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Focus On China

Jones Lang LaSalle Hotels turns the spotlight on China

China is the buzzword on everyone’s lips, including the hotel investment sector. Despite strong investor interest in…

China is the buzzword on everyone’s lips, including the hotel investment sector. Despite strong investor interest in China, however, few hotel transactions have occurred. In Jones Lang LaSalle Hotels‘ newly released Focus On China, the firm investigates China’s major hotel markets to uncover why.

Hotel investors, developers and operators alike are currently scrambling for market presence in China, especially in the key centres of Beijing and Shanghai. They are driven by the desire to benefit from an increasingly affluent domestic population as well as the influx of foreign corporate travellers said Mr Scott Hetherington, Executive Vice President, Jones Lang LaSalle Hotels.

According to Jones Lang LaSalle Hotels, their motives are understandable. China is home to the largest population in the world, plus it currently leads the world in terms of economic growth. This economic growth looks set to continue as the benefits of the foreign investment surge over the past five years and the country’s accession to the World Trade Organisation (WTO) crystallise. Furthermore, the liberalisation of the economy is likely to make it become easier for foreign organisations to enter the market.

On top of all this, Beijing’s win to host the 2008 Olympics offers an unparalleled marketing opportunity for the city and China as an international tourism destination.

The most obvious impact of the Olympic Games in previous host cities has been the sharp increase in average daily rates during the year of the event, averaging 15.7%. Most cities have also recorded a considerable increase in hotel room supply, with supply growth normalising two years after the event. Hotel demand is being affected in the lead up to the event as foreign corporations establish a presence in Beijing in time to win lucrative Olympic contracts said Mr Hetherington.

The growth of China’s inbound tourism market has consistently outstripped the world wide average: between 1990 and 2000, international visitor arrivals to China increased by an average of 11.8% pa, while global tourism grew by a modest 4.3% pa. Of note in 2001’s declining global tourism market, international arrivals grew 6.7% to reach 89.0 million, with Japan, US and Korea comprising key foreign markets. The World Tourist Organisation recently announced that China was set to overtake Italy, US, Spain and France and become the top destination by 2020, attracting 130 million international visitors.

As a result of demand growth, Beijing and Shanghai recorded exceptional performance during 2001. The cities were the only two Asian markets to record growth during a year in which hotel operators had to contend with a global economic slowdown and the aftermath of September 11. This performance has continued into 2002.

But, despite strong investor interest in China, few transactions have yet to occur. According to Focus On China, there are a variety of reasons for this, including:

  • A lack of market transparency;

  • A significant pricing gap between vendors and buyers persists in most key hotel markets in China;

  • Tenure laws, which state the maximum ground lease for hotels is 40 years;

  • Concern regarding the ability to repatriate earnings out of China;

  • Despite the presence of several distressed hotels in key markets across China, the country’s banking system makes foreclosure difficult and therefore such properties have not been placed on the market; and

  • The dominance of minority interests has also deterred foreign investment in hotels in China. However, WTO prompted reforms are likely to include unrestricted access for international hotel operators, including 100% foreign ownership by the end of 2005.

Investors are also aware of the potential for room oversupply and the impact that this could have on capital values in the medium term. However, on a recent visit to Shanghai and Beijing, Jones Lang LaSalle Hotels noted the general optimism of hotel operators despite significant supply growth. Most believe this will be more than absorbed by the predicted growth in demand.

It is the balance of supply and demand that determines the profitability of any hotel investment. Potential investors, developers and operators in China’s hotel industry need to look beyond the obvious attractions to these same hotel market fundamentals that apply across the globe concluded Mr Hetherington.