As developers in Beijing rush to complete more than 10,000 new hotel rooms before the Olympics next summer, there is concern that the building surge could lead to a big hangover of five-star properties after the Games. But international hoteliers are expressing long-term confidence in the Chinese economy. GDP grew 10.7% in 2006, and the World Bank estimates GDP growth this year at 9.6%.

The possibility of oversupply looms large for upper segments of the hotel market. “Development of four- and five-star hotels is so brisk that even in 2008, it will be hard for them to see occupancies of more than 75%, which means that it will be hard to see further room rate growth,” says David Ling, managing director of HVS East Asia, a branch of hotel consultancy HVS International.

Top international hoteliers are lining up to develop product in Beijing, including Ritz-Carlton, Westin, Novotel, Sofitel, Intercontinental, and Crowne Plaza. “Because of the cost of land in Beijing, mostly four- and five-star hotels are being built,” notes Ling. “In the long run, Beijing will probably see an undersupply of mid-tier properties.”

If China's strong economic growth continues, demand could possibly keep pace with supply despite rampant development of four- and five-star hotels. On the other hand, a review of some important metrics of those segments of the Beijing hotel market already show mixed results. Among Beijing's five-star hotels, the revenue per available room (RevPAR) climbed to $183.30 in June 2007, up 6.3% over the same month last year, according to Jones Lang LaSalle Hotels (JLL). In the same month, Beijing hotels of all segments enjoyed an average RevPAR of $104, on par with San Francisco's RevPAR of $113.51, according to Smith Travel Research.

Occupancy in Beijing hotels, however, shows a recent drop. In June 2007, occupancy at five-star hotels registered 70.4%, down 105 basis points from the same month a year earlier.

The Olympics are not alone in spurring hotel development in the capital. “The Chinese economy has been a much stronger driving force in recent years,” says Ling of HVS.

“Beijing gets both business and recreational travelers,” says Lily Ng, senior vice president of JLL in Beijing. “That's an advantage compared with Shanghai, which is mostly a business destination.”

Beijing attracted 3.9 million international visitors in 2006, a 7.6% increase over the prior year, reports the Beijing Tourism Association. In the first half of 2007, the city attracted 1.97 million visitors, an 11% increase over the first half of 2006. An estimated half-million additional visitors will attend the Olympics.

Hoteliers responded to the traveler influx, completing some 1,817 new rooms in 2006 in Beijing. By the end of 2007, JLL projects the completion of 3,910 new rooms — properties put in the development pipeline prior to the city securing the Olympics. Next year, some 7,525 rooms are slated for completion, followed by a relatively slack 1,017 in 2009.

Sensitivity about China's image has also affected hotel development. For parts of Beijing, says JLL's Ng, such as along the main road ringing the capital, the government quit issuing building permits early this year, so the world won't see half-finished structures in 2008.

“The government is strongly encouraging buildings to at least look complete from the outside by 2008,” Ng says. “Developers have been aware of that for some time, and are scheduling their projects to meet the requirement.”