Singapore conglomerate Hong Leong Group has announced that the next part of its regional growth plans will be centred on budget hotel projects, as the company is now looking to avoid high costs of entry in saturated markets such as Shanghai.
But Hong Leong explained that while it welcomes the cooling measures in China to avoid a bubble, their full effect on the property market is yet to be seen.
Cities in China are growing and contributing to increasing land costs in major centres. To counter it, hospitality players such as Hong Leong are pulling business hotel and budget offerings away from the gateway cities.
"In the case of Shanghai and Beijing, the land cost has gone up very high. If you want to create this kind of concept, the cost per key will be high," said Kwek Leng Beng, executive chairman of Hong Leong Group Singapore.
"And there is a lot of oversupply now in Shanghai and Beijing, and hence you don’t want to go to a place where a price war could be going on for years."
Instead, the company is targeting third-tier Chinese cities, which it believes are under-served by the budget and business segment.
Hong Leong is also avoiding other hot markets such as Vietnam, where high inflation is limiting margins.
"You will not realize how effective it is because there is a time lag. So advocating to prevent the bubble is something that I am for, but pressing the button once too many may be something one has to be careful about," said Mr. Kwek
"Otherwise, the engine will stall and the car cannot restart again and will take a longer time to recover."