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Hong Kong’s hotel industry recovers slowly
The sector has to adjust its offered services to cater to local demand.
Hong Kong’s hotel industry is expected to recover at a gradual pace before the market fully reopens its border with the Chinese mainland, prompting hotel operators to align their services with the domestic demand.
In the Hong Kong Hotel Report November 2022, Knight Frank said operators have to ensure flexibility in providing products and services that will serve the demand locally to guarantee occupancy and cash flow.
“Before the border fully reopens with the Chinese mainland, we expect the hotel industry to recover at a slow pace,” the Knight Frank report said.
“It is certain that the new normal for the hotel sector will focus on a quality guest experience and differentiated product offerings,” it added.
As domestic demand is insufficient to fill the loss from international and Chinese mainland visitors, the occupancy level and average daily rate (ADR) of High Tariff A hotels will remain at low levels in 2023.
For the longer term, Knight Frank expects the hotel industry to hold momentum when the market and Chinese mainland fully reopen their borders, with local and international arrivals seen to rebound to 60% to 70% of the pre‑pandemic levels.
More investors are also expected to target converting hotels to long‑stay rentals accommodation, together with co‑living operators, it said.
2022 hotel performance
From January to August 2022, Hong Kong saw the number of overnight visitor arrivals increase by 234% year‑on‑year (YoY) to 175,852. In August alone, the number skyrocketed by 529% YoY to 56,499 visitors. This came after the fifth wave of the pandemic was controlled in May 2022.
As such, the hotel performance improved due to the local staycation and hotel quarantine demands which pushed the occupancy rate and the ADR.
High Tariff A hotels’ occupancy jumped to 56%, up by 15 percentage points YoY in the first eight months of 2022, with the ADR rising by 16.5% YoY to $1,671. Meanwhile, the occupancy rate of High Tariff B hotels was up by 11 percentage points YoY to 71% with the ADR growing by 31.8% to $820.
Medium Tariff hotels, on the other hand, saw a five percentage points decline compared to the same period last year to 66%, and its ADR was up by 47.1% YoY to $687.
As of end‑August 2022, a total of 41 High Tariff A hotels opened with 21,471 rooms. This is compared to the only two new High Tariff A hotels that opened in 2021 which are The Arca in Wong Chuk Hang and WM Hotel in Sai Kung with 187 and 260 rooms, respectively.
Knight Frank has also identified five key trends that emerged in hotel operations.
Scaling down
Some hotel owners are cutting their hotel business to renovated hotels for other uses, mostly as residential property amidst the subdued residential market. Knight Frank said there are at least seven planning applications with the Town Planning Board (TPB) to convert to residential use since 2020 with a total of 4,823 flats.
It cited CK Asset’s plan which was approved by the TPB with the conditions to renovate two existing blocks of Harbour Plaza Resort City in Tin Shui Wai to provide 1,120 flats, which is a reduction of 78% from the 5,000 under the previous redevelopment plan. It completion was brought forward to 2028.
The Horizon Suite Hotel, another CK Asset property, will also be renovated and prived 758 flats, amongst others.
“Hotel rates follow seasonal trends, while domestic housing has a far more stable and upward growth trend. Hotel investors and operators who prefer lower volatility cash flow, while still enjoying the upside of seasonal uptrends may opt for partial conversion to long‑stay or co‑living space,” Knight Frank said.
Turning into a co-living space
Hotels are also attracting inventors’ interest in converting them into co‑living or long‑stay accommodation spaces. International funds were the main buyers of hotels through joint ventures with co‑living operators.
At least eight of the total 17 hotel transactions since 2020 included plans or have confirmed conversion into alternative uses such as co‑ living or student accommodation, reaching $9.3b out of the total $12.7b transactions.
Knight Frank said that such premises offer more risk‑adjusted returns than traditional real estate investments.
“These partnerships provide stable cash flow, given longer‑term leases and high occupancy levels for co‑living premises, allowing operators to scale up their business and increase margins,” it said.
