China hotel market: First tier cities continue to outperform

China hotel market begins to record a pick up in occupancy rates in 2015 supported by robust demand in first tier cities and increasing demand from the tourism sector in the coming years

The China hotel market remains tough but there is cause for optimism, while most indicators at a national level remain in decline the pace of this decline has slowed markedly in the last one to two years. Indeed occupancy rates for four and five star hotels are up year on year and occupancy rate increases in the five star markets have offset declines in ADRs over the last year to generate a net increase in RevPAR.

There is however a marked difference in terms of performance by city and tier of city, with the first tier cities generally outperforming lower tier cities.

Tier analysis

First tier cities continue to outperform lower tier cities in terms of five-star hotel RevPAR, reaching RMB538.0 in Q3/2015 (see Table 2). This equates to RMB562.2 on a seasonally adjusted (SA) basis. First tier cities recorded a bottoming of RevPAR (on a SA basis) in Q1/2013, having increased by 16% since this point. Second and third tier cities have continued to record decline over the same period.

Much of the improvement in RevPAR during this time was generated by significant gains in occupancy rates, having gained roughly 6 percentage points on a SA basis, with ADRs having largely remained unchanged, up just 3.7% on a SA basis.

Second tier cities increased their ADRs over the 2011-2012 period, but a combination of weak demand and oversupply resulted in a marked fall in occupancy rates from roughly 60% in mid 2011 to 55% in Q3/2015 on a SA basis. At the same time second tier city ADRs fell from RMB650 at the end of 2012 to RMB580 by Q3/2015 on a SA basis. This combination of factors has meant that these cities recorded a fall in RevPAR from RMB400 at the end of 2012 to their Q3/2015 levels of RMB330 on a SA basis.

City analysis

As mentioned above, first tier cities have seen a recovery in occupancy levels that have lifted overall RevPAR figures. The most notable improvements have been in Shanghai and Shenzhen, two of China’s key financial centres where previous 12 month RevPAR figures are up 9.6% and 6.2% respectively compared to the previous thee years.

The two best performing second tier cities were Xiamen and Tianjin that while recording decline in ADRs saw gains in occupancy rates bring RevPAR levels up by 4.0% and 1.1% respectively.

The two worst performing second tier cities were Shenyang and Zhengzhou, though relatively small markets (seven and four five star hotels respectively) have seen a substantial fall in RevPARs as a result of declines in both occupancy rates and ADRs.

Angel Chen, Associate Director at Savills Hotels based in Shanghai says “The Chinese economic slowdown and excessive hotel supply in recent years, presented another challenging year especially for second and third tier cities. In recent months we have heard of a number of luxury hotel projects in lower tier cities having been put on hold due to the developer’s lack of funds. It is incredibly important to carry out an adequate feasibility study and ensure proper contract negotiation at the early stage in order to minimise investment and future operational risks.”

Annie Wang, Director at Savills Hotels based in Beijing commented “While the macro data points to an overall soft market, albeit a recovering one, niche sectors and players – often not covered by the government data – have been able to outperform the rest of the market. Smaller hotels with history, culture and a story behind the development manage to tap into an emerging experiential tourist traveller segment that we are seeing emerge.”

James Macdonald, Savills Head of Research for Mainland China commented “Hotel operators understand that it is a tough market in China but it will also one day be the largest in the world both in terms of the mainland China hotel market as well as the Chinese national overseas tourism market. To ensure that you are known and trusted you have to have a big presence in China and deliver quality product. Many operators are also customizing new hotel brands that specifically cater to the needs of the Chinese traveller.”

Outlook

The hotel market remains especially tough in China with oversupply, especially in second tier cities, plaguing operators’ ability to generate reasonable occupancy rates. First tier cities with firm demand foundations from the business, MICE and tourism communities as well as a more measured growth in new supply have been able to defend their performance levels in recent years and look set over the coming years to be able to continue to improve narrowing the gap that still exist with international peers.

About Savills Hotels team
The Savills hotels team consists of leading individuals who have a strong track record and expertise working within all segments of the hotel property sector. The team offers independent advice across hotel development, contract negotiation, construction, investment and asset management. The team guides developers through a continually evolving hospitality environment, with a strong focus on creating outcomes that help minimise clients’ costs, whilst maximising revenues opportunities.

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The above information refers to information provided by the China National Tourism Administration (CNTA) - 中华人民共和国国家旅游局. The information refers to hotel schemes that have been star rated by the CNTA authority, as not all hotels have to be star rated by the CNTA, this remains just a snapshot of the market conditions and does not presume to speak to the whole market.