beyondbrics

Talk about a post-Olympic hangover. Every hotelier wanted to cash in on what was expected to be a boom in visits to the Chinese capital with the 2008 Games. Security worries however kept the crowds from heaving, and now the city’s stuck with more fancy digs than in knows what to do with – and more hotels are still going up.

The result is a predictable plunge in profit. The 2010 China Hotel Industry Study to be published this month by consultants Horwath HTL in conjunction with the China Tourist Hotel Association shows that gross operating profits at five-star hotels in China have fallen to an eight-year low. The study puts profits per room at Rmb91,752 ($13,535) in 2009, 39 per cent below the peak level reached in 2005 and the fourth straight year the figure has declined. The comparable figure for Hong Kong was HK$331,393 ($42,518).

“Quite clearly, the continued decline that we have witnessed in hotel profitability in China over the last few years can be attributed to the oversupply that we see in many markets across the country,” said Julie Dai, a Horwath director in Beijing.Gross operating profits at five-star hotels in the capital last year came to less than 40 per cent of the level in 2007 as occupancy rates slipped to 47.5 per cent, down more than 20 points from two years before. Profits in Shanghai halved over the two years, with the average nightly room rate paid dropping 17 per cent last year to Rmb975, but that was still enough to overtake Beijing. The capital was pricier during the 2008 Olympic year, but hit Rmb836 in 2009.

Sliding profits, however, are not deterring new projects. Lodging Econometrics, an industry research group, projects that more new hotel rooms will be added in China this year and next than anywhere else in the world, with 737 properties opening. By the group’s figures, China alone accounts for a majority of Asia-Pacific hotel projects underway, with announcements of new projects and construction starts at a two-year high, with a heavy concentration of luxury projects from leading western groups Hilton, Hyatt, Marriott and Starwood.

InterContinental Hotels said last week that it would double its greater China network over the next five years, with plans to open more than 30 during 2010 alone. Dubai’s Jumeirah Group also said last week it would launch its new luxury brand Venu with an “art themed” 400-room property to open in Shanghai next year.

But overseas investors aren’t staking capital for these flights of fancy. Jumeirah will simply be managing Venu Himalayas Hotel Shanghai for Shanghai Zendai Himalayas Real Estate, an affiliate of a Hong Kong-listed developer. InterContinental similarly signed its most recent deal, to manage five new hotels, with an affiliate of Shanghai-listed Hainan Airlines. It’s a similar story with Shanghai’s second Ritz-Carlton which opened last month in a Hong Kong developers’ complex.

Kevin Murphy, an industry consultant with Asiawide Hospitality Solutions in Bangkok, says the real market opportunity in China is in budget and economy hotels, but persuading developers, city officials and bankers can be a challenge given the prestige of another ‘palace’.