Starwood Eyes Luxury Hotels In Tier-Two Cities

Starwood opens luxury hotel in Dalian

China’s building economic slowdown isn’t dampening enthusiasm from hoteliers, with word that Starwood (NYSE: HOT), operator of the Sheraton and Westin chains, is about to double the number of its top-end luxury properties in the market. Starwood’s announcement comes just 3 months after US rival Hyatt (NYSE: H) announced its own major China expansion. (previous post) I should be fair and point out quickly that Starwood’s latest expansion isn’t all that large in terms of actual numbers, involving the opening of just 4 new properties. I should also point out that this kind of plan was probably the result of at least 3 or 4 years of planning, meaning work began well before China’s current economic slowdown.

All that said, I wouldn’t expect big things initially from Starwood’s 4 new luxury hotels that will open by the end of this year. (company announcement) The 4 are part of the more than 20 new hotels that Starwood plans to open in the market this year, reflecting the big potential that both domestic and global hotel companies see in China. In its announcement in March, Hyatt also said it would launch 2 more of its 9 brands in the market, with 20 properties set to open in the next year or so.

Starwood’s new announcement includes 2 new properties from its Luxury Collection of hotels, one from its St. Regis brand, and one from its trendier W brand. What’s most interesting about the announcement is the locations for the 4 new properties, all of which will open later this year. Of the 4, only 1 is in a first-tier city, a new W hotel in Beijing. The other 3 hotels are in the cities of Chengdu, Hangzhou and Dalian.

None of these new cities is exactly small, and all are probably among China’s 20 largest cities. What’s more, each of the 3 new locations has a strong foreign element, meaning they could attract large numbers of bigger-spending overseas travelers. Dalian is a favorite among Japanese and Korean businesses, and Chengdu is rapidly emerging as China’s interior hub for foreign technology firms like Intel (Nasdaq: INTC). Hangzhou is home to leading e-commerce firm Alibaba, which also has numerous foreign connections including longtime shareholder Yahoo (Nasdaq: YHOO).

A growing number of Chinese and foreign industry leaders are setting up major facilities in these second-tier cities to escape high costs in top destinations like Beijing and Shanghai. That means these cities should offer big growth potential for all hotel operators in the years ahead, including the high-end and luxury end.

But over the medium term, I’m far less optimistic about the prospects for all of these new hotels. The big flood of properties into the market is far larger than growth in demand, which will force the properties to lower room rates and delay their move to profitability. China’s economic slowdown will also impact the high and luxury properties, as many business travelers are likely to downgrade to cheaper options to save money and many may simply postpone and cancel trips due to tight budgets.

We’ve already seen recent signs of rapid weakening in the sector from the nation’s leading budget hotel operators, Home Inns (Nasdaq: HMIN) and China Lodging (Nasdaq: HTHT), operator of the Hanting chain. (previous post) The big global operators like Starwood and Hyatt don’t typically disclose performance for individual markets like China; but I wouldn’t hold out big near-term hopes for their new properties coming into the market, and expect that many will have to offer moderate to big discounts to fill their rooms over the next 2 years.

Bottom line: Starwood’s opening of 4 luxury hotels reflects good long-term potential from the high-end market, but the properties could get a slow start due to overcapacity and China’s economic slowdown.

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