Shanghai hotel sector remains highly profitable, Average room rates to continue to rise

Global hotel investment services firm Jones Lang LaSalle Hotels is confident that the Shanghai hotel sector still offers investors substantial investment value in the medium to long term, even though the market is likely to consolidate over the next 12 to 18 months as room supply increases over the near term.

Four and five-star hotels in Shanghai have been riding on a tremendous uptrend in the recent past. Average daily rates (ADR) of the five-star segment rose for the sixth straight year in 2005 to reach new highs of RMB1,649, 16.4% more than the 2004 record of RMB1,417. Similarly, ADR in the four-star segment reached a ten-year high of RMB833 in 2005. Occupancy levels in 2005 for both four and five star segments however, declined compared to 2004 partially reflecting operators’ willingness to accept lower occupancy rates for stronger room rates as well as a result of increased supply.

“Four and five-star hotels in Shanghai have been expanding since Year 2000. In fact, room rates for Shanghai’s five-star hotels have risen significantly above levels in other comparable Asian metropolises, with the exception of Hong Kong. Based on our estimates, 8,527 rooms will be added to Shanghai’s hotel sector from 2006 to 2008. This increase in room inventory will place some pressure on occupancy levels as the industry consolidates but we expect hotels to stay profitable with continued ADR growth supported by the strong local economy,” said Andreas Flaig, Head of China and Executive Vice President of Jones Lang LaSalle Hotels.

In the first six months of 2006, ADR of upper-tier hotels (four and five-star) in Shanghai increased to RMB1,164, 1.4% higher than the levels recorded in the same period in 2005, while occupancy rates were 3.46 percentage points (pp) lower. Jones Lang LaSalle Hotels forecast growth of ADR for the upper-tier segment to pick up in the second half of the year as this period is traditionally stronger than the first. On a full year basis, the company forecasts ADR to grow by 2.4% to 6.7%. Occupancy on the other hand is expected to decline by 2.3pp to 4.3pp.

“The development of a significant branded, mid-market in Shanghai will to some extent draw some customers away from the upper-tier hotel segment as their room rates are relatively more competitive and offers the added appeal of a brand new product,” explained Mr. Flaig.

In the luxury hotel segment, the upcoming entry of new premium brands such as Park Hyatt, W Hotel, Conrad and HanTang Jumeirah is also expected to limit future occupancy growth.

“The continued influx of international brands, and the fact that existing luxury hotels Ritz Carlton and Four Seasons, both presently in Puxi, have announced plans for a second hotel in Pudong, sends a strong message to the rest of the world and is a clear vote of confidence in Shanghai’s growth potential.

However, the market would have to absorb the increased supply of rooms over the next 24 months, putting pressure on occupancy levels in the five-star segment,” added Mr Flaig.

The good news, however, is that room rates in the luxury hotel market still have plenty of room to increase. Mr. Flaig explained, “The strong national and local economies will drive corporate demand for the upper-tier hotels in Shanghai. Shanghai also has the added advantage of being one of the most important cities in Asia, together with the likes of Hong Kong and Tokyo, where ADR of luxury hotels are significantly higher than those in Shanghai. The collection of luxury hotels in Shanghai offers all the benefits of excellent service standards and newer, beautiful properties to an increasingly sophisticated clientele. It is reasonable to expect that there is still room for ADR at Shanghai’s luxury hotels to match international prices.”

Looking forward, Jones Lang LaSalle Hotels identified several factors that will sustain the growth of Shanghai’s hotel market:

• Expansion of new exhibition facilities which will strengthen Shanghai’s meetings, incentives, conventions and exhibitions (MICE) offering
• Sustainable corporate demand driven by a growing service-driven economy (the service sector is traditionally a strong demand generator for hotels)
• Auxiliary demand from the extended Greater Shanghai area
• Government’s commitment to develop Shanghai’s leisure tourism segment
• Pudong getting a further boost in mixed-use development projects which comprise of both hotel and office components

Said Mr. Flaig, “There is no reason to doubt the potential of Shanghai’s hotel sector given the strong underlying demand. We are optimistic that hotels in Shanghai will be able to sustain their profitability by focusing on ADR growth.”

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