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A new and unchartered phase for China’s hotel market: focus on hotel sustainable development strategy

Jones Lang LaSalle Hotels’ latest research continued to focus on the new competition phase of the hotel market and the sustainability of the hotel development strategy in China.

With a history of vibrant real estate market and a strong development pipeline, the hotel market is seeking to balance between increasing demand and growing supply. According to Jones Lang LaSalle Hotels’ latest research report “China Hotel Market Outlook 2012” in conjunction with the China Tourism Hotel Association, many developers and investors are gradually shifting their focus from building new hotels to protecting their asset in order to better respond towards the risks and potential challenges they might face in the future. Therefore, Jones Lang LaSalle Hotels believes that a solid understanding of the market conditions and effective asset management to maximize returns on investment while minimize risks are essential for both the owners and operators. The report also highlights significant trends and opportunities in the industry such as: 

1. The RevPAR of surveyed hotels is expected to increase by 3.1%, which is lower than the 10.0% growth in 2011.
2. Amongst the 35 studied markets, room count of internationally-branded hotels increased 14.4% from 2011. Growth of rooms in Tier 1 cities showed a consistent trend as the previous years. On the other hand, the market in Tier 2 and 3 cities are more likely to experience a stronger growth as it is less developed compared to Tier 1 cities. Between 2011 and 2014, the compounded annual growth rate of new supply in Tier 2 and Tier 3 cities is estimated at 21.5% and 28.6%, respectively.
3. Business travellers are still the main customer source of the surveyed hotels. MICE and incentive travel remains the most important demand generators. As domestic consumption continue to rise, leisure travel market is likely to be stimulated by the local demand of lodging products.
4. Cost of operation continues to increase, along with high employee turnover rate, are significant concerns for hotel operators.

Andy Flaig, Managing Director for Advisory Asia of Jones Lang LaSalle Hotels notes, “Many Chinese cities today are confronted with a hotel demand and supply imbalance despite the significant economic growth. While this is especially apparent in the 5-star sector, we see a lot of potential growth opportunities for the limited service mid-market hotel sector that to us shows similar levels of pent up demand as the budget sector 10 years ago and still today enjoys occupancy levels on average in excess of 85%.” The Senior Vice President of Jones Lang LaSalle Hotels, and Head of China Advisory, Mr Charles He, notes: “Despite increased operating costs caused by rising inflation and the increased labour costs showed increasing challenges to future operations compared with the survey in 2011, however, 44.6% of surveyed hotels are optimistic or very optimistic on future market outlook relatively more confident compared with the 43.0% surveyed result in 2011.”

Top 10 Cities of New Supply

Hotel revenue can mitigate certain inflation risks by adjusting daily room rates, the depreciation and amortisation can be deducted from total tax liability, and the hotel can generate relatively stable on-going cash flow for owners in a longer investment horizon. Therefore, developers continued to appreciate hotel properties when the real estate market experiences a decline under the control of the government. It is estimated that by the end of 2014, the top 10 cities for new hotel supply growth are Taiyuan, Haikou, Zhengzhou, Zhuhai, Hefei, Harbin, Changsha, Guilin, Xiamen and Tianjin. The top 10 cities in terms of number of new guest rooms are Shanghai, Tianjin, Chengdu, Shenyang, Xiamen, Wuhan, Beijing, Guangzhou, Haikou and Wuxi.

City cobweb and its hotel market development character

According to China 50, Jones Lang LaSalle’s research team has outlined each city’s fundamentals under 12 indicators and created the “City Cobwebs”. The “City Cobwebs” shows the responding evolution curve of the market and influences towards the local hotels. The research includes factors such as real estate, social, infrastructure and other economic performances. As to mature markets, it is important to consider the characteristics of the demand in order to better support the current development. As to cities with high potentials, the growth of supply might not be appropriate for the demand level of the city, which in turn puts pressure on market performances.  For international hotel operators, new opportunities are now emerging in Tier 3 cities, but operators will need to be more flexible and adaptive in order to compete effectively in these untested markets.

Hotel Asset Management Strategy

China’s hotel market is progressively moving from the development / expansion stage to an ownership / maintenance phase. The continuous increase on labour and operating cost, competitive pressure from new supply and aging facility issues causes challenges and pressures to hotel investors, owners and operators. Hotel owners and operators need to have a solid understanding of the individual hotel market and asset cycle to determine a tailor made asset management plan for each and every market. An effective hotel asset management strategy requires a comprehensive application of effective cost management, understanding of market factors, accurate market assessment, sound forecast, reasonable risk management and revenue management.

The future of tourism development

The development of tourism destinations and hotel properties are being encouraged by increasing disposable income and purchasing power, along with preferential government policies. On the other hand, the competition of tourism-related real estate projects is being strongly increasing across the country. The success of a tourism destination and a tourism real estate development cannot rely solely on natural scenery or cultural heritage, but also the integration of existing resources, facilities and policies, as well as short and long-term development strategies.

About FocusOn – China Hotel Market Outlook

Jones Lang LaSalle Hotels’ FocusOn – China Hotel Market Outlook is a joint annual publication produced with the China Tourism Hotel Association which provides a high-level, thought-leading overview of demand, supply, and performance trends across China’s markets. In its third consecutive year of publication, the China Hotel Market Outlook includes a survey of hotel owners and operators as well as a high-level trend analysis of 35 urban hotel markets in China. It contextualizes current and future hotel performance trends with fundamental developments in China’s macro-economic, tourism, real estate, and capital market environment.

About Jones Lang LaSalle Hotels

Jones Lang LaSalle Hotels, is the industry leader of global hotel investment services. The global team comprises over 250 hotel specialists, operating from 40 offices in 20 countries. In 2010, Jones Lang LaSalle Hotels provided sale, purchase and financing advice on $4.1 billion worth of hotel transactions globally. In addition, advisory and valuation services were provided on over 1,000 assignments.

Our China team constitutes multilingual professionals specialize in hotel and real estate development, dedicated to serving our China clients through offices in Beijing and Shanghai. As of today, the team has completed over 250 assignments in over 60 cities in China. Our services span the full hospitality spectrum – from single properties to large portfolios, from luxury assets to selective service and budget hotels, resorts and serviced apartments – and include market studies, feasibility analysis, operator selections, management contract negotiations, investment sales, mergers and acquisitions, capital raising, valuation and appraisal, asset management, strategic planning, industry research and project development.