The demand for high-end hotels in China is sinking in a financial downturn that is showing no fast signs of recovery.

"There isn't enough demand for top hotels in front-line cities such as Beijing, Shanghai and Guangzhou, as these markets are saturated," said Lily Ng, senior vice-president of Jones Lang LaSalle Hotels.

"And the concern in the second-tier cities is whether local consumption can cover the high investment," Ng said.

Transaction volumes of Chinese hotels sank from $1.6 billion in 2006 to $1 billion in 2007 to $0.3 billion in 2008, according to statistics from Jones Lang LaSalle Hotels.

Four-star and five-star hotels apparently are faring worse.

According to the global hotel consulting company HVS, the top five luxury hotel markets at the Chinese mainland - Sanya, Beijing, Shanghai, Lijiang and Tianjin - reached a supply-and-demand balance in 2006 and 2007 and an oversupply in 2008.

During the past four years, the supply of five-star hotels in these cities increased by 15 percent, while demand only grew by 10 percent.

As the second-largest city after Hong Kong in the number of new room supplies for the next two years in China, Shanghai will offer more than 11,340 new rooms between 2009 and 2011 to meet the demands of the Shanghai 2010 World Expo.

At least 28 confirmed four-star or five-star hotels will contribute to these new rooms, including the Four Seasons Pudong, Ritz-Carlton Pudong Shanghai, Peninsula Shanghai and new Shangri-La.

Even when the World Expo brings 800,000 tourists to Shanghai next year, she said, less than 5 percent of those tourists are expected to check into luxury hotels.

"If you don't have a very good reason to build a luxury hotel in Shanghai, let's hold it back first," said David Ling, the managing director of HVS Asia-Pacific.

"And that's already applied to some developers," Ling said.

Beijing apparently is suffering from a post-Olympics slump, welcoming fewer tourists than expected since the 2008 Olympic Games.

"Other host cities benefited from the long-lasting chain reaction of the Olympics," Ng of Jones Lang LaSalle Hotels said.

"Beijing hasn't been that lucky. Incentive travel and MICE (Meeting Incentive Convention Event) business has been down in this economic downturn," Ng said. "Both four- and five-star hotels are under tremendous pressure."

Hotel markets in second-tier cities such as Suzhou and Hangzhou are showing more promise, sources said.

"The major cities such as Beijing, Shanghai and Guangzhou have been hit harder by the economic decline. Secondary cities seem to be more stable and less affected," said Julian van den Bogaerde, regional vice-president in China for Swissotel Hotels & Resorts.

Ling of HVS Asia-Pacific said that "where the opportunity really is now" is in second-and third-tier cities.

Currently, occupancy rates and average daily hotel room rates (ADR) at Shanghai's high-end hotels are not encouraging.

Through May, the occupancy rate at Shanghai's five-star hotels dropped to 44.9 percent from 56.3 percent at the end of last year. The ADR dropped from 1,552 yuan to 1,225 yuan.

"The occupancy rates of Ningbo and Wuhan's top hotels are much higher than ours," said a spokesperson at a five-star hotel in Shanghai who declined to provide her name.

"We exchange information on average daily room rates and occupancy rates with JW Marriott, Ritz-Carlton and Shangri-La every month and add them up to know the total market demand," she said.

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