Colliers Radar Report 2018 - Colliers International
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Colliers Radar Report 2018
Melanie Kotschenreuther
Analyst | Research
Executive Summary
melanie.k@colliers.com
Don’t miss the opportunity
Soaring overnight visitor numbers to Hong Kong led to a
boom of new hotels in 2012 and prompted numerous
investors to convert their office properties into hotels.
Hannah Jeong However, many investors missed the optimal time to
Senior Director | Valuation and Advisory invest, as completions reached a peak just as tourism
growth started to decline. This led to a change of heart,
hannah.jeong@colliers.com with several investors ending conversions.
Given the recent recovery in tourism numbers, is it time
for this trend to be reversed? Recently, we have seen
several cases where owners have considered the
Pureanae Jang conversion of their hotel asset into other uses,
particularly to offices. This is natural given the current
Assistant Manager | Valuation and market environment of soaring office prices and rents in
Advisory core locations. However, an increasing number of
pureanae.jang@colliers.com investors are seeking advice about whether it is a good
time for hotel investments in Hong Kong. Existing hotel
owners are also interested in understanding whether
they should hold on to their assets and prepare for
another peak in tourism or exit with fast evolving
Colliers projects that the number of concepts such as co-working spaces or small office /
overnight visitors to Hong Kong will grow home (SOHO) office.
at an annual rate of 7%, reaching 36.6 Our analysis of the current tourism and hotel market
performance shows that the local market is currently
million by 2021, up from 27.9 million in experiencing a revival in fortunes. In H1 2018, Hong
2017. We expect this to be driven mostly Kong’s hotels accommodated more travellers than ever
by millennials and the emerging middle before, this is largely attributable to the influx of mainland
Chinese that are flocking back to the city. Room
class, with medium-tariff hotels in high occupancy and particularly medium-tariff hotel
demand. As a result, our analysis shows performance, especially in the New Territories, has stood
out. Current conversions from hotel to office are
that the demand for medium-tariff hotels therefore not driven by weak hotel market performance,
should outstrip supply by 21.5% in this but rather by the consistently strong office market
segment by 2021, providing investment performance in the CBD and fringe CBD locations due to
a long-term supply shortage combined with high
opportunities in this high return demand. Can hotels, in an improving tourism market,
segment. offer better returns or compete on a level playing field?
Numerous tourism initiatives from the government,
coupled with major upcoming transportation
We want to encourage developers and infrastructure, should strengthen Hong Kong’s position
investors to consider this segment as an international hub, whether for business or leisure.
carefully. This is particularly true in the medium-tariff sector, where
despite new supply, the room availability will likely not be
sufficient to accommodate the rising number of travellers
in this segment. With a shortage supply of medium tariff
hotels in the next couple of years and relatively lower
development and operating costs, we project a solid
performance that leads to good hotel investment
opportunities.
Contents
1. The revival of Hong Kong's tourism
market ............................................... 4
1.1 Hong Kong remains an attractive
destination ............................................. 4
1.2 Entering a new tourism cycle - the
potential upside of the current market .... 5
1.3 Upgrading attractions and infrastructure 7
1.4 Conclusion ............................................ 8
2. Is it still a good market for hotel
investments?.................................... 9
2.1 Busy 2017, an active year for hotel
transactions ........................................... 9
2.2 A cross-sectoral perspective ............... 10
2.3 Securing Plan B................................... 12
3. Adapting to changes in the
hospitality market .......................... 14
4. New opportunities for hotel
investments on the horizon .......... 17
4.1 An imbalanced pipeline ....................... 17
4.2 Hotel investment opportunities ............ 18
3 Are you checking in or checking out? | Colliers International | Radar Report 2018
1. The revival of We believe that Hong Kong has entered a new cycle as
records continued to be set in H1 2018. The arrival of
more than 13.8 million overnight visitors, including 9.2
Hong Kong's million from mainland China in the first six months of the
year alone, set a new record high, as highlighted in
Chart 1.
tourism market Hong Kong is still the number one choice for
Mainland tourists
1.1 Hong Kong remains an With rising spending power and relaxed visa and entry
requirements, mainland Chinese tourists are increasingly
attractive destination venturing further afield when travelling.
Strengthening tourist arrival performance Numerous international markets are benefiting from the
Hong Kong's tourism market is currently experiencing a Chinese travel boom. Despite suffering from a visitor
revival. The upturn follows a two-year decline in visitors decline in 2015 and 2016 Hong Kong has remained the
between 2015 and 2016, which was largely attributable undisputed number one choice for mainland tourists
to the decreasing number of mainland Chinese tourists, given its proximity, accessibility and reputation for
as political protests and anti-mainland sentiment shopping. In 2017, 35% of all mainland Chinese
impacted the relationship between Hong Kong and outbound tourists came to Hong Kong.2 Hong Kong was
mainland China. also the strongest performer amongst its peers regarding
overnight stays from mainland travellers as shown in
Since Q3 2016, however, overnight tourists have been
Chart 2.
