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Discouraged investors shift their focus overseas

A couple stand with their child as they look out of a luxury hotel in Beijing.   © Getty Images

HONG KONG -- Chinese hoteliers have emerged as major bidders in a spate of overseas deals to diversify from a slowing domestic market.

     Homegrown Chinese hospitality, aviation and logistics conglomerate HNA Group is no exception to the trend. Based in Hainan, a tropical island in southern China, HNA, owner of the country's fourth largest airline Hainan Airlines, is betting big on growth driven by overseas buyouts.

     HNA bought airport luggage operator Swissport in late July in addition to its 29.5% stake in Spanish hotel chain NH and investment in the Red Lion hotels in the U.S. It is now negotiating with Tsogo Sun, an African hotel and casino group, for another 8% share on top of its current 5%.

     "China has been a very difficult market to try to expand in," said John Kidd, president of HNA Hospitality Group, citing oversupply as a major obstacle for growth. "Outbound investment ... is a reflex reaction to what's happening in China at the moment with market conditions being saturated."

     Over the past two years, HNA signed some 20 contracts to operate its internal brands in China but many of its new hotel openings were put on hold. "Because it's actually cheaper to have a building empty than to risk losing money to operate it," Kidd told an audience at the Hotel Investment Conference Asia Pacific in Hong Kong earlier.

     Oversupply is a major issue in the luxury end of China's hospitality market.

     According to JLL, the number of branded four- to five-star hotels in 60 major Chinese cities has more than doubled since 2011. Room rates fell 5% on average in the last quarter in 2014, according to property consultancy Savills.

     A surge in hotel supply has also coincided with weaker demand, largely driven by the economic slowdown and a clampdown on conspicuous spending by the Chinese government.

Eyes overseas

The lackluster home market has prompted hotel investors to venture abroad, following free-spending outbound Chinese tourists.

     The projections for the surge in Chinese tourism are substantial -- 200 million outbound Chinese tourists by 2020, up from just 100 million in 2013. Chinese travelers overtook their counterparts in the U.S. and Germany as the world's top spenders in tourism with $164 billion in 2014, according to the United Nations World Tourism Organization.

     Meanwhile, Shanghai Jin Jiang International, one of China's largest state-owned hotel groups that operates luxury hotels and a budget hotel chain, is fast making inroads toward foreign investments. 

     In July, Jin Jiang announced a merger with Chinese hotelier Plateno Group following its acquisition of France's Louvre Hotels Group -- the second-largest European hotels company -- from Starwood earlier this year for 1.3 billion euros ($1.47 billion).

     The partnership of Jin Jiang, Plateno and Louvre is set to create a combined portfolio of 6,000 hotels with more than 600,000 rooms around the globe, putting it into the world's top five hotel groups alongside global players such as InterContinental, Hilton and Marriot.

     "We didn't pay much attention to acquisitions at first, due to a lack of capital," said Eric Wu, chief financial officer at Plateno, a hotel group known for its mainstay 7Days Inn chain. Plateno also owns seven hotels in Southeast Asia and has plans to open new offices in Europe, North America and Africa to explore new markets.

     "Now our strategy is to look overseas, given the sheer number of outbound Chinese travelers out there," said Wu. "Hopefully we will be a true global player in two to three years' time."

Still appealing

So has the domestic hotel market in China lost its appeal? Not quite yet.

     Kevin Colket, senior vice-president of head of hotels Asia at Starwood Capital Group, a U.S. private investment firm, said the next decade will be the "golden age" for hotel investment in China.

     "When we talk about China's 100 million outbound travelers, it's huge," said Colket. "But when we look at the domestic market, it's 35 times the size, and some people project it to go up to 50 to 60 times."

     The fact that hotel supply outpaced demand in the last decade has hurt occupancy rates and profits. However, a surge in demand lies in China's burgeoning middle class and business travelers.

     "There are lots of big cities in China -- not just Beijing, Shanghai and Shenzhen," said Colket. "I don't think the right product has been invented yet in the three- to four-star space -- not five-star, not economy, but something in between."

     The mid-market remains a huge gap to be filled, particularly in lower-tier cities such as Kunming, Foshan and Zhengzhou -- all with an average population of over 6 million.

     Plateno is gearing up to fill that space. Over the last two years, the group acquired 10 new brands with 400 midscale and upscale hotels boasting a diverse brand portfolio, spanning from a hotel designed for women, Xana Hotelle, and James Joyce Coffetel, a brand for coffee lovers.

     Nevertheless, a one-size-fits-all approach isn't going to work in the mid-market.

     "You simply can't fulfill all their demands if people only pay 200 yuan ($31) for a budget room," said Plateno's Wu. "But for the mid-scale market, people are looking for different things because of the extra money they pay."

      "We run the Hampton Inn, a three- to four-star business hotel for Hilton, but there are people who get bored. The mid-market can't have one brand to satisfy all the demand," he added.

     Looking ahead, the Chinese domestic market remains too large to be overlooked for hoteliers, including the HNA Group.

     Last December, HNA signed a joint venture deal with NH to help bring the Spanish hotel brand to six of its hotels in China. 

     "That's the idea of not being able to invest in China because we don't see opportunities for our company there per se in bricks and mortar," said HNA's Kidd, "But we are investing overseas to do a turnaround and bring back the brands and technology to China."

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