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Luxury hotelier: Oversupply is a big issue for China

Oversupply is a major issue in the Chinese hospitality market, CEO of luxury hotel group Hong Kong and Shanghai Hotels Clement Kwok told CNBC.

Hong Kong and Shanghai Hotels is the owner of the high-end luxury hotel brand Peninsula with a total of 9 hotels across the U.S. and Asia with a tenth under construction in Paris.

Kwok told CNBC's Managing Asia that China is the most important market for the hotel industry, but oversupply was a concern. The group has hotels in Beijing, Shanghai and Hong Kong, and is eyeing second-tier cities in China for future development, he said. China's cities are divided into first, second and third tier categories reflecting their size both geographically and in terms of income. Shanghai and Beijing are grouped in the first tier.

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"When a new market opens up it is quite normal that you will see a lot of new supply go in. At the moment many people see great future prospects for China and they are building hotels in China," said Kwok.

Kwok acknowledged that the oversupply situation in China, where in Shanghai alone more than 1,000 luxury hotel rooms were added to the market last year, has put downward pressure on the room rates offered at his hotels.

"Definitely our room rates are lower than would be the case if there was less supply - that will always be the case. If there wasn't competition it would mean that the market we are operating in is not a desirable place," he said, adding that he expected prices to have now stabilized.

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However, he pointed out that while a new market was bound to attract an influx of supply, the question of whether or not these hotels would survive comes down to quality.

"Who has the long-term staying power? We do not yet know. We are still in the early stages of the game, and there's still a lot of the game to be played," he added.

The CEO added that a key conundrum hoteliers often face is balancing the necessity to invest in upgrades and renovations to keep their product fresh while trying to keep margins under control.

The illuminated exterior of The Peninsula Hong Kong in Tsim Sha Tsui, opened in 1928 and expanded in 1994 it is the flagship property of the The Peninsula Hotels group.
Kimberley Coole | Lonely Planet Collection | Getty Images
The illuminated exterior of The Peninsula Hong Kong in Tsim Sha Tsui, opened in 1928 and expanded in 1994 it is the flagship property of the The Peninsula Hotels group.

The group's Paris-based hotel is set to open in the second half of this year, and Kwok said he was now seriously eyeing London, while considering Rome, Berlin and Madrid if the right opportunity were to arise.

When asked if he was concerned about the uncertainty surrounding the euro zone markets, Kwok said the firm's move into Europe was more of a long-term investment.

"[We have a] network of hotels that we are building. No one will deny London and Paris should be on that international network of gateway cities and we've wanted to be in London for a long time," he said.

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"Actually if you look at room rates at the very top hotels in Paris at the moment they are somewhat higher. The average rate is up to 1,000 euros per night so that reflects demand," he added.

He said that he has no desire to expand the Peninsula brand into one offering hundreds of hotels worldwide - much like other major hotelier brands such as Starwood or Marriott. Kwok noted that he'd be content with 15 hotels.

The group recently ventured into rapidly developing Myanmar, after it bought the headquarters of a former railway company for redevelopment purposes last year.

"Burma is now a very exciting developing country, we all know about the reforms that are taking place there and we that this is a good time to go into that market," he said.