Luxury hotels in Shanghai appear headed for tougher climes as they grapple with low occupancy, fierce competition and recession winds.

The International Branded Hotels Shanghai (IBHS), which has 65 top hotels in the city as members, said average occupancy rate among its members fell by 11 percent in 2008, to 56 percent from a year ago.

"Occupancy in January and February this year, which is normally quiet for Shanghai, has been worse than expected," said William Hall, chairman, IBHS.

"It's unusual circumstances at the moment. Nobody expected the business to be so slow," Hall said.

Since last November, deluxe five-star hotel Le Royal Meridian Shanghai, has seen an increasing number of booking cancellations, and fewer business travelers.

"We therefore have to do some big promotions like reducing prices and granting free dinner coupons to entice more customers," a source from the hotel said.

"We have managed a 50-percent occupancy rate in February, which is quite good when compared to others," the source said.

According to Wang Zhongze, deputy director of the Budgetary Work Commission of Shanghai Municipal People's Congress, the current occupancy rate in some of Shanghai's four- and five-star hotels has dropped to 10 percent, while the figure was 80 percent during 2007.

Many of these hotels like Le Royal Meridien have in fact escalated a war of sorts by offering hefty price cuts to entice customers.

According to local media reports, a four-star hotel in West Nanjing Road has reduced its room charges from 1,300 yuan to 698 yuan per day.

Europe's biggest hotelier Accor is offering discounts of up to 75 percent on 1 million rooms over 13 countries throughout the Asia-Pacific region, including China.

The price for a standard room in Accor's six hotels in Shanghai has since fallen from over 1,000 yuan to 308 yuan per day, according to Travel Daily.

"Cutting prices and saving expenses through recruitment freezes and downsizing hotels are the major ways for luxury hotels to weather economic hardship," Hall said.

According to property services provider Jones Lang LaSalle, the revenue per available room at Shanghai's five-star hotels fell 16.6 percent to 911 yuan in 2008, while the average daily rate declined 3.9 percent to 1,541 yuan.

The reality of the situation is that price cuts have become necessary to keep the revenue ball rolling.

Zhang Baohua, chairman, Shanghai International Equatorial Hotel, said occupancy rates at the hotels offering price cuts has reached nearly 50 percent in February, while the figure for those who did not do so, have dropped to 12 percent.

Generally, the break-even point for hoteliers is 60 percent occupancy, and a lower rate could result in operating loss, said Zhao Huanyan, chief consultant, SAO Hotel Solution Consulting Ltd.

"The overheated competition and cash strains have squeezed hotelier's profit margins further this year," said Zhang.

In the 1.57 sq-km Jing'an Community with 17,537 permanent residents under the hotel-intensive Jing'an District, there are 6,000 rooms, equaling the city's total room numbers back in 1984, he said.

"The room expansion rate vastly outpaced demand," Zhang said.

"In the upcoming months, we'll see some pickup, but maybe not as much as before," Hall said.