Jones Lang LaSalle Hotels China Executive Vice-president Andy Flaig talks to The China Perspective about China’s sizzling hotel scene

The China Perspective: What characterizes the hotel scene in first and second tier cities in 2007? Moving forward, what is likely to change in 2008?
Andy Flaig: In both Beijing and Shanghai, the cost of land has increased very rapidly in 2007, which has significant impact on how investors consider what needs to be built to produce the highest investment return.

Generally speaking, 2nd tier cities have caught a lot of investor attention because some of the secondary markets post the greatest medium- and long-term potential for growth in the country. Economic growth is higher in some second-tier cities than first-tier cities, while land costs are lower and land availability higher, serving as primary attractions for more investment. In addition, the government has consciously boosted investment in infrastructure in these locations in order to enhance their accessibility. This has also made these secondary locations more attractive.

Investment in the hotel industry in second-tier cities is at a very early stage. We expect it will continue to boom at least in the next five to ten years. The second-tier cities that have received the most attention from investors so far are Hangzhou, Chengdu and Sanya.

TCP: The Olympics is considered to be a main driver for the development of the hotel industry in Beijing. What is the post-Olympic industry outlook?
AF: Many investment activities have resulted from the upcoming Olympics. The event has ushered in a strengthened city infrastructure and increased confidence in Beijing’s position as a commercial capital. We don’t see a major slowdown in Beijing’s hotel industry after the Olympics.

First, the increase in short- and medium- to long-term lodging demand in Beijing will continue to drive the industry. Second, Beijing is a city of rich cultural heritage, and this will continue to attract leisure travelers. While the Olympics showcases Beijing’s position as a commercial capital, the event also demonstrates it as a city of great culture.

Moreover, there are a number of true luxury hotels, which are lacking in the current market, entering the market and set to be completed in the next 18 months. This will benefit the five-star segment since the price level will rise.

We expect the hotel occupancy rate in Beijing will be slightly lower in 2009, but we believe it will recover in 2010 and 2011.

TCP: Multinationals have been rapidly expanding into the five-star hotel market in China. How has this help shaped the competitive landscape and pricing? Has the five-star hotel market reached saturation?
AF: Multinationals’ rapid expansion into China’s five-star hotel segment shows the rise in disposable income among domestic travelers who can afford five-star accommodation. In second tier cities, particularly, this shows these markets are maturing. With domestic and international traveler groups becoming more sophisticated, there has been a growth in the occupancy rate in five-star hotels in these markets.

In Shanghai, some level of saturation has shown in the upper market with a considerably negative impact. The statistics show a flat five-star hotel occupancy rate of 68% in the first half of 2007. While supply is growing faster than demand, five star hotels in Shanghai would encounter difficulties in moving up the occupancy rate in 2008 and 2009. However, what should be noted is we do not see a crisis in Shanghai’s five-star hotel market as it is still demonstrating growth in revenues.

TCP: The budget hotel industry continues to be competitive, featuring rapid expansion of various domestic and foreign chains. What is the prospect for the budget hotel industry in China in 2008 onwards?
AF: China’s budget hotel industry enjoys great prospects. It is particularly positive for the brands that have established good market positioning and branding. However, we think that there are currently too many budget hotel brands in China, among which some are copycats that only copy the business models of more successful brands. I believe only ten brands at most will eventually survive in the market.

Leading players, including Home Inns, Jinjiang Inn and Super 8, have reported significant growth and are occupying the top market positions. The business model for budget hotes is very sound and has great potential to grow geographically.

Some established budget hotel brands have found new capital partners that would help them to improve corporate, finance, supply and service structures, which are important for them to stay competitive.

TCP: Home Inns is planning to purchase another budget hotel chain, Top Star. Will there be more acquisitions and mergers in the industry in 2008?
AF: There will definitely be more acquisitions and mergers and the market is set for such activities. Home Inns’ acquisition of Top star illustrates the fact that top budget hotel chains of sufficient capital and brand power will continue buying smaller players that fit their business model and portfolio. The business model and product of budget hotels enables Home Inns to absorb Top Star into existing products relatively easily.

TCP: Geographically speaking, where generates the most demand for new hotels in China, and which areas, if any, are already saturated? Does this differ between budget and luxury hotel chains?
HF: As I’ve mentioned above, Hangzhou, Chengdu and Sanya see a lot of demand and opportunities. For Sanya, opportunities lie with the four- to five-star hotel segment. Opportunities are across the board in Chengdu and Hangzhou. These are relatively hot markets in terms of the number of investors exploring opportunities there.

TCP: What is your company’s role in the hotel sector in China? Moving forward will your China operations change with the changing competitive landscape?
AF: With our understanding of market fundamentals, Jones Lang LaSalle Hotels provides assistance to hotel owners, developers and investors in China. For owners, we assist them to sell hotel assets to our network of international contacts. We have successfully sold 6 hotels in the past 18 months in China. For developers, we provide thorough analysis for a site and hotel positioning. For investors, we provide valuation and acquisition due diligence services. Currently, we have engaged with Beijing Airport’s plan to build two hotels outside terminal three in which we are helping to find the right operators to manage these hotels.