12 th May, 2009 Beijing -- CB Richard Ellis recently published a special report on Hotel Operators in China . According to the report, hotel operators in China are increasingly facing new opportunities in a more sophisticated marketplace.

There has been a great deal of literature on the expansion of hotels in China , in particular the growth the Chinese branded budget hotels which has mushroomed over recent years. However, little has been written on hotel operators per se, and how hotels are intrinsically linked to the real estate sector.

CBRE Hotels, in conjunction with the CBRE Research team, has prepared a special research paper on hotel operators in China, covering the development of the hotel industry as international hotel operators entered a predominantly local market in the late 1980s, to the present situation where domestic and international operators are effectively in business side-by-side, in a country where there is still much opportunity for the hotel industry to grow and mature.

Due to the change in lifestyles in mainland China and the rapid development of the real estate sector over the last 20 years, China 's demand drivers for the hotel market have altered significantly. The change in lifestyles has resulted from the greater wealth of Chinese, as China 's economy enjoyed successive years of strong positive growth and people have more to spend on luxury rather than necessity goods and services. A leisure economy has evolved as the government has promoted more structured national holidays, and the growing middle-class Chinese are taking full advantage of this. At the same time, there have been big improvements on transport infrastructure in terms of airports, railways and roads, which have increased the mobility of the population.

From the entry of the first privately-run hotel in 1980s, when the market was dominated by state-owned operators, to the real estate boom leading to the completion of a large number of hotels, serving different markets, China 's market-oriented hotel industry has only had a relatively short development history of about 30 years. Although its rapid growth in the past few years has raised concerns on oversupply, the industry is still considered less mature than its counterparts in established world cities, in terms of market penetration and sophistication of products and services.

Rob McIntosh, Executive Director of CBRE Hotels Asia Pacific says, “The present economic downturn has probably had the largest negative impact which the China hotel industry has suffered in its short history, and it comes after substantial growth period. The financial tsunami has fast-forwarded the industry into the next phase of a typical cycle where weaker individual players will be adversely impacted.”

“However this phase of correction is not likely to inhibit the maturation and refinement of the market as hotel operators continue to search for new markets and discover unfulfilled demand in China and as the market widens its geographical distribution. There is expected to be a period of consolidated growth, but with sound fundamentals, the market will continue to grow and cater for changes within the industry, based on demand patterns,” added McIntosh.

Tourism and travel has developed into one of China 's pillar industries, and it accounted for more than 3.9% of GDP in 2008. In tandem with increasing travel, China has shifted to a market-oriented economy and this change is now slowing moving from the coastal cities in the east, in a westwards direction.

Since the early 1990s there has been a real estate boom in China . Mixed-use development is a model which is used in abundance in China and the hotel element has been seen very much as being the heart of the mixed use, creating a premium identity for the whole project. High-end hotels operated by well known international brands can be found in most major Chinese cities. Domestic players dominate the fragmented mid-range hotel market and economy/budget sector. Fundamentally each sector has its own niche market.

The spectacular growth in the number of hotels in China over the past few years has inevitably led to concerns over the risk of oversupply, especially in first tier cities like Beijing and Shanghai . The situation is further magnified by the global financial tsunami which has already begun to contribute to the easing of Chinese economic growth.

However it is the general consensus that the overall fundamentals remain sound, that any oversupply situation will be short term, and that the markets will be able to absorb new properties and stabilise. Indeed, most operators are continuing with expansion plans in China and are maintaining their roll out of new hotels, provided that the developments that house the hotels are not delayed or stopped. However in the short term there will be significant difficulties in some locations. The market appears to be settling into a pattern with domestic operators controlling the lower end market and international operators spreading their risks over a number of different brands but firmly establishing themselves as dominant players in the luxury market.

Overall, market entry is anticipated to become increasingly difficult as the industry matures and becomes more competitive. Finding a well-located project to manage will become tougher, although with the myriad of brands at their disposal, there is certain flexibility when choosing sites. International and domestic hotel operators remain aggressive in developing their business by using different branding, especially in the mid-tier market which is viewed as less affected by the rapidly shrinking number of foreign travellers. However, large international players still have a competitive advantage in brand recognition over local players as customers may prefer international branded lower cost alternatives to five-star hotels, rather than paying more for an up-scale domestic brand. Local players aiming to raise their competitiveness will have to implement more comprehensive branding strategies. In addition, the battle field is set to go further beyond the traditional first- or second tier cities and major tourist destinations, to lower tier cities, to tap domestic demand.

Although the current market is suffering from declining occupancy and stalled growth in room rates, particularly in the first-tier cities, the long-term outlook of the China hotel market remains positive with tremendous potential in developing mid-tier markets and widening geographical coverage, as end-users become more sophisticated in their demands, and the hotel market matures in China.