Hotel operators plan to provide more low-cost accommodation to cater for the growth in economy and business travellers Hotel operators, both international and home-grown, and institutional investors are targeting China's economy hotel sector as budget travellers begin to crisscross the country. While overseas hospitality groups such as France's Accor are expanding their reach from the coastal areas to the inland cities, domestic operators such as Home Inns, Jinjiang Inn and Motel 168 are building up war chests, either by listing their shares on overseas stock markets or recruiting foreign strategic investors. 'China's economy is undergoing rapid development, and we foresee strong demand for budget accommodation among local business travellers,' said Zhang Shangzhi, a general delegate of Accor China and mainland chief executive of the company's budget chain, Ibis. Mainlanders are embarking on an unprecedented wave of tourism and business travel. According to the China National Tourism Administration, 1.2 billion Chinese travelled within the country last year, up from 1.1 billion in 2004. Mr Zhang said Accor had signed up agreements to develop 30 budget hotels in cities including Shanghai, Xian and Chongqing. Its total investment would be US$100 million. 'Our target is to open 100 budget hotels in the next five or six years,' he said. At Accor's two hotels in Tianjin and Chengdu, occupancy rates are more than 90 per cent. Room rates range from 138 yuan to 168 yuan per night. Another aggressive foreign player is Super8, a well-known American brand. It entered the mainland in 2004 and now has 18 hotels there. Mike Wood, head of commercial real-estate lending and structured finance at Citic Ka Wah Bank, said interest in the budget accommodations sector was growing among foreign hotel operators and investors, creating lending opportunities for banks like his. He recently accompanied a US company on a trip to Shanghai to study an investment in a small, locally owned hotel. 'There are a lot of small hotels operated by mainlanders, those you wouldn't want to stay in,' said Mr Wood. But once foreign investors get hold of them, they can easily be transformed into international-standard properties. China has more than 300,000 guesthouses and hotels, of which less than 4 per cent are star-rated, according to industry sources. 'Among the numerous small hotels, only a few dozen meet proper budget hotel standards,' said Miao Lisheng, general manager of Beijing Tourism Holdings' Hong Kong office. Beijing Tourism is a founder of Home Inns, one of the biggest home-grown budget chains. Other strategic investors include foreign funds IDG Ventures and Sycamore Ventures. Home Inns sees large growth potential in the segment. It has 140 hotels in more than 40 cities, compared with only 80 hotels at the end of last year. Sources said the company was planning a listing on the US Nasdaq as early as the end of this year in order to build a war chest to help it compete with foreign rivals. However, Mr Miao said it would not be easy for foreign players to capture a major share of the fragmented budget hotel sector. Shanghai-based Jinjiang International, China's largest hotel group, is seeking a Hong Kong listing this year. The group owns Jinjiang Inn, another major domestic budget chain. David Zou, a partner at law firm Boss & Young, said investors were attracted by the three 'highs' of economy hotels - high rental rates, high investment returns and high profit margins. He said such high growth potential had lured Morgan Stanley into taking a 20 per cent stake in another home-grown chain, Motel 168, last year. However, a warning was sounded by Jim Yip, investment director at DTZ Debenham Tie Leung's Shanghai office, who said the industry, particularly in Shanghai, had become 'overcrowded'. 'It is increasingly difficult to acquire prime sites now. Some players will buy existing industrial buildings or old office blocks in good locations and renovate them as budget hotels,' he said. However, Mr Miao said budget hotels would succeed in many inland cities as domestic travel continued to expand.