flocking back to the city. Due to the mainland's strong
economic development and improved sentiment towards
Hong Kong, the trend of mainland Chinese tourist
arrivals was reversed and regained momentum in 2017,
growing 6.7% YOY. Overall, 2017 marked an all-time
record high in Hong Kong as the city accommodated
more overnight tourists than ever before, with the
majority of visitors coming for vacation and visiting
friends or family.1
Chart 1: Development of Overnight Visitor Arrivals in Hong Kong
Mainland Chinese overnight visitor growth (L) Total overnight visitor growth (L)
Total overnight visitor arrivals (R) Linear
Trend (Total overnight visitor arrivals (R))
50% 10
Overnight visitor arrivals (mil)
40% 8
30% 6
YOY growth
20% 4
10% 2
0% 0
-10% -2
-20% -4
Q4
Q3
Q4
Q3
Q1
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q1
Q2
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q1
Q2
Q4
Q2
Q3
Q4
Q1
Q2
Q3
Q4
Q2
Q3
Q1
Q2
Q1
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Hong Kong Tourism Board, Colliers
1 2
Hong Kong Tourism Board China National Tourism Administration
4 Are you checking in or checking out? | Colliers International | Radar Report 2018
Chart 2: Development of Mainland Chinese Visitor Arrivals in Selected Countries/ Territories and YOY growth (2016/2017)
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H1 2018
20,000,000 6.7%
18,000,000
Number of overnight and total
Mainland Chinese visitors
16,000,000
14,000,000
16.4%
12,000,000
12.0%
10,000,000
(48.3%) 15.4%
8,000,000
6,000,000
48.6%
12.7% 14.7%
4,000,000 7.4%
12.2%
2,000,000
0
Hong Kong* Macau* Thailand South Korea Japan Vietnam Singapore U.S. Malaysia Australia
Notes: *Overnight visitor arrivals figures only for Hong Kong and Macau, YOY growth figure for 2016/2017, U.S. growth figure refers to 2015/2016
Source: Hong Kong Tourism Board, Colliers
Millennials are travel champions 1.2 Entering a new tourism cycle -
Be it spending on shopping, entertainment, or travelling, the potential upside of the current
millennials, being one of the most influential
demographic groups, are setting the tone. Millennials market
focus on ‘lifestyle’ to express their personalities and New momentum for hotel spending
place travel as part of their identities, as such, they travel
more than any previous generation.3 Making up 44% of Traveller habits, especially given the influence of
all hotel guests in Hong Kong (as of 2017), millennials millennials, are shifting more towards lifestyle
and their hotel requirements are shaping the city's experiences, and so has spending. While shopping is
accommodation landscape. still a popular pastime in Hong Kong, the emphasis on
experiences is rising, which is also reflected in hotel
Fuelling the growth of global tourism, millennial travellers spending. After a decline for four consecutive years,
from the mainland have had a significant impact on Hong spending on hotels has regained momentum in 2017.
Kong's hotel industry, accounting for almost a third of all
hotel guests in Hong Kong in 2017.4 There are 415 In 2017, overnight tourists spent on average HKD431
million and 440 million millennials in mainland China and (US54.90) per person per night, an increase of 8.6%
India respectively, making up 47% of the world’s YOY. The jump has been even bigger for tourists from
millennial population.5 Given the sheer size of this the mainland, which on average spent HKD354 (US45.1)
demographic, we expect millennials to remain a key for their hotel room per night, 16.8% more than in 2016.
driver for international traveller growth, like the baby The spending on hotel bills increased across all major
boomers before them, but perhaps with less spending short-haul submarkets.
power. Considering the fact that mainland Chinese visitors
account for on average around 67% of overall overnight
tourists (2013-2017),6 their spending power indicates the
significance of medium-tariff hotels in Hong Kong.
Medium-tariff hotel performance stands out
Consistent with higher numbers of millennial travellers,
we found that hotels in the medium-tariff segment are
faring better than those in higher categories.
3 5
Forbes.com, 8 November 2017 SCMP, 5 August 2018
4 6
Hong Kong Tourism Board Hong Kong Tourism Board
5 Are you checking in or checking out? | Colliers International | Radar Report 2018
Chart 3: Occupancy Performance by Hotel Category Chart 4: RevPAR Performance by Hotel Category
All Hotels High Tariff A Hotels High Tariff A Hotels High Tariff B Hotels
High Tariff B Hotels Medium Tariff Hotels Medium Tariff Hotels
Linear (All Hotels)
Trend
Occupancy (%) RevPAR YOY growth (%)
95% 60%
50%
90%
40%
30%
85%
20%
80% 10%
0%
75% Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2
-10%
2009 2010 2011 2012 2013 2014 2015 2016 20172018
-20%
70%
-30%
65% -40%
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 H1
2018 Source: Hong Kong Tourism Board, Colliers
Source: Hong Kong Tourism Board, Colliers
Note: continued in H1 2018 as the RevPAR for medium-tariff
High Tariff A – the highest rated properties based on location,
hotels grew by 18.2% YOY in H1 2018, reaching an
facilities, staff-to-room ratio, achieved room rate and business mix. average of HKD699 (USD89) in this period, while high-
This segment mostly equates to luxury hotels tariff hotels struggled until year-end 2017 and have only
High Tariff B – the second highest, and loosely equates to five- returned to positive territory in H1 2018.
