Industry / Real Estate

Hospitality Real Estate (China)

Group Research / October 23, 2019

Photo Credit - AFP

Overall Outlook

Near-term sentiment kept trending south. Domestic tourism growth slowed down to 8.8% y-o-y in 1H19 from 10.8% in 2018. Yet, tourism revenue growth from domestic visitors sped up to 13.5% y-o-y in 1H19, vs. 12.3% in 2018. Lingering trade tensions have raised concerns over economic uncertainty, affecting business travel in recent months. According to a hotel sentiment survey conducted by Horwath HTL, all regions across the nation suffered from negative sentiments. Overall sentiment index was -32, the lowest level since the government’s anti-corruption campaign in mid-2013. Among five tier-1 cities, Shenzhen and Sanya have suffered the most, while Guangzhou is seeing better sentiment than other cities.

2) Investment sentiments might not recover anytime soon. Hotel assets have been the least favourable asset class among commercial properties, given the complexity of operation and low profitability. Rising redevelopment in 2016/2017 had improved the liquidity of hotel assets and helped value recovery. Yet, the number of hotel transactions dropped significantly in 2018, especially in 4Q18, given weaker sentiments amid uncertainty.

3) Revenue per room (RevPAR) dropped YTD. While the latest official operating numbers are not available, our channel check reveals that RevPAR has dropped YTD in most top-tiered cities. However, most domestic economy-driven cities have seen moderate improvement lately, except for Shenzhen and Shanghai, which have higher exposure to foreign trade. Only Guangzhou has registered positive RevPAR YTD, given limited new supply. Profitability is expected to drop given lower RevPAR and hotels’ higher operating leverage.

4) Future supply well controlled, given declining investments and rising redevelopment. Hotel fixed asset investments (FAI) from developers or local governments have become more rational, as reflected by the declining number of hotels since 2014. In addition, the central government is encouraging the long-lease rental apartment business and allows the conversion of commercial projects (hotels should be the major beneficiary) into long-lease rental apartments. We are also seeing the trend of converting luxury hotels into offices in tier-1 cities lately. In 1H19, JD.com acquired Beijing Jade Palace hotel in Zhongguancun, with the intention to convert it into office use.

Key Risks

1) Rising labour costs. Labour and training costs have been affected by high employee turnover. More competitive remuneration packages would have to be offered to attract qualified employees.

Near-term Outlook

Steady growth in domestic tourism. Urban disposable income grew 8.0% y-o-y in 1H19, vs 7.8% in 2018. Continuous growth in disposable income has been supporting tourism activities. According to China National Tourism Administration (CNTA) and China Tourism Academy (CTA), the number of domestic visitors grew by 8.8% in 1H19, slower than 10.8% in 2018, vs. a CAGR of 11.2% in 2013-2017. Tourism revenue from domestic visitors grew 13.5% in 1H19, vs. 12.3% in 2018.

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Our In-House Expert

Ken HE Liang
+86 21 6888 3375
ken_he@dbs.com

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