As business travel in China forges ahead, the Middle Kingdom’s hospitality industry is racing to keep pace
As anyone who’s been awake in the past decade knows, China has rapidly moved from emerging market to rising giant on the world’s economic scene. Even in the face of its recently announced “slowdown” in the last quarter of 2013, the country’s full year GDP growth still stands at a solid 7.7 percent, a picture of steady dramatic growth.
In part the pullback is the story of a reversal of roles as the country shifts from supercharged growth to a more stable and mature global player. Plus even as the recovery is picking up steam in the United States and Europe, inflationary trends in those high-growth economies remains uncomfortably elevated, resulting in tighter monetary policies.
It’s a delicate balancing act for China’s government. While the demands of maintaining growth require adequate credit, too much easy money creates imbalances which can lead to financial crisis. Nevertheless, the cooling down in the Chinese market is relative; growth remains sky high compared to developed economies and productivity continues to rise as cities boom.
The trend toward rapid urbanization has changed the business travel landscape in China for both domestic and international travelers. In its latest report on the outlook for China, the Global Business Travel Association projects the country’s total business travel spend will grow 16.5 percent in 2014 – more than double the rate of China’s GDP growth. At this rate, China is likely to overtake the US as the number one business travel market in the world, surpassing the US in spending as early as next year.
A Flock of CranesWith business travel growing, upgrading the nation’s travel infrastructure has become a national priority, maybe even an obsession. In the runup to Shanghai’s Expo 2010, it was reported that the city was host to half the construction cranes in the world. Once that event ended, Shanghai’s building fever subsided into a mere frenzy, with new construction still rising at a breakneck pace over this, and every other Chinese city.
“You look at a city like Shanghai that is so big and so densely populated, that I think there’s ample opportunity for development and expansion,” says Bill Foltz, CFO of serviced apartment company Oakwood Worldwide. “At the same time, things are so heated up in Asia. A serviced apartment in Asia right now could go for a million dollars a unit, which is a price you’d see for a very high end hotel.”
In addition to large public projects like airports, high speed rail and highways, the hospitality industry has enjoyed a building boom that continues to trend steadily upward. According to the latest data from Lodging Econometrics, in the third quarter of 2013 the hotel construction pipeline for the Asia Pacific region reached 2,494 projects, adding 584,554 rooms to its capacity.
China dominates the Lodging Econometrics numbers with two-thirds of the projects for the entire region – 1,695 hotels generating 435,006 rooms. This represents the largest hotel pipeline in the world by rooms; it is second only to the US in the number of projects. A look at the 25 markets in the region with the largest number of hotels in development reveals 20 are located in China.
Despite the economic slowdown, which has resulted in some weakening in new project announcements, Lodging Econometrics reports that China’s total pipeline has been trending upward for 17 quarters and is now at historic highs. In fact, development is so strong that some cities like Hong Kong are beginning to worry about a prolonged glut of capacity.
Among the industry segments, the strongest showing comes from the higher end of the market, according to Smith Travel Research. Across the Asia Pacific region in the remainder of 2014, the upscale segment is projected to open over 23,000 rooms. Three other segments expect to add more than 15,000 rooms each: the upper upscale segment (over 18,000 rooms), the unaffiliated segment (over 17,000 rooms) and the luxury segment (15,000-plus rooms).
“Almost everything we see in Asia are mixed use opportunities, with an office building and then maybe a hotel tower and maybe a serviced apartment tower,” Foltz observes. “People want to be geographically very close to whatever their business need is. If you’re in Beijing and you get in one of those ring roads, you could be there for a long time. And that’s why there’s still such a good opportunity, because the business centers keep popping up, and you need hospitality right there to be able to service it.”
Upscale ExpectationsHotels with iconic Western luxury brand names are opening in major cities across China. Hilton’s recent opening of the 176-room Waldorf Astoria in Beijing was the second property for the brand in China. Calling the new hotel “the epitome of luxury,” John T. A. Vanderslice, global head, luxury and lifestyle brands, Hilton Worldwide characterized it as “a true expression of Beijing’s heritage and unique culture in a location providing global travelers with personalized service.”