star/upper upscale hotels
Medium Tariff – can be loosely equated to midscale
tariff/midmarket or three/four-star hotels. Strong performance in the New Territories
Tourist Guesthouse – loosely equated to budget hotels and other Despite a slight slowdown in H1 2018, we also found
downmarket options including hostels and the like.
that hotels in the New Territories showed superior
Please refer to the website of the Hong Kong Tourism Board for
more detailed information
occupancy performance compared to other districts in
the past five years, outperforming against the traditional
> Occupancy of Medium Tariff hotels is the highest tourist districts including Yau Ma Tei/Mong Kok and Tsim
Having reached a low in 2015, the recovery of Hong Sha Tsui (“Yau Tsim Mong”), as illustrated in Chart 5.7
Kong's overall hotel occupancy rate has been
Chart 5: Hotel Occupancy in % by District
encouraging. In H1 2018, the average overall occupancy
rate reached 91%, an increase of 3.5 percentage points Central/ Western Wan Chai/ Causeway Bay
Eastern & Southern Hong Kong Tsim Sha Tsui
compared to the same period last year. Yau Ma Tei/ Mong Kok Other Kowloon
New Territories Islands
The gap in occupancy rate between different hotel
Occupancy (%)
categories has been narrowing. However, medium-tariff
hotels have consistently outperformed other categories 100%
over the past ten years and their occupancy reached an
average of 92.0% in H1 2018, compared to 88.5% in the 95%
same period last year as shown in Chart 3.
> Average daily room rates are on an upward trend 90%
We have witnessed a sustained trend of double-digit
85%
RevPAR growth rates at medium-tariff hotels since the
beginning of 2017, as presented in Chart 4. In Q4 2017,
80%
this hotel category reached an all-time record ADR of
HKD840 (USD107.50), fuelled by almost half a million
more overnight visitors from mainland China compared 75%
2005 2010 2011 2012 2013 2014 2015 2016 2017 H1
to the same period in 2016. The strong upward trend has 2018
Source: Hong Kong Tourism Board, Colliers
7
Hong Kong Tourism Board
6 Are you checking in or checking out? | Colliers International | Radar Report 2018
room rates. At the same time these hotels can take
1.3 Upgrading attractions and advantage of unique local neighbourhood cultures, which
infrastructure can particularly attract millennials.
In addition to the current positive performance of the
hotel sector, the government in Q4 2017 brought forward Government initiatives to attract more overnight
a comprehensive tourism development blueprint, which visitors
include numerous short, medium and long-term tourism New tourism products encompassing culture and
initiatives and measures. Planned to be implemented heritage, arts and ecotourism should be offered to attract
over the next five years, the measures are intended to more overnight visitors. Recently, the former Central
boost arrivals and strengthen Hong Kong's position as Police Headquarters in Central reopened as the Tai
an attractive and highly competitive tourism destination.8 Kwun Centre for Heritage and Arts. Victoria Harbour
Transportation infrastructure projects will lead to continues to serve as a focal point for tourists as new
attractions including museums and a theatre in the West
greater connectivity
Kowloon Cultural District, a redesigned Symphony of
Major infrastructure projects currently under construction Lights and a revamped Avenue of Stars will be launched.
such as the Hong Kong-Zhuhai-Macau-Bridge (HZMB), Moreover, efforts to promote large events are increasing
the Hong Kong section of the Express Rail Link (XRL), as more funding has been allocated to position local
the Shatin to Central Link and the construction of a third events such as the Wine and Dine Festival as one of the
runway at Hong Kong International Airport (HKIA) hold signature events in Asia. The proposed Kai Tak Sports
enormous potential for the local economy and the Park, scheduled to open around 2022, features a multi-
hospitality industry. Within the Greater Bay Area (GBA) purpose stadium and has the potential to attract
concept, enhanced connectivity and shortened travel additional large events. Further efforts to attract large-
times should make it more convenient for tourists and scale MICE (“meetings, incentives, conferences, and
business travellers to visit the city. Both, the HZMB9 and exhibitions”) events and cruise passenger development
the XRL10, due to be commissioned in H2 2018, should is also necessary.12
not only attract more visitors from mainland China, but
These initiatives will likely help Hong Kong remain a
should also help position Hong Kong as a gateway city
competitive travel destination internationally, amid fiercer
for travellers who would like to visit the mainland as part
competition like competitive pricing for air plane tickets
of their journey.
and relaxed visa policies.
The new infrastructure is planned to help maintain and
boost the city's competitiveness in the region and
globally. New infrastructure, together with the
development of multiple-destination travel packages in
partnership with GBA and “One Belt, One Road”
countries will probably facilitate the diversification of
source markets as well, making Hong Kong's inbound
tourism more sustainable.11
Given that the new transportation infrastructure should
provide greater accessibility within Hong Kong as
presented in Chart 6, location should be a less crucial
factor for many new hotels and will likely boost hotel
performance in decentralised districts, especially the
New Territories. Furthermore, hotels which are planned
to be in decentralised districts are well-positioned to
capture diverse demand, driven by increasingly
individualistic travellers.
