Hotel executives continue to be bullish on China, where the national economy is picking up steam after a sluggish end to 2012.
GLOBAL REPORT—China’s gross domestic product might have softened last year, but hoteliers’ optimism for the emergent market has scarcely waned.
And with early indictors suggesting a faster year-on-year pace of growth for the first quarter (8.1%) compared to the fourth quarter’s 13-year low of 7.8%, the outlook for the country’s hotel sector is looking brighter than ever.
“There’s literally more new economic growth in China today than anywhere else on the planet. And in the end what drives growth in the hotel business, what drives the expansion of our footprint is business activity, the number of people and the availability of capital. China has all three of those in a way that is literally unprecedented,” said Frits van Paasschen, president and CEO of Starwood Hotels & Resorts Worldwide.
Frits van Paasschen
Starwood Hotels & Resorts Worldwide
The country’s hotels reported a 1.3% decrease in occupancy during 2012, according to data from STR Global, sister company of HotelNewsNow.com. Average daily rate in U.S. dollar terms for the year was up 1.4% to $101.53 and revenue per available room was essentially flat at 0.1% growth to $65.65.
“The growth that’s happening there, the acceleration that’s happening in the higher end of the hotel market is something that we see as a not an immediate but a once-in-a-lifetime opportunity over the next few years,” he added.
Starwood Hotels has slightly more than 100 hotels operating in the China at present, with another 100 under construction.
Wyndham Hotels Group is another global chain with a big appetite in China. As of 31 December 2012, the group had 543 hotels with 67,559 rooms operating under its Super 8, Ramada, Days Inn, Howards Johnson and Wyndham Hotels and Resorts brands. Wyndham had an additional 105 hotels with 23,000 rooms in its pipeline.
The key to such growth? Follow the demand, said Bob Loewen, Wyndham’s CFO and executive VP.
“We aim to have hotels in markets with the right, relevant brand where there is growing demand,” he said.
Tracking growth in China is easy enough, sources said. In a country with such rampant development, there are new cities and markets being built almost every day.
“For our industry, infrastructure development is one of the big drivers,” said Richard Solomons, president of InterContinental Hotels Group, during a panel at last month’s International Hotel Investment Forum. Hotel development follows roads, railways and airports, he added.
Wyndham Hotels and Resorts
“Many of the cities today are essentially being created. The rate of urbanization in China is going to continue even over the next few years and will accelerate. Cities that had a million people are going to 2 million, new city centers are being created. Getting great locations, getting a presence for our brands there now is preemptive for a long time to come,” van Paasschen said.
Growth from within
Outside investors continue to flood the field, offering new brand offerings designed to appeal specifically to the Chinese consumer. IHG’s Hualuxe, which launched March 2012 and now has 15 properties in the pipeline, is one notable example.
Just as much of China’s growth in the hotel sector, however, is sprouting from within.
“International brands have to a large degree dominated the third-party management space for around two decades but various domestic groups are now making a competent push to gain ground, especially private companies,” said Nigel Summers, director of China and Hong Kong for Horwath HTL, in a written overview on the country’s hotel sector.
Recent years have seen a proliferation of flags, such as Ahn Luh Resorts & Residences, Wanda Hotels & Resorts and Nuo, not to mention significant acceleration of some longer-standing budget brands. The primary players include:
- 7 Days Group Holdings Limited (1,345 hotels as of 31 December 2012);
- China Lodging Group Limited (1,035 hotels);
- Home Inns & Hotels Management (1,772 hotels); and
- Jin Jiang International Hotels (Group) Company Limited (795 hotels in operation or under development).
That each established their base in the economy segment or counts annual property growth well into the hundreds is no coincidence. Much of China’s demand growth can be sourced to the country’s emerging middle class, which for the first time in the country’s history now has the means and desire to travel.
Domestic tourism in China is anticipated to surge at a compound annual growth rate of more than 11% during 2012 to 2014, according to a report by RNCOS, an industry research firm specializing in emerging markets.
“We remain positive on the growing trend of traveling demand in China. Our brand portfolio is well-positioned to meet the diversified needs of customers who seek good value for their money,” said Qi Ji, founder, executive chairman and CEO of China Lodging Group in an earnings release.
Further fueling demand is “The Outline for National Tourism and Leisure (2013-2020),” recently issued by the government of China, which sets the ground for the redefinition of tourism development and management in the country. In addition to supporting outbound tourism, the new policy promotes the taking of paid annual leave days and boosting the healthy development of the tourism sector in China, in particular by ensuring the coordination of different sectors.
“The Chinese traveler continues to show an insatiable appetite, and this will continue to present compelling opportunities in the resort sector. However, the biggest obstacle so far has been the ‘golden weeks’ policy that forces almost the entire population to vacation during the exact same weeks of the year,” Summers said.
“This is increasingly causing chaos and strain on hotels and travel infrastructure, so it is not unreasonable to expect that there will ultimately be a change to allow people to holiday whenever they chose throughout the year. When this occurs, the boost in demand for resort hotels will be staggering,” he added.
Successful implementation of the new Outline for National Tourism is not the only obstacle facing China’s hotel industry. Summers highlighted several others, including:
- Huge supply: “The huge amount of new supply entering many markets in China is well known. There are several markets where the pipeline of new properties shows no signs of stopping, and these are going to experience distress and most likely increased disputes between owners and operators. However, for a number of cities, the supply onslaught is reaching its peak, and as it gradually recedes, the substantial demand growth that China’s hotel sector exhibits should lead to quite quick market recoveries over a two- to five-year period.”
Sluggish ADR: “A historic challenge for China’s hotel industry has been its low average daily room rates relative to other international markets and the quality of the product being sold. However, the government is now trying to shift the economy to a more consumption-led model and this encompasses efforts to increase wages,” Summers said.
Executives from Home Inns, during the company’s fourth-quarter earnings call, noted a softening in ADR of 1.8% to 165 renminbi ($26.51) during the quarter from 168 renminbi ($27) recorded during the same period in 2011.
- Higher wages, fewer staff: “Many operators are also concerned about the impact of wage increases on profitability levels, but in our view these worries are exaggerated. … As a whole, we expect fewer better-paid staff actually to benefit hotels’ bottoms lines as well as the customer experience,” Summers said.
Challenges aside, the prospects continue to look promising in China, sources said.
InterContinental Hotels Group
“With domestic and international travel continuing in China and as financing becomes even more available, the country offers significant development opportunities and we expect continued growth in the coming years. It remains an important, strategic market in our company’s global expansion strategy,” said Wyndham’s Loewen.
Development looks to continue at breakneck speed, especially for the country’s domestic brands.
7 Days, for instance, expects to open 360 new hotels, including 50 leased-and-operated hotels and 310 managed hotels. And Home Inns Group is targeting 360 to 380 new hotels in 2013, including approximately 80 to 90 leased-and-operated hotels and 270 to 300 franchised-and-managed hotels.
“There’s no question that a directed economy which is very focused on travel and tourism … they’re making sure that development is happening,” IHG’s Solomons said.
“I remain very bullish in the medium to long term in China,” he said.