Shanghai is experiencing a glut of premium hotels and the hotel industry will face a high vacancy rate if investments in new hotel projects continue unchecked.
Plummeting ARP
The revenue growth of China’s star-rated hotels could not match the growth speed in GDP since 2011, and revenues even shrank in 2013. BTG president Qiang Duan recently revealed that 60 five-star hotels in Beijing suffered losses last year, as vacancy rate of up to 40% forced down the average room price (ARP) and total room price.
The ARP of Shanghai’s five-star hotels has been declining yearly too, from RMB1,151 in 2010 to RMB1,039 in 2011, and RMB956 in 2012 down to RMB969 in 2013 and RMB945.45 last year, according to Huamei Consulting data. Average occupancy also fell, from 62.83% last year to 53.37% in the first two months of the year, and RevPAR was down from RMB594.01 to RMB472.77 RevPAR over the same period.
“Business for Shanghai’s star-rated hotels has been in steep decline since the the 2010 Shanghai World Expo ended. Under serious financial pressure, many established hotels have started giving up their star ratings to transform themselves into more reasonably priced boutique and business hotels,” Huamei Consulting CIO and economist Huanyan Zhao said.
Can government regulations reign in runaway growth?
“China’s hotel industry experienced a glut in 2014. Despite a slight recovery in large cities this year, overall demand is still low. How the oversupply plays out after this year is anybody’s guess, and I can only be cautiously optimistic about Shanghai’s luxury hotel market this year,” Mr. Zhao said.
Despite the room glut, more new hotels are being planned in Shanghai. The neighborhood of Hongqiao exhibition center alone has 10 new hotels on the drawing board. “New investments are pouring in while Shanghai’s luxury hotel market is still far from recovered. It's simply unbelievable!” he said.
Mr. Zhao suggested the government set up a review and approval system for hotels in the immediate future to tackle the issue of oversupply. “During the transition period, local governments should maintain a hotel database to ascertain their actual usage rate and capacity and use the information to evaluate and intervene and to weed out weak players from the market,” he said.
Deloitte China’s vice president Jian Jin said: “China’s hotel industry currently has a low degree of corporate consolidation, branding, and chain operations leading to low ROI. As the industry undergoes major restructuring, many acquisition and merger opportunities will appear in the market and A&M will be the main target of investment for the industry this year.”(Translation by David)
