HVS: Hotels in China's fringe cities tend to perform better

A steady stream of new rules is reshaping the hospitality industry in China, and having a direct impact on the performance of investments. 

A new report by the Shenzhen office of hospitality industry intelligence provider HVS, entitled China’s Hotel Market After the Implementation of the ‘Eight Provisions', looks at how the new rules affecting the behavior of government officials have impacted China’s hospitality sector. HVS used in-house research and data from the Chinese National Tourism Administration for hotels in 50 cities to compare average rates, occupancy, and F&B income for 2012-2014.

The findings were surprising. Revenue at five-star hotels, for example, rose slightly in 2013 before dropping by 2 billion yuan ($322 million) in 2014. At four-star hotels, income dropped from 34 billion yuan to 32 billion yuan during 2012-2014. During the same period, three-star hotels saw revenue drop from 27 billion yuan to 25 billion yuan.

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Accompanying across-the-board decreases in room revenues, the percentage of total revenue generated by rooms grew strongly for four- and three-star hotels—up 3- and 5-percentage points, respectively, with five-star hotels experiencing a slight uptick followed by a drop. All three types of hotels are now slightly over the 44 percent mark.

Looking at revenue per available room (RevPAR), 46 percent of the cities surveyed posted decreases in their overall market RevPAR in 2013, followed by 44 percent of cities in 2014.

Despite the overall downturn in demand, some locations have managed to benefit from the changes initiatied at the end of 2012. In general, these destinations tend to be popular with international travelers and located on China’s fringes.

In 2013, the two top performing cities for RevPAR growth in the luxury market were Kunming and Lijiang with year-on-year growth rates of 38 percent and 21 percent, respectively. Both cities are popular tourist destinations in the southwestern province of Yunnan. The worst performer was Taiyuan, capital of Shanxi province, which posted a 35-percent decrease in RevPAR growth.

In 2014, the Tibetan capital of Lhasa was experienced the greatest RevPAR growth, jumping 60 percent. Another western Chinese city, Yinchuan, posted the second-biggest growth, nearly 24 percent. Kunming’s fortunes changed dramatically, with RevPAR growth plummeting by 32 percent, second only to Zhengzhou’s 44 percent drop.

Of China’s top five hotel markets—Beijing, Shanghai, Guangzhou, Shenzhen and Sanya—only Sanya experienced RevPAR growth in 2013, barely clearing 2 percent. Beijing was hit hardest, with RevPAR growth dropping by more than 10 percent. The big five fared better in 2014, with only Guangzhou experiencing negative RevPAR growth.

One thing these numbers show is that in China’s new anti-corruption climate, politics matter. In 2013, Taiyuan was a focus of much of the anti-corruption investigations. Kunming, a winner in 2013, became a loser in 2014, a year in which it was caught in the anti-corruption spotlight.

In terms of food and beverage, revenue in second- or third-tier business destinations in China suffered the most, as they tend to rely more on business generated by government officials or state-owned companies and lack the private companies and large middle class of a Beijing or Shanghai. Lijiang boasted the strongest F&B growth, most likely fueled by a lack of reliance on government business and a strong position as a leisure tourism destination.

The results of the HVS study point to a bright future for select-service hotels, which emphasize convenience and efficiency and eschew restaurants and banquet facilities. Brands such as Radisson Red, Hilton Garden Inn and Hyatt Place that focus on guest experience and cater primarily to businesspeople, middle class travelers and the younger end of the market are poised to benefit the most from the recent seismic shift in China’s hotel sector.

The Chinese government started unveiling new rules in 2012. Two sets of rules have had a major impact on China’s hotel industry, particularly its high-end market. Given the strength of this campaign, it is not unrealistic to expect that China’s hotel landscape will remain changed beyond the short term.

The first set of new rules, referred to as the ‘Eight Provisions’, calls for the streamlining and even elimination of meetings and events that could be platforms for lavish consumption and currying favor with officials. Its impact has been primarily on the MICE and F&B segments, which have been compounded by the so-called ‘Six Bans’, which target banquets, celebrations and events featuring excessive expenditures.