Hoteliers in secondary cities are benefiting more from China's stimulus measures, with larger markets in Beijing and Shanghai weighed down by past construction booms, said Jones Lang LaSalle Hotels on Friday.
Tier-two and tier-three cities are benefiting from massive infrastructure spending, while the massive hotel expansion ahead of the 2008 Olympics saturated the Beijing market, said Andreas Flaig, Beijing-based managing director at the consultancy, a unit of Jones Lang LaSalle.
From 2006 to 2008, the number of hotel rooms doubled in Beijing and will grow another 23 percent through 2011, said Flaig. That buildout has pushed occupancy rates in Beijing to 47 percent for five-star hotels, and 50 percent in the four-star market.
"Once you drop below 50 percent occupancy, then you start to seriously impact the profitability of a hotel," said Flaig. "We are way off the 75 occupancy the city has enjoyed before."
But the economies in secondary cities such as Sanya, Dalian and Hangzhou are still growing around 15 percent, buoyed by domestic demand, central government stimulus measures and a lower reliance on export industries, he said.
"It is a reflection of the government stimulus and banks pumping in trillions of yuan," said Flaig. "Therefore, buying land to start new projects is easier now than six or nine months ago."
Despite high expectations of post-Olympics demand, China's hotel sector was hit badly by the global economic crisis in 2008. Ten out of the 13 cities that the firm interviewed witnessed a decline in revenue per available room (RevPAR).
In the five-star sector, occupancy rates for Beijing and Shanghai dropped by 7.2 and 10.4 percent from a year earlier to 60.7 and 56.3 percent. Occupancy rate of four-star hotels in the two cities fell by 13.4 and 8.5 percent to 60.9 and 59 percent.
"The anticipated post-Olympic demand was hit badly by the economic crisis," said Lily Ng, senior vice-president, of Jones Lang LaSalle Hotels China.
In 2008, international visitor arrivals to the Chinese mainland dropped by 1.4 percent to 130 million, but domestic visitor arrivals surged by 6.3 percent to 1.7 billion.
That also explains why the second- and third-tier cities have outperformed Beijing and Shanghai.
In 2008, the five-star RevPAR for cities and municipalities including Qingdao, Chengdu, Chongqing, Dalian, Xi'an and Shenyang rose by 37, 10, 14.4, 12.8, 16 and 1 percent, while it dropped by 7 and 3.4 percent for Beijing and Shanghai.
Though the new room growth in Shanghai was just 17 percent last year, the city is expected to see a surge of nearly 47 percent over the next three years.
"The supply has grown too much, but the demand has not kept pace," Flaig said.
Compared with mature markets, China has enough luxury hotels at the moment, but it lacks mid-level hotels especially three- and four-star ones and this is where the opportunities are for hoteliers, he said.
Reuters contributed to this story