Typical of many enterprises in the Middle Kingdom, the hotel is operated by Hilton Worldwide but owned by a domestic company, China Oil & Foodstuffs Corporation (COFCO). Waldorf Astoria Beijing is located on the former site of Xianliang Temple, which was the permanent residence of Li Hongzhang, the first Chinese guest to stay at the Waldorf Astoria New York. Li’s visit held great political, economic and cultural significance within China.
Hilton is also expanding its DoubleTree brand in China. With the recent opening of the 23-story, 301-room DoubleTree by Hilton Anhui-Suzhou and the addition of the DoubleTree Resort in Hainan - Qixianling Hot Spring in August, the brand will be found in 19 locations across China.
Marriott International is another Western hotel name with a big footprint in greater China, adding such properties as the 317-room Shanghai Marriott Hotel Parkview. “With the addition of our 15th Marriott branded hotel in China, our total portfolio grows to 66 hotels in the country and our 21st in Shanghai, where we are the largest operator of full-service hotels in the city,” according to Simon Cooper, president and managing director of Asia Pacific for Marriott International.
Hong Kong-grown luxury brand Shangri-La Hotels and Resorts has brought its portfolio of properties in greater China to 43 hotels. The latest additions are the Shangri-La Hotel Qufu in the historical hometown of Confucius and Shangri-La Hotel Shenyang in Shenyang, the largest city in Northeast China and an important industrial base.
Another Hong Kong-based luxury hotel name with a global presence is the Langham Hospitality Group. “We have been developing like gangbusters throughout mainland China,” says Louise O’Brien, regional director of public relations – North America. “We have a new hotel to add to that collection, of which we are quite proud.” The opening of The Langham Place Xiamen makes it the ninth LHG hotel in mainland China and 22nd in its global portfolio. It joins the recently opened Langham Place hotels in Guangzhou and Ningbo.
Taking a more design oriented approach, Starwood Hotels & Resorts Worldwide has added seven of its Aloft hotels to its China portfolio. The latest of the urban chic properties opened in Yancheng in Jiangsu Province of eastern China. The 299-guestrooms hotel is the first international hospitality brand in this up-and-coming metropolis.
“From the recent opening in Dalian to Aloft Yancheng, Aloft reflects a growing demand for design-led hotels with a lively social scene in emerging cities,” says Qian Jin, president, Greater China, Starwood Hotels & Resorts.
Both Ends Against the MiddleThe midscale hotel sector in China has begun to see revived attention from many hotel brands, both international and domestic.
Midscale hotels have heretofore been seen as the less glamorous step-sister of the upscale hotel market. However, as the rarefied ranks of the higher end hotel market are filled and demand for this market segment grows, branded hotel groups are adopting different strategies to develop and carve out their space in China's midscale hotel market.
“The high end market is getting a little crowded,” Foltz says. “Certainly high end executives need accommodation over there, but there’s a lot of mid-level management that’s moving around Asia that needs to be taken care of too.”
In the past, China’s hotel development has pretty much taken on a ‘dumbbell’ pattern; fat on each end and thin in the middle. Thus the hospitality business has seen strong growth in the high end segment and among economy properties, but less robust growth in the middle. For example, a report from hospitality consultancy HVS notes that between 2000 and 2010, the star-rated hotel room inventory in China increased rapidly, with “the strongest growth within the five-star segment, recording a compound annual growth rate of up to 18 percent.”
At the other end of the scale, economy hotels were able to expand rapidly thanks to lower costs, chain management and easy attraction for investment. “For instance,” the HVS report continues, “Renowned economy hotel brands like 7 Days Inn, Jin Jiang Hotels and Home Inns have already reached or will reach the milestone of having 1,000 hotels.”
