Luxury Hotels In China In Slump Due To Austerity Measures, Slowing Economy And Oversupply

The luxury hotel sector in China, which just a few short years ago was booming, is now facing the triple threats: President Xi Jinping’s austerity and anti-corruption measures, China’s economic slowdown, and an oversupply of hotel rooms.

For years, China’s rapidly expanding economy and its rising class of newly rich businessmen and government officials with deep pockets meant luxury hotels in China had no shortage of business, but that’s changing with the Chinese president’s “four dishes and a soup” policy intended to cut down lavish banquets, according to Quartz. Hotels have suffered along with high-end restaurants, as many banquets were held in hotel banquet rooms previously.

The effects of the crackdown on corruption are compounded by the economic slowdown in China, which is eating away demand and profits, as well as oversupply in the sector, which is causing a plummet in both room rates and occupancy rates.

China currently has about 110,000 luxury hotel rooms, with another 50,000 in the pipeline in the coming months as a glut of top-end hotels open, according to research firm SR Global. About half of the new rooms will be in service in the next 18 months, many in cities like Tianjin and Sanya that primarily attract domestic travelers instead of international tourists, another reason to worry about the shrinking domestic demand, Quartz reported.

“We’re seeing a huge amount of new supply coming on,” said STR managing director Elizabeth Winkle. “The problem is demand is not keeping pace.”

In the first six months of this year, demand for luxury hotel rooms in China increased 4%, but supply was up 7.4%.

Overall, China’s hotels brought in 16.4 percent less in the first four months of this year, compared to the same period in 2012, according to statistics from the China Hotel Association, with government meetings in hotels dropping almost 40 percent. Food and beverage sales in Beijing declined by 10 to 20 percent, said managers at Beijing luxury hotels.

Occupancy rates in China’s luxury hotels dropped to 57.6 percent in the first six months of the year from 59.5 percent in the same period of 2012, according to STR Global data. The numbers were already low compared to occupancy rates of around 80 percent for Singapore and Hong Kong, or even the industry standard of 70 percent where five-star hotels usually break even, according to Quartz.

”Most hotels are losing money,” one Shanghai developer said, according to the Economic Observer. Nonetheless, hotels continued to be built. “If you build a skyscraper, mall or luxury hotel in a third- or fourth-tier city, in return the local government will offer discounts on the price of land or tax concessions.”

The central government has wised up to these incentives, however, and has put a five-year ban in place in July, which prohibits all government office, hotel and training center building projects, in an attempt to stomp out political corruption tied to the construction industry, according to the Law 360, a news outlet covering legal topics.

Most major international hotel companies have disregarded concerns raised regarding the combined impact of austerity and economic slowdown. On July 29, Shangri-La Asia Limited (HKG:0069) warned of a “material decline” in profit thanks to its mainland China hotels, and revenue of Hyatt Hotels Corporation (NYSE:H) suffered from “weak market conditions in China,” in its Q2 earnings report.

Even so, companies have not put expansion plans in China on hold. Starwood Hotels & Resorts Worldwide, Inc. (NYSE:HOT) plans to open more than a dozen new luxury hotels in mainland China, and Hilton Worldwide is planning four new Waldorf hotels in China, according to Quartz.