High-End Hotels Hit Hard Times in Shanghai

Construction on two luxury hotels in Xintiandi, Shanghai, one belonging to Jumeirah Hotel Group and the other to Hilton Hotels Corporation, has recently been suspended.

Jumeirah’s top management once projected their hotel would be open to the public in 2008, and the room rent might be as higher as $400 a day, even higher than the present most expensive five-star hotel in Shanghai. Jumeirah planned to open 48 new hotels worldwide, including the hotel in Shanghai, before 2011.

However, the two hotels have failed to be completed on time, and construction has now been suspended. A source revealed that ownership of these projects might change, as the present owners of the two projects might be experiencing funding problems due to the global financial situation. Moreover, it is just not a great time to open new hotels.

Hilton confirmed the suspension of its project in Xintiandi, saying the hotel may not open until after 2010 due to the company’s problems.

This indicates a crisis for high-end hotels in Shanghai and other big cities in China. Recently, The Regent Shanghai and The Plaza Royale Oriental Shanghai both rescinded contracts with their foreign partners. The Regent brand and Howard Johnsons under Carlson Hotels Worldwide have dropped away from the two hotels.

Changfeng Real Estate, owner of The Regent Shanghai, said due to increasing profit pressure led by a steep real estate price decline and lowering occupation rates the company had rescinded its management contract with Regent before it expired, and had hired a foreign general manager to operate the hotel. Carlson claimed it was looking for new business partners in China after quitting from the hotel, but that does not look to be easy.

International hotels have expanded rapidly in China since 2003. 20 to 30 top five-star hotels, including Regent, Park Hyatt, and Peninsula, entered the China market over the years since. Some companies have opened more than one hotel in the same city. For example, Shangri-La has two hotels in Shanghai, one in Pudong and another in Puxi, while Hyatt’s three luxury brands, Hyatt, Park Hyatt, and Grand Hyatt, have all entered Shanghai.

Over-expansion has left little room for further development, so later international hotel groups have had to develop their business in medium and smaller cities.

Due to the fierce market competition, hotel management groups have hoped to expand. Land owners, with real estate in good areas, are taking more initiative.

"Most overseas hotel groups are managers, not investors, making land owners very powerful, which is not good for hotels�management. The conflict worsens during the financial crisis, since high-end occupancy ratio and room rent have both seen a decline," said Zhao Huanyan, chief consultant of SAO Hotel Solution Consulting Ltd.

Average occupancy rate of hotels in Shanghai stood at 54.6% from August to December in 2008, a record low in the past 20 years. The occupancy rate in some foreign tourist-oriented hotels dropped to 30% to 40%. Room rent has dropped by 20% to 30% since November 2008. Some high-end hotels have even begun to offer a 50% discount.

"The income is not satisfactory, but overseas management companies still charge high management fees," revealed Zhao Huanyan. Usually management fees accounts for 2.5% to 3% of total operations income, while incentive management fee accounts for 3% to 5%.