A China posting for an expatriate is no longer regarded as the hardship it may have been even five years ago. At least in the major coastal cities, it is now possible to buy a wide variety of products, provide your children with a decent primary education and receive high quality basic medical care. Foreigners still have to come to terms with the pollution and over-crowding but in many respects life can be as comfortable as back home.
One area where there is greatly improved choice is in housing. The wave of villas and condominiums that were being built during the property boom of the early 1990s have now come on stream, giving executives real choice over where they can live. This means that for the first time in China, serviced apartments are facing real competition. "There used to be a two-year waiting list when we were the. only place to live," says Ms Susan Schulman, PR Director of the Shanghai Centre. Apartments in the complex are still 98 per cent occupied but for the first time there is a real sense of competition. Given the prospect of a villa with a garden, perhaps located in a relatively green and tranquil part of the city, many families are tempted to leave the familiar but rather enclosed world of a serviced apartment complex.
Location is the key
Despite this new competitive climate, property developers are buoyant about prospects for the serviced apartment business. Research carried out by Marriott hotel group shows that there is demand for what the company describes as "convenient, secure and prestigious homes while far away from home". The target is senior to mid-level executives in banking, professional services and manufacturing. Its research shows that about half of this group goes on assignment for the first time and most will be travelling alone. About one-third of relocations involve entire families, with the remainder relocating with a spouse.
In China, there continues to be strong demand for the convenience of being close to place of work and to an array of amenities. With traffic congestion worsening in all the major cities, it is a great advantage not to have to drive to work.
These apartments are furnished and decorated, and fully equipped with kitchen utensils, television, VCR and other home comforts. Guests are spared the hassle of connecting a telephone or securing the services of a maid or cleaner.
The only drawback is that while apartments are in most cases tastefully decorated, they often lack individuality. Given the nature of the business, it is understandable that operators are reluctant to allow major refurbishment or modification to an apartment.
Earlier this year, Marriott launched executive residences as a worldwide brand. It already operates such a chain in the US where it is one of the group's most profitable businesses. In coming years, it is committed to building five executive residences a year, worldwide. "We see it as a major growth vehicle and we see probably greater opportunities than five per year to come forward with," says Mr Joel Eisemann, the company's managing director of hotel development in the region.
The Asia-Pacific will be a major focus, he says, although no specific China projects have yet been announced. Instead of looking at the country as a whole, Marriott will assess the viability of specific sites in a city. "It could be a stand-alone project," he says. "In that case it would need more units in order to be able to support itself. Or it could be a smaller project, ideally part of hotel, to help with the overheads and synergies. There's also a tremendous advantage from the guests' perspective because they have access to all the hotel's amenities."
China figures prominently in Marriott's plans since its recent acquisition of the New World and Ramada properties. The acquisition now means that Marriott has 13 properties in China, making it the third largest international hotel group in the country. Two of these properties, the Jiang Guang Center in Beijing and the Ramada in Wuxi, are already equipped with apartments, and the group is presently evaluating the new portfolio and the various commitments.
Shangri-La, which is the largest deluxe hotel group in China, is also attracted by the serviced apartment prospect. Unlike Marriott it is not considering the concept of a branded product, but it is looking at the concept in secondary cities where it can dominate the market in the early years. Shangri-La's new property in Dalian, due to open in August, will include residential and commercial floors. Likewise its properties in two other northern cities, Harbin and Changchun, will also be equipped with serviced apartments.
"Shangri-La is not looking to get into the residential business but we will invest in certain locations where we can see advantages," says group PR Manager Joanne Watkins. For both groups, it seems, location is the key. "The projects that are much better located and better operated will always achieve premium in the market," says Eisemann.
The rewards for the initial entrants in China have been very, apparent since the late 1980s.
Even by mid-1996, the Holiday Inn Lido apartment complex in Beijing had a waiting list of over 300 executives and families, and there were similar numbers queuing up at the China World Trade Centre and the Kempinski Hotel Beijing Lufthansa Center. Each of these centres, complete with hotel, offices, shops and apartments, have become commercial magnets with a nucleus of major corporate clients.
