Challenges, but room for expansion in hotel industry

China's hotel developers and investors are gradually shifting their focus from building new hotels to protecting their assets as uncertainties and challenges are building up, but the country's hotel industry still offers great opportunities, according to a new report.

The report, jointly issued by the China Tourism Hotel Association and Jones Lang LaSalle Hotels on Tuesday, said that China's hotel market is progressively moving from the development-expansion stage to an ownership-maintenance phase.

The continuous increase in labor and operating costs, and competitive pressure from new supply and aging facilities are bringing challenges and pressures to hotel investors, owners and operators.

Based on an extensive hotel survey and an assessment of 35 hotel markets in China, the report said that economic growth has brought new opportunities and challenges to the sector, with many hotels gradually entering the market and fueling competition.

To respond to the challenge, hotel operators and investors should adopt aggressive and creative tactics, experts said.

China's hotel market has an average occupancy rate of 60 percent, compared to about 80 percent in developed markets. The low occupancy rate is a result of oversupply, according to Zhao Huanyan, chief consultant at Shanghai-based SAO Hotel Solution.

The average daily rate of a five-star hotel room in Shanghai was 526.17 yuan ($83) at the end of 2011, a drop of 14.05 percent from 2010. In the same period, the occupancy rate of five-star hotels averaged 55.81 percent, down 11 percent year-on-year, said Qiu Yongqiang, secretary-general of the hotel division of the Shanghai Tourism Trade Association.

"The large supply of new hotels is not only intensifying competition among hotels, but also affecting their rates. Hotels without special features can hardly retain customers," said Qiu.

The increasing costs along with high employee turnover are worrying hoteliers.

"Many Chinese cities today are confronted with a hotel demand and supply imbalance despite the significant economic growth," said Andy Flaig, managing director for advisory Asia of Jones Lang LaSalle Hotels.

However, some hotel owners are optimistic, said Charles He, senior vice-president of Jones Lang LaSalle Hotels and head of China advisory.

"Despite the fact that higher operating costs caused by rising inflation and the increased labor costs pose increasing challenges to future operations compared with the survey in 2011, 44.6 percent of surveyed hotels are optimistic or very optimistic when it comes to the market outlook," said He.

According to Qiu, many boutique hotels, in particular, are getting more business these days than ordinary hotels due to their special features.

"Boutique hotels are not as well-equipped as five-star hotels, but their rates are much higher than average five-star hotel rooms. The secret is their exceptional service," Qiu said.

While business travelers are still the main customer source among the surveyed hotels, many indicated growth in meeting, incentive, conference and exhibition venues as a key demand driver.

Meanwhile, many hotels are continuing to explore F&B opportunities to increase overall revenue, the report said.

At the same time, some multinational hotel groups have high hopes when it comes to the Chinese market.

Marriott International Inc, for instance, said recently that it plans to open one hotel per month in China on average for the next five years.