Lower land prices compared to traditional tourism areas
provide investors with more flexibility, allowing for larger
room sizes, a greater variety of hotel facilities and better
8,11,12 10
Tourism Commission Commerce and Economic Commerce and www.expressraillink.hk
Economic Development Bureau (October 2017): Development
Blueprint for Hong Kong’s Tourism Industry
9
Hong Kong Economic Journal, 28 May 2018
7 Are you checking in or checking out? | Colliers International | Radar Report 2018Chart 6: Major Current Transportation Infrastructure Projects in Hong Kong
Source: expressraillink.hk, threerunwaysystem.com, hzmb.hk, mtr-shatincentrallink.hk, hyd.gov.hk,
the Government of the HKSAR press releases, Colliers
1.4 Conclusion This positive outlook holds opportunities for the hotel
investment market. With indications that Hong Kong has
Colliers believes that the availability of upgraded and
entered a new tourism cycle and is heading toward a
new tourist attractions, an increasing comfortability with
new peak of arrivals, both potential investors and hotel
wanderlust, in particular among millennials, together with
an enhanced transportation network should lead to a owners should now prepare to accommodate those
tourists.
continued upturn in overnight visitor numbers which
should strengthen Hong Kong’s position as an attractive
“
leisure and business destination.
Based on these factors, we project the number of
overnight visitors in Hong Kong to grow at an annual rate We project that the
of 7% from 27.88 million in 2017, to 36.6 million by 2021,
with the majority being visitors from the mainland.
number of overnight visitors
Moreover, the World Travel and Tourism Council has a in Hong Kong will likely
positive outlook for Hong Kong, projecting that total
inbound tourism expenditure will rise 51.2% in real prices grow at an annual rate of 7%
by 2028, reaching HKD461.9 billion (USD58.84 billion),
compared to HKD305.5 billion (USD38.92 billion) in
from 27.88 million in 2017, to
2017.13 36.6 million by 2021, with the
majority being visitors from
Mainland China.
“
13
World Travel & Tourism Council (March 2018): Economic impact
2018 Hong Kong, WTTC refers to inbound tourism expenditure as
visitor exports
8 Are you checking in or checking out? | Colliers International | Radar Report 2018compared to 2015 as the increased transactions come
2. Is it still a good from a variety of investors.
Continued interest in the hotel investment market
market for hotel We see continued interest from investors likely to enter
the local hotel market and others who would like to
remain invested.
investments? There are several owner-operators who consider now is
a good time to invest into the hotel market in Hong Kong.
One example is the international medium-tariff hotel
2.1 Busy 2017, an active year for brand Travelodge Hotels Asia. Headquartered in
Singapore, the brand recently entered the market in
hotel transactions 2017. In a franchise agreement with the local Tai Hung
Increased investment appetite for medium tariff Fai Group, the former Hotel Rainbow in Hong Kong’s
hotel assets Jordan neighbourhood was renovated and rebranded as
Travelodge Kowloon.15 The group has since expanded
Coinciding with the recovery of inbound tourism, we and opened Travelodge Central on Hollywood Road in
have seen increased investment activity, reversing the Sheung Wan. According to a 2017 comment from Mr.
downward trend of previous years. Stephen Burt, Chairman of Travelodge Hotels Asia, the
Hong Kong's hotel investment showed renewed launch of the second hotel in Hong Kong reflects the
buoyancy in 2017, with a transaction volume of group’s confidence that, despite the challenges in recent
HKD23.55 billion (USD3 billion), with 17 hotels changing years, Hong Kong will continue to be a major leisure and
ownership. Notably, demand came from both local and business destination. The hotel, formerly Butterfly on
international investors. As displayed in Chart 7, Hollywood, was acquired by Travelodge Asia's parent
investment activity has continued in H1 2018. Four company ICP and Pamfleet (a real estate private equity
hotels with a combined value of HKD3.34 billion fund) in mid-2017 and has since been renovated and
(USD425.9 million) were transacted in H1 2018, rebranded. The hotel benefits from its proximity to the
demonstrating strong market liquidity.14 Sheung Wan MTR station, numerous tourist attractions,
some of the city's largest malls, including ifc mall and
Chart 7: Hong Kong’s Hotel Investment Market The Landmark, as well as offices in the CBD.16
Hotel transaction volume Number of hotel transactions
There have also been numerous investment activities by
Investment volume Number of
(HKD million) transactions local investors. Hong Kong based investor Tang Shing-
20,000 12 bor, for instance, has been on a buying spree. Pushing
18,000 forward the expansion of the hospitality sector of family-
16,000 10
owned Stan Group, the real estate magnate has so far
14,000 8
12,000
invested around HKD10 billion (USD1.27 billion) into
10,000 6 hotels and other assets to be redeveloped into hotels.17
8,000 Focusing on increasing demand from young travellers in
6,000 4
APAC, the group has been rapidly expanding its portfolio
4,000 2
2,000
of new medium-tariff lifestyle hotel brands in Hong Kong.
0 0
While international investment companies have been
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2
focusing on core districts, some local investors, like Stan
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Group, have been leveraging local market insights and
Source: Real Capital Analytics, Colliers expertise, making use of investment opportunities in
emerging decentralised districts.
