"The international brands are in a race against time to be ready for the 2008 Beijing Olympics and the 2010 World Expo," Flaig said. He expects foreign operators to considerably boost their presence on the mainland.

About 27,000 branded hotel rooms will be rolled out in Shanghai this year, 8,240 of which will be new, according to Jones Lang LaSalle Hotels research.

Many world-class hotels are in the pipeline for the two cities. A 190-room Four Seasons hotel will be opened in Shanghai's Pudong District next year, while a Mandarin Oriental hotel with 203 rooms is also scheduled to open in 2008 in Beijing's Chaoyang District.

Flaig said the vibrant economy and tourism industry of the two cities is creating strong demand for the hospitality sector that could be sustained well into the next decade.

"The mainland has the largest domestic tourism market in the world. With growing affluence and better internal travel networks, the domestic traveler will become a key source of demand for a variety of hotel categories - from budget to luxury hotels," he said.

Between 1997 and 2006, international tourist arrivals to Beijing increased at a CAAG (compound average annual growth) rate of 8.1 percent and 13.5 percent for Shanghai. The number of inbound tourists to both Beijing and Shanghai reached a new high last year.

Luxury hotels in Shanghai and Beijing are also seeing strong revenue growth.

The ADR (average daily rate) of five-star hotels in Shanghai surpassed the 1,700-yuan mark for the first time in 2006. The city's ADR tops other mainland cities, and is 33 percent higher than Beijing's.

Flaig predicted ADR growth in Shanghai of 5 percent for 2007, while the occupancy rates of the five-star hotels is expected to pick up moderately.

Last year, Beijing's five-star hotels achieved the highest RevPAR (revenue per available room) since 1994. RevPAR for the first six months of the year has outperformed the same period in 2006. A similar pattern was observed in the four-star segment.

Regional investors from Hong Kong have actively pursued investment opportunities in key gateway cities such as Beijing and Shanghai as well as in second-tier cities. Hong Kong investors were involved in eight out of the 20 major hotel transactions this year.

But Flaig said overseas investors tended to target second-tier cities because of lower land cost. "Land constitutes the most significant cost for hotel development. Building hotels in second-tier cities can help investors raise their profitability."

Flaig said the growing popularity of budget hotels is having an impact on the one- and two-star hotels. "The budget hotels offer very competitive prices of less than 200 yuan per night... so they (one- and two-star hotels) are forced to either mark down prices or refurbish their outfits."

(China Daily September 21, 2007)