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Disneyland optimism

"Many people are optimistic about Shanghai's hotel market because of the increased number of tourists expected as a result of the Disneyland project in the coming years. But actually the supply now already exceeds the demand," Qiu said.

To become a five-star hotel, a hotel must offer a number of services and provide quality management and accommodation. Particularly these hotels are expected to offer 24-hour reception, multi-lingual staff, the availability of good food and drink 24 hours a day, spas, swimming pools and gyms as well as impressive foyers.

Every room in a five-star hotel will be worth between $150,000 and $200,000 which means that anyone building a five-star hotel needs to invest billions of dollars, according to research conducted by meadin.com, an online portal based in Hangzhou for the hotel industry. The website suggested that a five-star hotel becomes profitable when its occupancy rates reach 60 percent. It takes an average 10 years for the investment to be returned.

The global financial crisis struck the hotel market here in 2008 and 2009. Occupancy rates and room rates for five-star hotels in Shanghai fell to a 20-year low hitting 53.50 percent for occupancy. Room prices tumbled to an average 1,010 yuan ($160). In off-season periods like January and February the occupancy rates could be as low as 10 percent.

Even with the benefit of the World Expo 2010 in Shanghai and the extra 70 million visitors in the city, the occupancy rate for five-star hotels in Shanghai was only 68 percent and average room price was 1,136 yuan.

Over the past year with a record number of five-star hotels in Shanghai, occupancy rates were just 60 percent and the average room price was 1,038 yuan. In contrast, in 2004 hotels enjoyed an 80 percent occupancy rate and the average room price was around 1,350 yuan.

"In Huangpu district the occupancy rate has declined 10.57 percent while room prices have fallen 6 percent compared with the previous year," said Qiu Yongqiang.

A unique model

Zhong Jinhua, the vice president of a major real estate company, said the reason behind the rocketing expansion of luxury hotels in Shanghai was China's unique development model.

"In China high-star hotels are developed in a bundle with real estate developers and international hotel management groups," Zhong said. According to him, the typical development mode in the West saw hotel groups renting or purchasing the property before they took over the business. But in China the hotel groups had only one task and that was managing the hotels. The management fees they are paid by the property owners are their income.

"As long as a hotel has an income, the hotel group can claim its management fees. If the hotel does not make money, it's not their concern," Zhong said. "So when a Chinese property owner offers a hotel project, why wouldn't they accept it?"

China has been overwhelmed by the real estate boom in the past decade. Hotel real estate development has become a popular commercial investment.

"The developer thinks of how the real estate is appreciating not how profitable the hotel might be. In many cases a high-end hotel project can boost the price of a big real estate project because the developer can use the hotel as collateral for its bank loans," Zhong said.

Because of this, real estate developers in China and international hotel chains can be very friendly. But there are dangers for the industry in this system.

This high speed expansion brings high risks at the same time, a senior executive with a Shanghai five-star hotel told the Global Times. The executive asked not to be named.

"If there are these thousands of extra rooms every year in five-star hotels in Shanghai, how on earth will we find enough guests for them all?" he asked.

A few years ago international hotel groups would run just one hotel in each city to ensure brand quality. Today it is common to see one group managing three or four hotels in a city. Sometimes a group finds itself with too many hotels to manage and has to create new brands for China.

The potential market

Experts like Yang Yong, a professor of tourism at the East China Normal University, remain positive about the future of hotels in Shanghai.

"Shanghai has a large potential market with the support from the Yangtze River Delta area and even the entire country as the city has a unique position in China. In the long term there is a great deal of optimism for the hotel market," he said.

Over the past decade, the number of international travelers coming to Shanghai has soared from 1.81 million to 8.51 million in 2010. This means some 23,382 guests visited Shanghai each day spending an average 3.51 days in the city, according to figures released by the Shanghai Statistics Bureau.

"With many more international events, meetings, exhibitions and shows, Shanghai needs accommodation to match," Yang said.

But others like Qiu Yongqiang question whether there has been too much development of five-star hotels in the city. "The key issue is whether the demand and supply is balanced and on the right track. I think the market in the downtown area has been saturated. More hotels could just cause bubbles and cutthroat competition," Qiu said. He would like to see more guidance offered so that the industry has a more secure and sustainable future.