While the hotel investment volume in 2015 was jacked
“
up by a few landmark hotel transactions (including the
InterContinental Hotel and Grand Hyatt), 2017 was The majority of hotel transactions
supported by numerous medium-tariff hotel transactions. in 2017 were medium-tariff hotels, “
We believe this represents a healthier investment market
proving investors’ strong appetite in
this segment.
14 16
Real Capital Analytics, August 2018 Travelodge Hotels Asia press release, 7 August 2017
15 17
Travelodge Hotels Asia press release, 16 January 2017 Colliers interview with STAN GROUP
9 Are you checking in or checking out? | Colliers International | Radar Report 20182.2 A cross-sectoral perspective Chart 8: Gross Unit Price by Property sector
Medium-tariff hotels provide an attractive price point Grade A Office Grade B Office
Medium Tariff Hotel Industrial
Why has there been strong investment appetite on Price per sq ft (HKD) on GFA
medium-tariff hotels? 30,000
25,000
Despite the general increase in prices and compression
of yields across all property sectors over the past years, 20,000
medium-tariff hotels still represent an attractive asset
15,000
class compared to other sectors. The strong investment
appetite for medium-tariff hotels can be explained 10,000
through the fact that, with the exception of industrial
5,000
assets (flatted factories), medium-tariff hotels are
offering a lower unit price and a higher yield than Grade 0
A and Grade B office premises, amounting on average to 2010 2011 2012 2013 2014 2015 2016 2017 H1
2018
HKD18,000 (USD2,293) per sq ft in H1 2018, with a yield Source: Colliers, Rating and Valuation Department
we estimate at 3%, as shown in Chart 8 and 9. Although Source: Colliers
the price difference between Grade A office and Grade B Chart 9: Net Yield by Property Sector
offices still has a gap, the yields of the two office sectors Grade A Office Grade B Office
come down to almost the same level. However, medium- Medium Tariff Hotel Industrial
tariff hotels still provide a good buffer on the yield level in Estimated Net Yield (%)
comparison to the office sector, and have higher 6.0%
potential for capital appreciation. 5.5%
5.0%
In Chart 10, we undertook a simple hypothetical analysis 4.5%
to compare profitability between a medium-tariff hotel 4.0%
and a Grade B office in a decentralised district, by using 3.5%
Kowloon East as an example. Based on the assumption
3.0%
of an equal Gross Floor Area (GFA), we compared the
2.5%
current room rate for a medium-tariff hotel (Scenario
2.0%
One) and the Grade B office rent (Scenario Two) in
2010 2011 2012 2013 2014 2015 2016 2017 H1
Kowloon East together with their operating costs. At the 2018
gross operating profit (GOP) level, we found that the Source: Colliers, Rating and Valuation Department
Chart 10: Profitability Scenario: Medium Tariff Hotel versus Grade BSource:
OfficeColliers
in Kowloon East
Source: Colliers
10 Are you checking in or checking out? | Colliers International | Radar Report 2018medium-tariff hotel from Scenario One can generate a Due to the significant share of millennial travellers and
15% higher profit than the Grade B office in Scenario an increasing number of affluent mainland Chinese
Two. The operating expenses from GOP to net operating tourists, we forecast that the market share of occupied
income (NOI) would be different for both, with hotel room nights in medium-tariff hotels will grow from 32%
operation (as shown in Scenario One) tending to have now to nearly 40% in 2021, implying an annual growth
higher expenses, such as hotel operation management rate of about 5.5%.
fees and incentives. Even after adjusting for this factor,
the profitability of the medium-tariff hotel is superior to Based on our analysis, the demand for medium-tariff
the office example. This helps explain the increased hotels should outstrip the number of available rooms in
activity of hotel transactions in the medium-tariff segment this segment by 2021, providing opportunities for
with a focus on decentralised districts since 2017. We investment in this segment. Under these assumptions,
believe this trend should see a continuation, given the demand for hotel rooms in the medium-tariff segment will
superior performance potential. probably exceed supply by 21.5%. We expect this
outcome to boost hotel capital values over the next five
Capital appreciation potential years.
The market share of visitors staying in medium-tariff
hotels in Hong Kong has been increasing continuously
over the last seven years. In 2017, almost one third
(31.6%) of all overnight visitors chose medium-tariff
hotels for their stay in Hong Kong.18 19
Interview with STAN GROUP
STAN GROUP is a local business conglomerate lead by chairman Stan Tang. The group’s hospitality arm
has been growing rapidly in Hong Kong. In an interview with Colliers, Mr. Stan Tang and Mr. Eric Cheng,
Managing Director of Tang's Living Group, shared valuable insights into their successful investment strategy.
Leveraging rising opportunities in the New Territories
The hotel portfolio is mainly located in decentralised areas which are non-traditional tourist spots.
Hotel COZi Oasis and COZi Resort, its newest additions which are due to open soon, are both Mr. Stan Tang,
scheduled to be in the New Territories, in Kwai Chung and Tuen Mun, respectively. Chairman of STAN GROUP
Looking at the real estate mantra "location, location, location" in a new light, STAN GROUP is not fixed on prime city centre
locations. By building up a strong positioning in decentralised areas, particularly in the New Territories, the company can
capture tourists from new cross-border channels and cater to changing traveller demands such as exploring local culture,
heritage, and indulging in outdoor activities. Moreover, the New Territories hold opportunities for hotel investment, as
improved accessibility is transforming these areas into new tourism hubs that are increasingly attracting visitors.
