• Hilton grows with Country Garden

Hilton has signed a deal with China-based developer Country Garden to manage a number of properties in the country under its brands.

The agreement focused primarily on the DoubleTree by Hilton and Hilton Garden Inn brands,  as the country’s hotel sector looks increasingly to the mid market.

The partnership saw an initial six hotels owned by Country Garden converted to Hilton-branded properties or in the pipeline. Country Garden has an existing portfolio of over 120 hotels in trading, under construction, and planning.

“Country Garden is a widely admired property developer and we are thrilled to be extending our partnership with them,” said Hilton president & CEO Chris Nassetta. “Ultimately, our goal is to provide exceptional experiences to our guests wherever they may be, and through this partnership, we have an opportunity to bring Hilton’s signature hospitality to even more locations across the country.”

Country Garden Hotels Group said: “Country Garden, as the practitioner of China’s new urbanisation process, has been striving to meet peoples’ demands for increased quality of education, tourism, and life as a whole.”

New hotels included in the partnership deal include DoubleTree by Hilton Hainan Lingshui; DoubleTree by Hilton Guangzhou Zengcheng; and Hilton Zhengzhou Xingyang.

Hilton currently has 470 hotels either trading or under development in China, with 266 under construction.

The deal came one month after Country Garden Holdings acquired a residential site in London, for around GBP80m, with plans to turn it into a GBP400m development of 785 homes. The move, the first foray for the group into London, was described by one executive as expected to offset disappointing sales at a project in Malaysia which had failed to sell to Chinese buyers as anticipated.

Commenting to the South China Morning Post, they said: “The purchase [in London] is financed overseas so it totally complies with state policies. Unlike the previous Malaysia project which mainly targeted Chinese, this project will target locals.”

The company reported a 106% increase in net profit for 2017 on the back of a 78.3% increase in contracted sales, with analysts expecting the company to benefit from its focus on smaller cities as it maintained its core strategy of residential sales.

The group said: “In line with the government’s efforts to promote supply-side structural reform, Country Garden plans to provide high-quality housing in the downtown areas of third- and fourth-tier cities while avoiding oversupply of similar products.” Last year, the company acquired 881 lots of land, with the floor area within these newly acquired lots in third- and fourth-tier cities representing 61% of all such acquisitions, up 9 percentage points year on year

Property sales dominated the group’s business, accounting for 95.8% of the total CHY77bn (GBP9bn) in revenue in the first half of last year. However, hotel operation revenue increased by 17.7% over the same period to reach approximately CHY873.4m.

The group previously branded hotels under its own Country Garden flag, with its open hotel portfolio dominated by five-star properties. The deal with Hilton came as the country’s market turned to towards the mid market.

China Lodging announced last year that two thirds of the group’s pipeline was in the midscale and upscale segments.  The company said that, within China, there were seven brands with more than 100 hotels in the midscale segment, with its having three, in the form of Ji Hotel, Orange and Starway. It expected HanTing Plus to pass the 100 mark in just under two years.

During the past three years, China Lodging has increased its room inventory in mid and upscale segments from 11% in 2014 to 25%.

The group is also looking to expand across the hospitality sector as the growth in branded hotels in the country slowed. CEO Jenny Zhang described the domestic travel market in China as “very strong”, commenting: “From 2011 to 2016, disposable income per capita grew at CAGR of 7% while domestic travel expenditures grew at 14% CAGR. The strong demand for travel has been driven by consumption upgrades and lifestyle change.”

HA Perspective [by Katherine Doggrell]: The turn towards the mid-market in China by China Lodging has been a familiar topic in these pages over the past year and the global brands have shown a similar interest, eager to join in the shift as the gap between economy and luxury gets coloured in.

But, as is the wont of the brands, the urge to lay out their own cash was limited and there has been a hustle to find local partners. In Country Garden Hilton has found one which is eager for a little light diversification from its core residential business, and also from the luxury market.

It also has access to stacks of land in areas primed for the mid market. Morgan Stanley said in a note following the group’s results: “Country Garden has a high land bank exposure to the lower tier cities. There is lower home ownership and a stronger intention in terms of net buys in lower tier cities than tier 1 and 2 cities, due to greater economic activity amid better connectivity.”

The residential market in China is one which, as Country Garden’s own comments indicate, the government has great sway. Should its whims – or that of residential demand – turn, Country Garden will be left with land with nothing on it. Land which might benefit from a nice hotel complete with warm chocolate chip cookies.

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