China faces downturn in hotel pipeline

Vigorous hotel development in China may be overblown.

According to Lodging Econometrics' recent China Construction Pipeline Trend report, China's pipeline for the first quarter of the year had 2,448 hotels with 549,222 rooms, down 8 percent by projects and 1 percent by rooms year-over-year. This is the second consecutive quarter of year-over-year decline.   

A full 68 percent of China’s pipeline rooms are currently in the "under construction" phase with 1,789 hotels and 375,638 rooms. This is a decline of 9 percent year-over-year. "Reflecting concerns about the slowdown in the economy and the availability of financing, announced projects are slow to migrate forward up the pipeline towards construction," the report said. As a result, projects slated to start over the next year (294 projects with 71,471 rooms) and in the early planning stages (365 projects with 102,113 rooms), hit new cyclical highs, and are not advancing toward completion. 

Top Cities

Lodging Econometrics has reported that the top cities in China for hotel development (by project count) are Shanghai (114 projects with 24,285 rooms); Guangzhou with (105 projects with 17,903 rooms); Chengdu (83 projects with 22,240 rooms); Suzhou (79 projects with 15,309 rooms); and Wuhan (76 projects with 12,059 rooms).

The Sanya resort area (pictured) has 53 projects in the pipeline and ranks 11th by project count, but those hotels are large enough to place the city second only to Shanghai by room count. In total, Sanya has 23,016 rooms in its pipeline. The Sanya pipeline includes one massive luxury hotel complex, the Beauty Crown, with 6,668 rooms already under construction. (The complex includes two luxury hotels as well as a combination hotel and serviced apartment.) 

Why IHG is Taking the Lead

While several global hotel companies have made inroads to China, InterContinental Hotels Group has the largest pipeline in the country of any global franchise company, according to Lodging Econometrics. IHG's overall China Construction Pipeline has 215 hotels with 61,227 rooms—triple the numbers from late 2012.  

In total, IHG has 73 hotels with 21,582 rooms currently under construction, 68 hotels with 18,705 rooms scheduled to start construction over the next year and 74 hotels with 20,940 rooms in the early planning stage.

IHG’s top two cities in China for hotel development are Chengdu with 17 hotels (4,384 rooms) and Suzhou with 13 hotels (3,207 rooms). The Holiday Inn Express brand is IHG's leader for the country with a total of 61 projects (14,710 rooms) in the pipeline. As noted last month, there is a good reason for this: China has seen a rapid rise of its middle class in recent years, leading to significant demand for midscale hotels in tier-1, -2, -3 and -4 cities. Looking to boost its appeal for local owners, IHG recently launched a new franchise model for its Holiday Inn Express brand in China called Franchise Plus. The new model, the company claims, was specifically tailored for the Chinese market and "provides owners with all of the benefits of operating a franchise model, but with additional benefits and features from IHG’s managed model."

In its Q1 call, IHG said that RevPAR in Greater China was up 2.2 percent in aggregate. In Mainland China, RevPAR growth was 6.2 percent. "This was driven by tier-1 cities up 8.3 percent and tier-2 and -3 cities also delivering mid-single-digit growth aided by strong business demand and greater leisure travel," CFO Paul Edgecliffe-Johnson said. "Hong Kong and Macau continued to be impacted by market-specific issues and was down 12 percent, creating a drag on RevPAR for the region as a whole."

Beyond China

Lodging Econometrics's recent Asia Pacific Construction Pipeline Trend Report found that the region’s first-quarter 2016 pipeline, excluding China, has 1,545 projects with 309,186 rooms—a decline of 5 percent by projects and 3 percent by rooms year-over-year. A little more than half of these (851 hotels with 176,869 rooms) are currently under construction. 

For the Asia Pacific region as a whole, there are 277 hotels with 57,769 rooms scheduled to start construction in the next 12 months, an increase of 9 percent by projects and 32 percent by rooms year-over-year. The long-term forecast, however, is less rosy: Projects in the early planning stage are down 14 percent by both projects and rooms (417 and 74,548, respectively), so a dearth of new hotels in the future may be a possibility.