There is no internal benchmark in terms of maximum travel time to major locations when making investment decisions.
However, bustling shopping areas, popular tourist attractions, the CBD, the airport and the new cross-border facilities (HZMB)
are within 30-40 minutes travel time from Stan Group’s hotels.
Making use of existing buildings
Recent land supply by the government has been limited, and the scale and location of the released sites has not been
suitable for developing targeted products. As for finding the right assets, Mr. Tang explained that they are acquiring existing
hotel assets, such as the former Newton Place Hotel, and repurposing them rather than building new ones. Old industrial
buildings in the group’s portfolio benefited from the revitalisation scheme during 2010 and 2016, as they could be repurposed
at nil waiver fee.19
STAN GROUP successfully converted four industrial buildings into hotels. The conversion of existing buildings requires a
lower capital investment, when compared to a new development.
18 19
Hong Kong Tourism Board Note: For explanation of waiver fees, please refer to the Lands
Department, The Government of the Hong Kong SAR
11 Are you checking in or checking out? | Colliers International | Radar Report 20182.3 Securing Plan B One prominent example is the conversion of Hotel
LKF in Central. After closing its doors to hotel guests
Despite rising numbers of tourist arrivals recently, we in July 2017, it has since been refurbished for
have seen several cases, as illustrated in Chart 11, of commercial use, with 14 floors of the revamped LKF
owners considering converting hotels into offices, as well Tower now leased to the flexible workspace operator
as into other concepts. The reasons behind this include: WeWork.20
> Concentration in core locations > Operation costs
We found that many conversion/redevelopment cases For smaller-scale hotels with less than 100 rooms, gross
are in the CBD and fringe CBD districts (e.g. Central, operating costs can be as high as 50% of the overall
Wan Chai, Causeway Bay) where office rents have revenue. In contrast, gross operating costs are less than
recently outperformed the whole market due to an 10% for offices as tenants need to bear management
extremely tight supply. According to Colliers Research, fees and utility charges. Most of the confirmed
in 2017 Grade A office rents increased by 4.1% YOY in conversion cases shown in Chart 11 are smaller than
Central/Admiralty and 2.9% YOY in Wan Chai/Causeway 100 rooms; in these cases, investors faced operational
Bay. The rents have continued their growth path in 1H inefficiency, therefore triggering a conversion from hotel
2018, due to a consistent lack of new office supply, and to other uses.
strong continued demand, particularly from mainland
firms. If the rental income for office properties becomes
significantly larger than the net income from a hotel, it is
feasible to convert to office use.
Chart 11: Confirmed and Potential Hotel Conversions into Other Uses
20
Mingtiandi, 31 August 2017; hongkongbusiness.hk, 23 August 2017
* SOHO office is a combination of a small office and a home office
12 Are you checking in or checking out? | Colliers International | Radar Report 2018> Short term exit plan market when tourist arrivals recovered rapidly in Q2
2010 (B). The fast increase in tourist arrivals in Q2 2010
Reportedly the owners of Hotel Excelsior21 and Crowne
(B) resulted in a large increment of the supply of
Plaza in Causeway Bay have secured approval for a
medium-tariff hotels in Q2 2012 (b) which could be
potential office redevelopment and conversion,
interpreted as oversupply.
respectively, while the buyer of Rosedale Hotel and
Grand View Hotel has submitted a proposal for From Q4 2015 to Q2 2016 (C), overnight tourist arrival
conversion in January 2018.22 These actions might growth slowed. The conversions from hotel into other
suggest that major hotels on Hong Kong Island might uses that we are currently seeing in the market could
fade out, giving the impression that it is time to exit from potentially result in negative growth of hotel stock in
Hong Kong’s hotel market. 2019 in the medium-tariff segment. Given that inbound
tourism is recovering, investors need to carefully review
However, a conversion approval/plan does not
their strategy to avoid missing out on the upcoming
necessarily mean that the option is executed
upside of the market.
immediately. We believe that these applications are part
of a strategy to position assets for sale to capture
interest from both hotel and office buyers. 2.4 Conclusion
Therefore, we conclude that potential conversion/ The active investment market driven by prudent local
redevelopment plans should not be seen as the sole investors and international operators and owners show a
measurement to determine if the performance of the strong appetite for medium-tariff hotels in Hong Kong,
hotel market is unfavourable, nor as an indicator for the which have provided an attractive yield and price point
right time to check out. compared to the office sector in general. A comparison
of the sectoral performance in decentralised locations
Chart 12: Development of Hotel Room Supply by Hotel
Category and Overnight Tourist Arrivals (YOY, in %)
has shown that medium-tariff hotels can provide better
profit than Grade B offices.