But with so much new building work in China's major cities, the quality of a location can change quickly. The 330-unit Lido was the first major mixed-use complex in China and it had the extra advantage of being close to Beijing airport and an international school. Today, with all the new commercial development downtown, the Lido's location is no longer its strongest suit.
The Kempinski Center, with 161 apartments, is no longer full, having lost some business to the villas. But Ms Joy Lister, director of marketing and sales at the centre, is confident that the quality of the complex and the influx of embassies and offices into the area will underpin future growth.
Occupancy at the Lido and China World is now at the 90 per cent mark or a little above. While these remain healthy rates, waiting lists seem a thing of the past. "People find that there are more products available on the market," says Ms Jeanne Tai, property manager at the China World. "Now the tenant is asking to be provided with many different things. He's becoming more demanding."
Most established hotel operators, which tend to focus on middle- to senior management sent abroad on assignment, set a minimum contract duration of one year. But in a competitive environment, the serviced apartment providers are becoming more flexible in responding to client needs. For example, the Shanghai Centre has started short-term rental of some of its studios – a move which has proved tremendously popular, according to Schulman. However, there is little prospect of the centre losing its exclusive appeal, with studios going for US$3,500 a month and two-bedroom apartments for US$7,000.
Likewise, the response of Swissotel Beijing Hong Kong Macau Center to the increased supply of residential space has been to add extra value rather than reduce rates, which are currently in the US$4,000-8,000 range. Recent upgrades to its 74 units include the installation of larger television sets with VCR and telephones with answering machines as a standard. Since mid-1996, the centre has started to grant rental terms of less than 12 months. Its relatively small apartments are geared to bachelors and couples – a market which is holding up well. Nevertheless, assistant manager Christian Henkemeir concedes that by the second half of next year it is likely that it will cut rates by 15 per cent in order to maintain occupancy levels.
Marriott is also targeting executives looking for accommodation of between one and six months. These might include expatriates needing a breathing space in order to find a permanent residence or groups such as engineers or accountants on fixed-duration project assignments.
Eisemann foresees some operators in cities where there is an over-supply of hotels and other properties, offering serviced apartments for just four or five nights. He envisages people using them as they might a hotel, providing guests with the option of more space but less in the way of facilities.
Emphasis on security
Lister says the market for Grade A complexes in China is maturing, with demand now concentrated among singles and parents with young children. She says that villas with gardens are popular among families with slightly older children. However, isolation for wives can be a major problem, she adds, in an environment where it can be difficult to make friends.
Security and proximity to medical centres are important factors for those with younger children. "There is now more emphasis being placed on safety and security," says Lister. "It is perceived as being increasingly important."
Eisemann is confident that there remains plenty of potential in the serviced apartment business, despite the fact that many property developers have moved into this area because they have run into difficulties in selling units. He believes the current
property surplus in the major cities will be absorbed in coming years. "In China there is a high need," he says. "If you look at the Shanghai Centre, there's always been tremendous demand for the serviced apartment units there."
Hotel groups argue that their experience in looking after hotel guests gives them an advantage over property developers in being able to deliver high quality accommodation and the right level of service. There is much common ground between hotels and serviced apartments. "As part of a hotel group, we are aware of guests needs and we pay more attention to their needs," says Mr Lin Quan Ming of the Holiday Inn Lido. "We're always trying to improve the service."
Spin-off benefits for the hotel include a more even business flow over the course of a year and a better utilisation of its services. Resident families also help to boost occupancy levels by putting up overseas visitors in the hotel. For the serviced apartment resident, the Kempinski card gives various hotel discounts and they are afforded the convenience of paying restaurant bills by monthly account. "There are tremendous benefits for the hotel," says Lister. "I believe the serviced apartment business is a growth area for the hotels."
One cause of concern is the tendency for middle management expatriates to be replaced by local staff. But all operators say this decline is more than matched by the amount of new business coming in. Indeed, the China World is building two more serviced apartment blocks in separate locations a couple of kilometres from its main complex. Being located in less prestigious parts of the city, the target market is quite different. Due to be completed by the end of this year, they are designed to appeal to middle management with smaller housing allowances. If there is strong demand for these projects, it will demonstrate the scope of future market potential.
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