Some of the notable transactions include Weave Living and PGIM Real Estate’s acquisition of the 435‑unit Rosedale Hotel in West Kowloon for $1.37b in June. This is part of their US$200m joint venture wearing PGIM Real Estate holds and 90% stake, whilst Weave holds the rest and leads the repositioning and operations of the acquired assets.
Knight Frank said the hotel investment volume is expected to “hold up,” adding that more investors are looking for en‑bloc hotels or apartments to turn into long‑term rental accommodations.
“Once the border opens, these properties could be operated as hotels. More partnerships are expected between operators and investors or property owners in the acquisition, development and operation of the assets, leveraging the scale of efficiency of the operators,” it said.
Some hotel owners are cutting their hotel business to renovated hotels for other uses “Hotel rates follow seasonal trends, while domestic housing has a far more stable and upward growth trend.”
List of new hotels opened in 2021-2022
Quarter Opened 2021 Q3 2021 Q3 2021 Q3 2021 Q3 2022 Q1 2022 Q1 2022 Q1 2022 Q2 2022 Q2 2022 Q2 2022 Q3 2022 Q3
SOURCE: Knight Frank Research / Hong Kong Tourism Board
Location Wong Chuk Hang Tsim Sha Tsui Sai Kung Yau Ma Tei Chek Lap Kok Tai Kok Tsui Sheung Wan Wan Chai Wan Chai Tung Chung Wong Chuk Hang Wan Chai
List of new hotels opened in 2021-2022
Hotel Retail Industrial
Hotel $9.3 billion
Industrial $118.2 billion 3%
39% 26%
32%
Name of Hotel The Arca Hillwood House Hotel WM Hotel Green Jade Hotel Regala Skycity Hotel Starphire Hotel Lander Grand Hotel China Rich Hotel J Link Hotel The Silveri Hong Kong-MGallery The Fullerton Ocean Park Aki Hong Kong-MGallery
$78.3 billion
Retail $97.4 billion
SOURCE: RCA / Knight Frank Research
Asset repositioning, enhancement
Some operators have also taken the chance to reposition themselves or improve their concept through upgrades and renovations amidst the all‑time low tourist arrivals.
Knight Frank said Sheraton Hon Kong Hotel in Tsim Sha Tsui began renovation in November 2021 for the first phase of 100 rooms and suites that are now open to guests, the second phase which was set for launch in December 2022.
InterContinental Hong Kong is also set for rebranding in December 2022 as Regent Hong Kong, after renovations that started in April 2020.
“We expect to see some hotel operators take the opportunity amid the downbeat market to upgrade and enhance their assets. This will provide more long‑term benefits, such as higher room tariffs, a new and broader clientele, and new income streams from non‑room revenue to hotel owners,” Knight Frank said.
Adopting theme-based elements
To target locals, there were a few theme‑based hotels that have opened in the past year, featuring a particular motif across the hotel such as the interior design, decor, dining, as well as amenity facilities.
Knight Frank said Fullerton Ocean Park Hotel has six children’s‑themed rooms that offer a sea view. Aki Hong Kong ‑ MGallery was also the first to offer a Japanese‑style tatami room to attract guests who often travel to Japan for a “homecoming.”
As the popularity and number of themed hotels in the market are increasing, theme‑based hotels are expected to be an “alternative growth driver” for the industry. “Theme‑based elements play an essential role in determining the popularity of a hotel, so to increase the attractiveness and enhance the brand of a hotel, operators must do careful market research and ensure the theme matches the market trends,” Knight Frank said.
ESG measures
Hotel operators have integrated measures in the business and consider them as a strategic initiatives. These may include energy and water efficiency, reduced carbon emissions, sustainable buildings, responsible and sustainable sourcing, social impact, and transparent reporting, Knight Frank said.
Some of the ESG measures implemented include the “Staycation for Good” launched by The Rosewood with Social Venture Hong Kong. Through this, they offer a quarterly programme providing insights in addressing environmental and social issuers. Hong Kong and Shanghai Hotels also send recyclables to off‑site recycling facilities or for upcycling by partner organisations, amongst other initiatives.
Knight Frank said hotel operators should focus more on ESG measures “to mitigate future risks.”
No of rooms 187 82 260 38 1,208 154 51 78 80 206 425 173