High Tariff A Hotels High Tariff B Hotels Furthermore, based on our analysis, the demand for
Medium Tariff Hotels Total overnight tourist arrivals medium-tariff hotels should outstrip the number of
available rooms in this segment by 2021, providing
YOY Growth (%)
greater potential upside on capital value. Particularly
40% medium-tariff hotels in combination with decentralised
B
30%
locations should be able to leverage the potential of the
b upcoming new infrastructure.
20%
The recent news about more conversion and
10% redevelopment plans in the market are giving a false
impression about the right time to exit the local hotel
0%
market. We believe these conversion/redevelopment
-10% C plans are rather limited to CBD and fringe CBD
A a locations, which are driven by the extreme performance
-20% a of office rents in the area and small-scale hotels with
Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2 Q4 Q2
2008 2009 2010 2011 2012 2013 2014 2015 2016 20172018
less than 100 rooms that have a less efficient operation.
In our opinion, some approved conversion plans simply
Source: Hong Kong Tourism Board, Colliers
improve the owners’ positioning for a potential short-term
exit, while the positive outlook for the local hotel
In the past ten years, we have seen that investors investment market might not necessitate an execution in
tended to respond too quickly to market changes, the near future.
whenever there was a signal of uplift or downturn
particularly in the segment of medium-tariff hotels.
Medium-tariff hotels are relatively easy to convert to
other uses and vice versa due to their building size and
location. As illustrated in Chart 12, when overnight tourist
arrival growth in Hong Kong turned negative in Q2 2009
(A), investors rushed to convert medium-tariff hotels into
other uses, resulting in negative growth in stock (a).
Consequently, they were unable to catch the optimum
21 22
Buildings Department, Monthly Digest February 2015 SCMP, 10 January 2018
13 Are you checking in or checking out? | Colliers International | Radar Report 2018also launched its flexible workspace prototype.26 The
3. Adapting to hotel has carved out an entire floor dedicated to flexible
workspaces27, setting it apart from traditional suit-and-tie
hotels.
changes in the We expect an increasing number of hotel operators and
landlords in Hong Kong to seize the opportunity of
incorporating flexible workspaces, given the relatively
hospitality market low amount of investment needed. However, we believe
that, in the short-term these spaces will likely serve as a
Evolution of concepts to stay ahead gimmick or sweetener to test the demand or boost their
reputation as a trendy hotel as the concept has yet to
of the game prove lucrative amid strong growth in demand. According
to Colliers International’s Flexible Workspace Outlook
As of June 2018, 117 out of a total of 285 hotels in Hong Report 2018, the forecasted YOY increase of flexible
Kong are medium-tariff hotels, a proportion of 41.1%.23 workspace take-up will probably reach 40% in 2018.
Given the prospects of increasing tourist numbers,
> MOJO Nomad: Continuous adaptation to meet
notably millennials, there are a number of mid-tier hotel
ever-changing needs
brands that are keen to enter the local hotel market. At
the same time, established local and international mid- The Hong Kong Government announced in October
tier to upscale hotel brands are expanding their footprints 2009 a set of revitalisation measures to facilitate the
in the city. However, competition in this price segment is redevelopment and wholesale conversion of older
rising. Hence, brands and owners of medium-tariff hotels industrial buildings. These revitalisation measures came
have been exploring creative solutions to stand out from into effect on 1 April 2010, aiming to provide more floor
the crowd and maximise their profits. space for suitable uses to meet Hong Kong’s changing
social and economic needs.
New trends spotted amongst local players
Ovolo Group, a Hong Kong-based developer which owns
> Hotel Jen: Integration of hotel and flexible
and manages a portfolio of hotels in Hong Kong and
workspaces
Australia, has been one of the key players in the market
Flexible workspace concepts are growing rapidly in by repurposing aged industrial buildings. Opened in
APAC. Initially an economical solution for start-ups and 2014, Ovolo Southside in Wong Chuk Hang, Hong
freelancers with a limited budget and a need for space to Kong’s maiden warehouse-to-hotel conversion, is an
grow their businesses, flexible workspaces have become excellent case of the transformation of old industrial
a fundamental part of the local commercial real estate space into a stunning lifestyle hotel. It is bridging the
market, according to Colliers International’s Flexible district’s old industrial roots with its future as a modern
Workspace Outlook Report 2018. Besides small and business hub.28 The redevelopment saved the owner
medium-sized enterprises, multinational corporations are about HKD60 million (USD7.7 million) on change-of-use
now taking up large number of desks for back, mid and premium and another HKD80 million (USD10.3 million)
even front office functions. We are seeing that the fast on construction, compared with a new development.29
growth of this sector is also drawing the interest of hotel Ovolo Aberdeen Harbour, a former office building in
operators and landlords who are evaluating the benefits Aberdeen completed in 1997 which was repurposed as
of incorporating flexible workspace concepts into their serviced apartments and later as a hotel, has recently
hotels.
undergone a refit between August and November 2017
Leading the trend in Asia is Shangri-La Hotels and and debuted as the Mojo Nomad brand.