One of the main drivers behind the upswing in midscale properties is Beijing’s crackdown on excessive spending by party officials. Some high ranking party leaders were accused of holding lavish banquets in high end hotels and restaurants. That kind of conspicuous consumption has landed many higher-ups in hot water, and now they are being scrutinized, if not punished, for waste and corruption.
One international player with a foot planted firmly on either side of this divide is Hyatt Hotels. With the introduction of midscale Hyatt Place and the extended-stay Hyatt House, six of Hyatt’s nine brands are expected to be represented in China by 2015. More than 20 Hyatt Place and Hyatt House projects are under development in China.
“At Hyatt, we conduct extensive research to understand what our customers need and why,” said Chris Walker, vice president of brands for Hyatt Place and Hyatt House. “These two brands were specifically designed to meet the constantly changing needs of our guests.”
In addition to its higher-end properties such as Westin, Sheraton and Aloft, Starwood is also filling the midscale portfolio with new openings of its Four Points by Sheraton brand. With its recent debuts in several second- and third-tier cities, Four Points now offers 22 hotels across greater China and expects to double its portfolio here by 2018.
“Local demand for Sheraton’s brand is surging, driven by the region’s robust economic growth and rapid infrastructure development,” said Starwood’s Qian Jin. “Four Points is one of Starwood’s growth leaders in China, particularly in secondary and tertiary cities where the demand for well-known global brands is on the rise.”
Stay Just a Little Bit Longer
Another hospitality segment that’s attracting investment is longer-stay, serviced apartments. As both international and Chinese companies expand to take on new business opportunities throughout the country, extended assignments are becoming more commonplace, creating greater demand for less ‘transient’ digs. “Our average length of stay in 75 days,” says Oakwood CFO Bill Foltz. “If you’re going to stay somewhere 30 days, you’re going to want to be comfortable. You want to feel something that’s more like home. And that’s where we come in.”
Recently Oakwood Worldwide and Singapore investment firm Mapletree Group signed a corporate and serviced apartment joint venture with a plan to open more than 100 new properties not only in Asia, but also in Europe and America over the next five years.
In Guangzhou, Dubai-based Jumeirah Group has signed a management agreement with GT Land Holdings to operate 169 luxury serviced residences in a mixed use property together with the 207-room luxury Jumeirah Guangzhou Hotel, which is scheduled to open in 2015. The 169 serviced residences will be located in a separate low-rise West Tower and are scheduled to open in 2015.
Jumeirah Group currently operates 22 luxury hotels, resorts and residences, including 11 in the Gulf region, six in Europe and five in Asia. A further 15 hotels are now under development.
There is no doubt that China’s economic rise is changing the face of global travel and those changes are reflected in the country’s hospitality industry. As little as a decade ago, China’s outbound travel stood at just 1 percent of the world’s market. Yet, according to a study from Amadeus, the Middle Kingdom is likely to overtake the US this year to become the world’s largest outbound travel market.
And that growth is likely to continue unabated, with the number of Chinese households able to afford overseas travel set to more than double in the next 10 years to reach 220 million. The Amadeus study also predicts China will become the biggest domestic travel market by 2017, driven largely by rapidly increasing GDP, rising employment levels and higher consumer spending. However, what happens in China is not the only determinant of the future of the world’s business travel market.
“China’s development is an important driver but there are actually many more subtle factors also at play,” observes the report’s author Andrew Tessler, associate director of Oxford Economics. “Shifting competitive dynamics and the persistence of new behaviors that emerged during the recession are both impacting key indicators in the sector.”
In many ways China remains a puzzle wrapped in an enigma within a paradox, and when it comes to anticipating the dramatic developments in this country’s hospitality sector, the stage is set for prosperity and volatility to coexist.
“It’s both,” cautions Oakwood’s Foltz. “The country is so big – and it’s still expanding – that the opportunities are certainly there. But that has attracted a lot of capital and it’s very frothy. You’ve got to be careful where you put your flag in the ground.”