The Chinese hotel market was the fastest growing in the world in the early years of the new century. In the decade prior to 2008 the number of star rated hotels grew by over 10,000, an increase of 15 percent annually. International hotel chains flocked to the country and the luxury end of the market saw particularly impressive growth. However, there have been indications that the rate of expansion was unsustainable and disconcerting signs appeared in 2009 and 2010. Occupancy rates for hotels in Europe and North America average around 75-80 percent. In China they average only a little over 60 percent. In the city of Tianjin occupancy rates have been as low as 45 percent. A popular industry performance measure of revenue per available room also indicates trouble for the industry, dipping by just over two percent in 2010 compared to the previous year. In some cases, such as in Shanghai, the fall was severe, with revenue per available room falling by 28 percent in October 2010. With new hotels still being planned and built there appears to be a developing problem of oversupply in the market.
The failure of demand to keep up with the expanding supply can be partly attributed to the end of major events such as the Beijing Olympics and the Shanghai World Expo, as well as the impact of the financial crisis. However, the problem is more widespread than that and demand side shocks do not explain why hoteliers are still expanding the supply of hotels.
Some of this is due to foreign firms seeking to establish strategic positions in the Chinese market, so to some extent they are indifferent to short-term returns. However, much of the problem relates to how real estate is developed. This is usually done in mixed use parcels of land. Local authorities often insist on a hotel being added for reasons of prestige rather than commercial sense, and developers are not overly concerned with the profitability of the hotel as it is bundled up with commercial and residential properties that they can make money on if the hotel fails. The incentives for containing over-supply are poor.
China’s hotel market has been compared by some commentators to Dubai’s, which also enjoyed a long boom but is now stuck in a terrible and stubborn bust. However, this comparison is unfair and most industry analysts are more optimistic, arguing that in the long term China’s prospects are still bright. It has a wider range of attractions than Dubai and projected visitors are expected to increase. China also has a potentially massive domestic market as it continues to grow economically and its middle and upper classes expand. Some hotel chains have already recognised this. The InterContinental Hotels Group has set up the Hualuxe brand, which is focused on providing a Chinese rather than a Western hotel experience. Growth may not be as rapid as it was during the first decade of the century, but the outlook for the industry is still good.
