Industry / Real Estate

Hospitality Real Estate (China)

Group Research / June 25, 2019

Photo Credit - AFP

Overall Outlook

1) Notable drop in hotel sentiment lately. Domestic tourism growth continued to grow by 10.8% y-o-y in 2018, driving up a 12.3% y-o-y growth in tourism receipts. Yet, lingering trade tension has raised concerns over economic uncertainty, affecting business travel in recent months. According to a hotel sentiment survey conducted by Horwath HTL, only North China is generally showing positive sentiments, while the rest of China suffers from negative sentiments. Among five tier-1 cities, only Guangzhou and Beijing registered positive sentiments.

2) 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.

3) 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.

4) Revenue per room (RevPAR) dropped YTD. Overall occupancy of 5-star hotels hit a low of 49% in 1Q14 and gradually rebounded to reach 64.8% in 3Q18. While latest official operating numbers are not available, our channel check reveals that RevPAR has dropped YTD in most top-tiered cities, especially in Shenzhen and Shanghai, that have higher exposure to foreign trade and high-tech industries. Only Guangzhou has registered positive RevPAR YTD, given limited new supply. Profitability is expected to drop given lower RevPAR and hotels’ higher operating leverage.

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.

Steady growth in domestic tourism. Urban disposable income grew 7.8% y-o-y in 2018, vs 8.3% in 2017. Continuous growth in disposable income has been supporting tourism activities. According to China National Tourism Administration (CNTA), the number of domestic visitors grew by 10.8% in 2018, vs. a CAGR of 11.2% in 2013-2017. Tourism revenue from domestic visitors also grew 12.3% in 2018, vs. 16.0% in 2017.

Hotel market sentiment has reversed downwards. According to Horwath HTL, strong hotel sentiment has ended its two-year run and fell into negative territory recently, indicating hotel managers’ negative view on the market. In terms of region, North China is the only region to register positive sentiment. Sentiments in Northeast China, East China and South China are below the national average of -12. In terms of city, sentiments in five tier 1 cities (including Sanya) average at -14, with Sanya's being the lowest (-47) as it suffers from excessive supply. Shenzhen and Shanghai are seeing weak demand for business travel amid trade tensions, given their higher exposure to foreign trade and high-tech industries. 

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Our In-House Expert

Ken HE
+86 21 6888 3375

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