China’s transition from the golden child of hotel development to a promising adolescent with some growing pains can be summed up in a tweet-able sentence. “There’s no more ROE — return on ego,” said Howard Ho, director of development for Shangri-La Hotels & Resorts’ new soft brand, Hotel Jen. “Owners are taking a much closer look at the profitability of hotels.”
The maturation of hotels from status symbols to profit centers is one of the key factors reshaping the development landscape in the world’s most populous nation. It comes at a time when China itself is facing some of the realities of its evolution from a precocious up-and-comer for whom double-digit GDP growth was just expected, to an established economic power adjusting to a more modest (but still pretty enviable) 6%-plus annual economic growth rate (although the International Monetary Fund predicts India will take over the top spot next year). Governmental austerity measures are cutting the luxury and upper-upscale sectors down to size and forcing brands to curate just what amenities really do need to be there.
Even with access to China’s massive domestic and inbound travel markets, hotel companies can’t rely on numbers alone to make projects pencil out. “The market corrections both on the supply and demand sides have ended the boom years,” said Daniel Voellm, managing partner, HVS Asia Pacific. “The hotel investment market is mainly driven by the real estate market. For the time being it will likely remain slower than in previous years. Once the new supply is absorbed and market fundamentals improve, more ‘technical’ opportunities will surface.”
That hasn’t taken China off the top of hoteliers’ wish list for international expansion, but it has rewritten the rules. “The development of traditional, standardized and boring hotels might be over. However, more diversified, market-driven and personalized products will become popular,” said Julie Dai, director, Horwath HTL.
Trending projects
Expect luxury to stay on the radar, but extravagance is off the table. “Instead of multiple dining venues and giant ballrooms, it’s one dining venue and a more modest ballroom, for example,” Ho said.
Lifestyle concepts look like a good bet, especially given the universality of what Millennials and like-minded travelers from around the world want in terms of more gathering spaces and higher-tech guest rooms. There is also pent-up demand in the mid-tier and focused-service sectors. According to Lodging Econometrics, the economy sector dominates the Asia Pacific pipeline as domestic tourism continues to grow and international business travelers court businesses springing up in new economic stimulus zones.
For some giant international flags, that means turning a boutique offer into one of the primary development drivers for the region. Wyndham Hotel Group just announced it is adding Tryp by Wyndham to the five brands that already have a presence in China.
According to Ho, any new offer will have to be tailor-made for this increasingly sophisticated market. “The rise of the lifestyle sector in major markets means a lot more than just a personalized stay,” he said. “It’s opening up a new business model.”
The plus for lifestyle lies in the flexibility of the concept. For the first time, some insiders see the conversion market heating up. That could open up opportunities for regional players to get a solid foothold in this market, or for brands like Hotel Jen to strategically reflag sister-branded hotels (the recently-opened Hotel Jen Shenyang was formerly a Traders Hotel, and half of the brand’s total pipeline in and out of China are conversions).
The potential of rebranding is also heating up competition farther down the star-rating system. Reflagging opportunities make for exciting fodder for international brands looking to compete with local powerhouses like 7 Days Inn (which boasts the region’s largest single-brand pipeline). “A lot of deals that were done with local economy brands 10 to 15 years ago have come to term,” said Bob Loewen, executive vice president and chief operating officer, Wyndham Hotel Group. “Owners are looking to rebrand, and we plan to capitalize on that.”
Both local and international brands are eyeing the resort market. An increasingly affluent domestic travel market is drawing the heat into ever more diversified markets and products. Resort products catering to leisure FITs and families are becoming popular and range from luxury resorts, family resorts, camping sites and B&Bs to more interesting container and tented accommodations, according to Dai. “We think there are great development opportunities for these types of resort products in suburban areas and the traditional or emerging tourism destinations with improved accessibility,” she said.
Redrawing the map
That same out-of-the-box thinking applies to finding the next hot spots. “Development is moving inland, and we see more opportunities in tier-three and -four cities,” Loewen said.
“There are markets like Wuhan that are currently struggling but will be hot in a few years, so we’re looking at a conversion there,” Ho said.
For Kenneth Macpherson, chief executive, Greater China, IHG, it’s Yunnan and Sichuan Province that are getting his attention.
However, it is not just the “what” and the “where” of the Chinese market that are experiencing a rapid shift. It’s also the “how.”
Increasingly operations-savvy owners, even if they are still mostly the private companies and state-backed ventures of a decade ago, are demanding a lot more from hotel operators. That’s not necessarily key money from major international chains (though regional players like Rosewood Hotel Group say strategic investment is important) but over-delivery on everything from design concepts to products and operating models, according to Voellm.
They also want control. While dry management contracts are still going strong, some insiders point to franchising as the real future of development, at least for major international chains. “I actually could see the balance tipping toward franchising five years from now,” said Andreas Flaig, executive vice president of development, Asia Pacific, Carlson Rezidor Hotel Group.
Whatever terms owners want, they’ll find a ready field of contenders interested in working with them. The list of operators seeking to get or grow their Chinese presence continues to expand. “Regional players such as Rosewood Hotel Group are becoming more active and confident in making deals,” Dai said. “Plus, special attentions should be paid to domestic players such as Wanda, BTG Hotels, HK CTS, New Century, Huazhu, Plateno, etc. These groups have strengthened their IT supporting systems, loyalty programs and more.”
If there’s one takeaway regional and international players can agree on, though, it’s that opportunities in China are far from being fully exploited. “The infrastructure investment continues, and that’s going to continue to have a positive effect on our industry,” Flaig said.
Editor’s note: For more about the reality of development in China today, read the Regional Profile in the May issue of HOTELS.