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Updated: 2007-06-12 17:15

The average occupancy rate for Shanghai's hotels will likely continue to drop this year as a result of an imbalance between market demand and supply, a recent government report has found.

"For the coming three years, we should be very cautious about making any decision to open new deluxe hotels in Shanghai since the current facilities are almost adequate compared to demand," said Chen Xueyu, an official with the Shanghai Tourism Administrative Commission.

According to the commission, there was a total of 317 star-rated hotels in the city by the end of 2006, including 26 five-star and 43 four-star facilities.

Last year alone, a total of 17 four and five-star hotels were launched, adding a combined 5,901 hotel rooms for an increase of 16.68 percent from 2005.

In the low-end market, a total of 12,500 rooms were added in Shanghai last year, an increase of 9.8 percent from 2005.

However, demand didn't grow at the same pace in the period.

According to STAC, a total of 4.65 million overseas visitors had overnight stays in Shanghai last year, an increase of 4.52 percent from 2005.

A total of 96.84 million visitors from around China visited Shanghai last year, a rise of 6.4 percent from 2005.

The growth in supply has already had some negative effect on the average occupancy rates of hotels.

Average occupancy rates dropped 1.8 percentage points to 63.89 percent last year from 2005, according to the STAC. This was a decline of 7.93 percentage points from 2002 when average occupancy rates peaked at 71.82 percent.

This year, the city forecast five million overseas visitors, an increase of 7.61 percent from 2006, which requires about 2,307 new hotel rooms to accommodate, according to the STAC. About 100 million Chinese tourists are expected to come to Shanghai this year, a year-on-year increase of 3.26 percent from 2006. That will probably demand an additional 9,277 hotel rooms, the STAC said.

Therefore, the city needs roughly 11,584 new hotel rooms, STAC said.

However, overheated investment in hotels - both high-end and budget facilities - in anticipation of a business peak in 2010 during the World Expo can be traced three years back, Chen said.

For example, in the high-end sector, nine hotels with a combined 2,065 rooms were added in 2004, whereas 12 with 3,313 rooms and 17 with 5,901 rooms were introduced in 2005 and 2006.

And this year, according to statistics, another 23 high-end hotels - 13 five-star and 10 four-star - are expected to open, adding an additional 8,576 rooms.

Growth is even more rapid in the mid to low-end sector.

According to a market forecast by STAC, at least 15,000 new hotel rooms will be added this year, with budget inns taking the lion's shares. For instance, nine leading budget inn operators including Jin Jiang Inn, Home Inn, Motel 168 and Super 8 will probably open 67 outlets this year alone, adding 9,627 rooms.

In addition, statistics from STAC also show that from 2008 to 2010, some 58 new high-end hotels will go into operation, which will add another 21,576 rooms. Therefore, capacity for high-end visitors will reach 10 million by 2010, enough for the anticipated peak in visitors during the Expo.

To cope with the possible oversupply of hotel facilities, Chen said that strict control should be implemented in terms of both new construction and renovation projects. A limited number of high-end hotels should be planned over the coming few years.

Moreover, hotels in neighboring cities such as Suzhou, Wuxi, Hangzhou, as well as others within about one hour's drive from Shanghai could also be utilized if there is such a need, Chen said, explaining that it has proved successful in many countries where large events are held.

In terms of hotel rates, high-end hotels will likely raise prices as a result of rising expenses, an increase in business travelers and the relatively cheap prices compared to similar facilities in major cities around the world. However, for mid and low-end hotels, competition will likely push rates down, said Chen.