Property

Domestic tourism and the hotel property market in China

China

With the rise of the middle class and continuous expansion of the transportation network, China’s tourism industry is growing rapidly. In particular, domestic tourism, which accounts for 94% of all tourism trips in 2016, is the key driver. This led to an increase in investment in China’s hotel properties over the past few years.

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China’s domestic tourism grew very quickly over the past five years, with the number of domestic tourists growing at an annual rate of 10-12% and reaching 4.4 billion people in 2016. One of the reasons for the rapid growth is the rise of the middle-class and having an increased disposable income. Since Chinese people are becoming wealthier, spending on discretionary items, particularly travel and entertainment, is increasing. According to Boston Consulting Group’s forecast, the number of middle-class households in China will double to 69 million by 2020 and account for 26% of all urban households, compared with 17% in 2010. This will support steady growth of the number of domestic tourists. Besides, the development of the transportation system, like the high-speed rail and aviation network, makes travelling within the country more convenient and drives the demand for domestic tourism.

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With robust growth in the tourism industry, China’s investment in hotel properties is increasing. The large amount of hotel construction in China over the past years resulted in an overall oversupply situation in the country’s hotel market. Average daily rate (ADR) of hotel rooms dipped last year, according to the National Bureau of Statistics. There was a clear drop in ADR of five-star hotels with a decrease of around 4% y-o-y in 2016, while that of three-star hotels decreased by less than 1%. In addition, given the different supply and demand situations, discrepancies exist among different star ratings in the hotel market. Although overall occupancy rate fell gradually in the past couple of years due to the large amount of supply, five-star hotels recorded a rising occupancy rate since 2014. This is because people look for an upgraded consumption experience as their income levels start to increase therefore domestic travelers prefer more expensive and premium travel experiences, leading to a higher demand for five-star hotels.

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Underpinned by the growing middle-class and their increase in spending on discretionary items, China’s domestic tourism is expected to maintain its growing momentum in the coming years. Regarding hotel properties, as occupancy rates of hotels in key tourist locations are increasing to a near-full level, especially in first-tier cities, the ADR is set to pick up in the near future.

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