

For Starwood Hotels & Resorts Worldwide (HOT), owner of the St. Regis, Sheraton, Westin, and W brands, China may eventually pass the U.S. as the biggest hotel market, said CEO Frits D. van Paasschen in July after relocating to China for a month from White Plains, N.Y., to “better understand” the company’s second-largest market. Starwood plans to double the number of hotels it operates in China to 100 by the end of 2012.

Hoteliers are betting travel by increasingly affluent Chinese will fuel the demand for more rooms. Chinese travelers took about 2.1 billion trips within the country last year, with domestic trips projected to rise at an annual average rate of 9 percent for the next five years, Jones Lang LaSalle Hotels says. “Every small government across China wants a five-star hotel in their city to support businesses and put them on the map,” Horwath Asia Pacific’s Summers says.

Global chains “risk diluting their brands,” says Ricco DeBlank, CEO of the hotel division at Sun Hung Kai Properties, which owns a Ritz-Carlton in Shanghai and plans to open four hotels in China over the next five years. “It’s a worry just to see all these brands going to China and other places in Asia at such a rapid pace because they can’t go anywhere else, and Wall Street is expecting a certain growth.”

The bottom line: Aggressive expansion in China by hotel operators has caused low occupancy rates. Only 61 percent of China’s hotel rooms are filled.


Steve Ballmer, Power Forward
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Companies Mentioned

  • H
    (Hyatt Hotels Corp)
    • $59.09 USD
    • 0.91
    • 1.54%
  • JLL
    (Jones Lang LaSalle Inc)
    • $125.12 USD
    • 1.50
    • 1.2%
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