By Erik Lars Hansen, Tom McConnell
Spring 1996 -
Since the People's Republic of China opened its doors to foreign investment nearly 17 years ago, Beijing has offered a vital foothold for overseas hotel companies and their Chinese joint venture partners. In the past year, these investments continued to pay off as demand, occupancy and room rates climbed to new levels for international standard hotels serving the foreign visitor to China's capital city.
Diverse factors have shaped the market conditions benefiting existing hotel properties as China's economy has expanded at break-neck speed. Overbuilding has been limited, in part, due to the slowdown of new hotel ventures in the wake of the Tiananmen Square demonstrations of 1989. Much of the four- and five-star hotel development catering to foreign visitors dates to the latter part of the last decade -- creating a surge of new hotel properties entering the market during the slump following the Tiananmen Square incident.
Since mid 1992, however, business and tourism travel has skyrocketed, with foreign arrivals from Japan, the United States, Germany and South Korea leading the way. The result: a relatively stable supply of hotel rooms serving the foreign visitor at a time when demand is climbing dramatically. The past year saw virtually no significant new hotel supply added in the Beijing market.
A recent Arthur Andersen study of the Beijing lodging market placed
the increase in total demand at five-star hotels at approximately 9.3 percent
for 1994, with a further 6.6 rise forecast for 1995. Commercial travelers
to these
properties made up almost two-thirds of the total market demand, with
1994 showing an estimated rise of 11.1 percent in this segment. Demand
in the commercial market is expected to further increase in 1995, although
recent economic uncertainties throughout China may temper this outlook.
Several market components drive hotel demand in Beijing, including commercial individual travelers, corporate groups and tourism. The number of foreign visitors to Beijing rose to 4,450,000 in 1993 -- a 20.3 percent gain over the previous year -- while overseas Chinese visitation grew by 58 percent, and travel from Hong Kong, Macao and Taiwan was up 3A percent. Visitations overall have shown extraordinary increases since 1985, with annual growth rates during those years ranging from 42 to 19 percent.
In turn, hotel room supply has grown at a compound growth rate of 12.3 percent annually since 1985 as the country has modernized. The entire Beijing lodging market currently consists of more than 226 properties with approximately 53,000 hotel rooms. Almost a quarter of these properties are four- and five-star hotels, developed principally in joint ventures between Chinese government agencies or quasi-public groups, and foreign investors.
A good example of this relationship is the China World hotel complex, which is owned by a partnership consisting of Hong Kong-based Kerry Properties and the central governments Ministry of Foreign Economic Relations and Trade. A number of other hotels are owned outright by the government through the Beijing Tourism Administration. Approximately 2,500 additional four- or five-star hotel rooms are currently under construction or strongly contemplated for development.
Occupancy, Room Rates Climb
While Beijing has traditionally served as an industrial and government city, the service sector is expected to become a more dominant force in the local economy with the impact of hotel, retail and tourism development. Geographically, the city is organized as an interconnecting network of eight districts, with the Forbidden City, China's seat of government, creating a dividing line between the eastern and western portions of the city. The east side has been traditionally designated as the "foreigners area" and has undergone substantial redevelopment during the past 40 years. It is here that the embassy district, exhibition and convention centers, offices of overseas companies, and the majority of foreign hotels are clustered.
This eastern hotel district stretches from the Capital International Airport in the Northeast sector of Beijing south along the Third Ring Road. Two other general hotel districts include the Jian Guo-Changan-Fuxing Corridor running east/west through the heart of Beijing and the Northwest High Tech/University Area.
An analysis of the 12 highest quality hotel properties in Beijing reveals
that annual occupancy in 1993 reached approximately 68.7 percent at an
average room rate of $85.35. In 1994, occupancy was at 70 percent with
the average room rate at 102.90 -- a dramatic year-to-year rise in revenue
per available room (RevPAR) of 23%.
Although the Great Wall Sheraton and a number of Holiday Inn properties
have been a mainstay of the Beijing lodging market for several years, American
hotel companies have been relative late-comers to the city. Most properties
are affiliated with Asian firms, which include New Otani and ANA from Japan,
and Shangri-La, Peninsula and New World from Hong Kong. Two of the newest
properties in the eastern district are affiliated with European firms,
Hilton International and Kempinski. Various US firms have targeted Beijing,
so their presence will certainly increase.
Lodging Industry Dynamics
Multiple factors influence supply and demand in the Beijing hotel market, as well as opportunities for overseas hotel companies examining potential investments. Future demand in the lodging market will be driven by both tourism and business travel. Tourism has been a mainstay of China's economy since the country opened to foreign visitors in the late 1970s, and growth is expected to extend well into the foreseeable future. The commercial segment of the lodging market, however, is expected to be the predominant driver of new demand.
As the economy expands, Beijing continues to assert a stronger commercial role in China's development. While the city is the political center of China, it is also designated for extensive development as a focus of commerce and finance. A special planning district has been set aside on the west side of the city to attract financial institutions and potentially create a new stock exchange in the city.
At the same time, the number of foreign companies establishing representative offices in Beijing has increased at a record rate -- up 44.5 percent annually since 1988. Class A office occupancy is currently estimated to be close to 99 percent. This has obviously had a positive effect on transient hotel occupancy, but hotel properties have also benefited from renting rooms on a long-term basis as office space. This has enabled small office users to lease space without the financial commitment of a purchase or a lease. In turn, rentals to office users have benefited hotel operators by smoothing room demand throughout the majority of the year. Office users are generally not as price sensitive as transients because office rents have reached a point comparable to rack rates in hotels.
The speculative fever that has hit residential and office markets has
left the lodging market relatively untouched. Although there are a number
of new hotel developments in the planning stage, opportunities will be
defined by continued government regulation of the market, including impositions
of possible moratoria to regulate supply and demand. A prime market of
opportunity, however, additionally includes lower-priced lodging to support
economic growth of domestic companies. Beijing's commitment to infrastructure
development and its role as both a government and business center should
continue to drive strong demand in the capital city.
©Arthur Andersen