Economic Observer reporter Li Yian talks about the rapid development of the China hotel industry over the past decade and how it’s quick rise seems to be a paradox. Although many hotels do not maintain high enough occupancy rates to support its costs, five-star hotels have continued to maintain enthusiasm, springing up like bamboo shoots after a spring rain.
Many hotel executives from five-star hotels now readily admit that their hotels are not currently profitable as it takes time for the supporting areas surrounding the hotel to mature and build up. In recent years, according to the national average level of the market, the rate of return for five-star hotels is about 5% with a return cycle of about 20 to 25 years. For limited service and budget hotels, the return is 15-25% with the return cycle being much shorter.
Of course, five-star hotels are also used to bring attention to a city with names such the Guilin Club Med, Dalian The Tower House Hotel, Sheraton Huzhou. But more often, the local government's policy is not as sensible. Many local governments have promised hotel owners a discounted price for the land on the condition that the owners need to build a five-star or luxury hotel brand. However, what is not as obvious is that it takes a long time to generate enough supply and demand for these hotels in certain areas in order to make money and owners do not have much bargaining power against international hotel brands when negotiating management fees. Even though the owners understand these circumstances, they still eagerly build branded hotels in exchange for the discounted land price.
Owners are now beginning to realize that they have an alternative choice for hotel operator and have looked at solutions more favorable to owners such as third party management. While franchising has not made its way to China yet, the majority of major internationally branded hotels worldwide such as Hilton, Marriott and IHG are actually managed by a third party hotel management company. This will be the future trend for the hospitality industry in China.