China's Hotel Industry Rebounds with a Surge in Leisure Travel and Price Increases

The hotel industry in mainland China is experiencing a remarkable recovery, largely driven by the surge in leisure travel following the pandemic. Over the past three quarters, this sector has shown signs of resilience and growth, with rising demand for accommodations and increased room rates.

According to analysts at JLL, a real estate services company, the occupancy rate across China reached 68.4% during the first nine months of 2023, coming very close to the 2019 levels, with only a 2% gap. Notably, during the eight-day "golden week" holiday starting on October 2, there was a record-breaking 83.1% occupancy rate, with lower-tier cities witnessing a significant influx of domestic tourists, as reported by STR, a hotel analytics provider.

Flora Zhu, the director of China Corporate Research at Fitch Ratings, pointed out, "The surge in occupancy was driven by the release of pent-up demand for leisure travel after the pandemic." She also noted a brief uptick in business travel after the Chinese New Year but mentioned that this gradually faded due to a slowing economy, leading companies to cut their budgets for business trips.

During the first nine months of 2023, the average daily rate (ADR), which measures revenue from occupied rooms, increased to 975.1 yuan (US$133.3), marking a 6.4% rise from 2019 levels, according to JLL data. This increase in occupancy rate and ADR subsequently boosted the revenue per available room (RevPAR) for hotels across China by 4.3%, reaching 640.4 yuan, compared to 2019 levels.

One significant factor contributing to the price surge is a supply-demand imbalance. In January 2023, China's hotels recorded a total of nearly 14.3 million rooms, a 20% decrease from 2020 levels. This decrease was mainly seen in economy hotels, which were the hardest hit by pandemic lockdowns. As restrictions were lifted and travel demand surged, economy hotels experienced a more significant price increase, even though their occupancy rates hadn't fully recovered to pre-pandemic levels.

On the other hand, midrange and prime hotel chains, with their established brand influence and economies of scale, demonstrated greater resilience during the pandemic. Their price increases were more moderate compared to economy hotels.

The trend towards upmarket chains has been noticeable, with the number of midrange and prime hotel chains in China steadily increasing. For instance, as of December 2022, the number of midrange and prime hotel chains in China had risen by 26.3% and 9.2%, respectively, compared to 2019, according to data from the China Hotel Association.

This shift toward upmarket chains is also reflected in the financial performance of China's largest hotel chains. For instance, Shanghai-based Jinjiang Hotel reported a 13.5% increase in the number of midrange hotels in the third quarter of the year, while Beijing-based BTG Homeinns Hotels recorded a 10.6% increase in the number of midrange and prime hotels during the same period.

Despite the shift, China's hotels remain relatively affordable from an ADR perspective compared to other Asia-Pacific markets like Japan, South Korea, and Singapore, which have seen their ADR increase by 30% to 40% between September 2019 and 2023, according to Gus McConnell, associate director of APAC research at CBRE, a commercial real estate services and investment firm.

Looking ahead, the expectation is that there will be a higher proportion of luxury and upscale developments to align with recent trends, alongside an increased presence of international hotel brands in the Chinese market. However, it's important to note that in the mainland Chinese demographic, there is still a strong preference for "premium economy" locations, offering experiences above the median but remaining somewhat affordable.

By fLEXI tEAM