China60's hospitality sector holds strong potential over the next decade. The substantial purchasing power of China's middle class, rising domestic tourism and a strengthening private business sector all bode well for massive growth in the demand for hotel rooms. However, the sector is currently struggling from the combined effects of economic slowdown, anti-extravagance measures and selective oversupply. But with these challenges also come opportunities, and the sector is likely to provide investors with attractive buying prospects over the next couple of years.
The hospitality sector has since 2013 been hurt by China's broad economic slowdown. Hotels' woes have been further compounded in the 5-star market by a clampdown on conspicuous spending by government officials, which has been a cornerstone of the market.
Weaker demand has coincided with a surge in new supply. Local governments have continued to contribute to supply pipelines by wooing international brand hotels as part of large mixed-use projects, which they regard as integral to their cities' economic strategies, international profiling and tax base.
The number of internationally-branded 4 to 5 star hotels in the China60 has more than doubled since 2011 and, as a result, the proportion that the China60 accounts for in the total national supply has risen from half in 2011 to two-thirds in 2014.
However, this supply will be absorbed over the next couple of years, helped by the fact that new deliveries over the coming three to five years will not be as rapid as during the recent surge. In fact, some projects have been cancelled or delayed due to the current economic challenges.
The strong appetite for leisure activities among China's growing middle classes, combined with the expansion of business travel, has continued to buoy demand in the hospitality sector despite the challenging environment. Thus, while hotel performance has weakened, occupancy rates have been maintained, and have even improved, as hotels respond by lowering room rates to attract more customers. This has allayed some concerns about market saturation.
Facing acute challenges, the hotel sector is undergoing wholesale structural change. This will put the market on a much stronger footing over the medium to long term, with its previous over-reliance on demand from government officials being replaced by more robust and sustainable demand from domestic tourists and private-sector business travellers.
The focus of hotel operators and developers over recent years has been on Tier 1.5 cities, but opportunities still exist in many Tier 2 and Tier 3 cities. Nevertheless, they are catching up fast as international hotel operators aggressively target lower-tier cities; their spotlight is now on the West and Southwest, notably tourist-rich cities like
Kunming, Guiyang and
'Affordability' has become essential to the success of many hotels. 4-star quality 'select-service' hotels are now popular, positioning themselves as lifestyle hotels without crossing over into 5-star luxury. Below the 4 and 5-star segments, many mid-scale chains are growing quickly.
Given current challenges, many developers will be seeking to divest. This is providing foreign investors and institutions with a favourable opportunity to access a market with strong long-term growth potential.
Find out more about ourHotels and Hospitalityservices in China