Is this the time to invest in China's hotels?

Hong Kong-based private real estate investment firm Gaw Capital Partners is planning to focus its new Asia real estate fund, for which it is aiming to raise $1.5 billion, on investing in greater China's retail, office and hospitality property in what Reuters calls “first and major second-tier cities.”

"We're quite upbeat on hospitality because China's domestic consumption is getting strong,” Chairman Goodwin Gaw told reporters at the MIPIM Asia summit this week, noting that the firm, which reportedly controls $10.61 billion in assets under management as of the second quarter of 2015, is also looking at logistics and tourism opportunities in Vietnam.

The firm plans to focus on a “revitalization investment strategy” in Hong Kong that will include the renovation of industrial buildings, but Gaw noted that the price of assets means that choices are limited. 

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In July, Gaw advised consortium Supreme Key Ltd. in buying InterContinental Hotels Group's Hong Kong hotel for $938 million. Today, the buyer is planning to invest an estimated HK$1.5-$2 billion ($193.5-$258 million) to renovate the hotel over the next year or so.

Gaw has good reason to look to these key cities, and Hong Kong is definitely hot. Chinese companies are “shelling out record amounts” for trophy buildings in Hong Kong, Gulf News reports, with sellers reportedly reaching out to potential buyers including Industrial & Commercial Bank of China, Bank of Communications and Fosun International. Sigrid Zialcita, managing director of research for Asia-Pacific at Cushman & Wakefield in Singapore, told the paper that Chinese insurers will become major investors in Hong Kong commercial real estate as part of their global portfolio diversification. She also noted that Chinese insurance companies only hold about 1 percent of their assets offshore, compared with 10 percent to 15 percent for their U.S. and European counterparts.

Beyond Hong Kong
China’s broader hospitality industry is poised for an upswing. Fitch Ratings expects the Chinese hotel industry to grow as factors suppressing hotel spending relax, including the outpace of new hotel supply to demand growth. The domestic travel market is also poised to grow as infrastructure improves and the renminbi (which the The International Monetary Fund added this week to its basket of reserve currencies) remains low compared to other monies, making international travel expensive. The lower income group will boost the demand for visitor accommodation in China, and underpin the recovery of hotel room occupancy and daily rate in the next 12-18 months, Fitch claims. Domestic travel dominates more than 80 percent of the total travel demand, and Fitch estimates the domestic tourist spending will continue to grow at double digits in the next five years.

Hotels in China have registered positive RevPAR for the third quarter of 2015 compared to the previous year, reversing the four-year downward trend. In Beijing, the strong year-to-date local demand growth of 8.7 percent vs. 4.4 percent supply growth helped the RevPAR of luxury hotels grow by 4.2 percent year-over-year in the first nine months of 2015. 

Hotel room supply growth will increase by 17.9 percent in the next five years (4.2 percent per year) in China according to STR Global, which could accommodate the new demand and drive the low occupancy rate of China hotels to what Fitch calls “a level close to developed countries.” Forty percent of China’s hotel rooms are empty as a result of overdevelopment in previous years, but the oversupply of luxury hotels outside of the top-tier cities will probably continue. 

According to STR Global, cities like Sanya and Chengdu would lead the most capacity expansion in China in the next five years by increasing the hotel rooms by 69.1 percent and 31.5 percent, respectively.