Resorts, which launched a partnership between the
The brand provides “homstel living”, a combination of
flexible workspace operator theDesk and Hotel Jen, the hotel, home and hostel based on a co-living concept,
newest brand of the Shangri-La Group.24 This was targeting young professionals that are facing an
followed by the successful debut of service inside a five-
unaffordable local housing market.30
star Kerry hotel in Hung Hom by the flexible workspace
operator Kafnu in October 2017, upon the opening of the
hotel.25 A month later, in May 2017, Hotel Jen in Beijing
23 27
Hong Kong Tourism Board SCMP, 12 December 2017
24 28
theDesk press release, 25 July 2017 Ovolo Hotels press release, May 2015
25 29
Kafnu press release, 3 October 2017 SCMP, 15 July 2017
26 30
Hotel Jen press release, 9 May 2017 Ovolo Hotels press release, 21 December 2017
14 Are you checking in or checking out? | Colliers International | Radar Report 2018Learning from global players easy expansion, reduction and reconfiguration and is
thus able to adapt to changing needs.
The trend is not constrained to the local market, but
rather a global one. As the need for differentiation is > Radisson Red: Tapping into an underserved
increasing, we have seen major hotel groups, as well as segment – the four-legged furry travellers
smaller niche companies, introducing more new brands Radisson Hotel Group has also jumped on the
into the market in recent years than any time in modern bandwagon with its Radisson RED brand established in
history. Due to the rise of millennial travellers, it is not Europe since 2014, immersing itself in the underserved
surprising that most of the brands focus on limited- segment of four-legged furry travellers. Radisson RED
service hotels with tech-savvy offerings, design-heavy has a pet-friendly policy at a few of its properties in the
social spaces and budget-conscious room rates. US and Europe.34 As the market of devoted pet owners
Outside Hong Kong, the Medium Tariff brands Aloft continues to expand, the RED hotels with the pet
Hotels by Marriott International, citizenM by Artyzen programme in place has seen a high number of guests
Hospitality Group, and Radisson RED by Radisson Hotel checking in with their pets, receiving enormous positive
Group, have been rapidly gaining recognition as feedback by addressing the demand. Tapping the
innovative hotel brands among a competitive hotel growing market of international travellers with pets,
landscape that has been flooded with new hotel brands coupled with rising pet ownership in Hong Kong, this
offering similar concepts. could be another game-changer. This bold and creative
initiative reinforces the RED brand positioning as an
So how are they differentiating themselves from
evolutionary hotel that is clearly not rule-bound.
other concepts?
> Aloft Hotels: Expertise on conversion and adaptive
reuse of old buildings
One of the major players leading this trend, the Aloft
Hotels brand was first introduced into the US hotel
market in 2005. The brand has quickly gained market
shares by utilising Marriott’s expertise in producing
highly effective and cost-efficient designs for their
buildings. This concept was not only suitable for
purpose-built hotels, but also for the conversion and
adaptive reuse of residential, commercial, industrial and
even heritage buildings. Amongst a total of 138
operating hotels, 22 Aloft Hotels are conversion and
adaptive reuse projects (as of year-end 2017).31
> citizenM: Faster return on investment through
modular construction
citizenM, as a brand focusing on millennial travellers,
can leverage the benefits of off-site construction through
a modular building concept. With this construction
method, the Dutch brand has been able to accelerate
project completion times, mitigate product quality risks
and provide greater cost transparency.32 A successful
case is citizenM Bowery in New York, in Manhattan’s
Lower East Side neighbourhood, where the construction
period was reduced to one year, compared to a
traditional development taking up to three years.33
With consideration to high development costs,
construction delays, traffic congestion and limited
availability of high-potential development sites in Hong
Kong, smart construction could be a solution to these
issues. Moreover, it provides future flexibility, allowing for
31 33
Marriott International: Annual report 2017; Interview with Aloft Hotels Interview with Artyzen Hospitality Group.
32 34
polcommodular.com Radissonred.com
15 Are you checking in or checking out? | Colliers International | Radar Report 2018Interview with WEAVE CO-LIVING
Weave Co-Living is a Hong Kong headquartered collaborative living company founded in 2017
by Mr. Sachin Doshi. Their first project in Hong Kong, Weave on Boundary, is located in Prince Edward
and officially opened on 1st August 2018. We interviewed Mr. Doshi and his Associate, Mr. Bryan Pang,
to understand the company’s motivation to move into this emerging asset class and
create a competitive edge amid rising competition.
Mr. Sachin Doshi,
Nature of opportunity determines asset selection Founder & Chairman of
Weave Co-Living
Weave is making effective use of the number of conversion opportunities in Hong Kong,
as these are often suitable for co-living asset types. Lower investment costs as well as
shorter project completion times compared to new developments are major benefits. While building costs for new developments
range between an estimated HKD4,000 - 4,500 per sq ft (USD510 - 573), we estimate that costs for conversions are
considerably lower, ranging from approximately HKD1,500 - 2,000 (USD191 - 255). Compared to average construction times of
up to three years, Weave could complete an asset conversion within nine months, providing a positive impact on return metrics
by shortening the time from acquisition to cashflow.
Tackling the unaffordability of Hong Kong’s housing market
Weave aims to provide solutions to the two most challenging issues that Hong Kong is currently facing. Foremost, young
professionals find it difficult to find a place that is affordable, yet not too far from the city centre; and secondly, a place that
provides space to mingle and socialise. The company is redefining co-living, providing a convenient yet affordable living space
that makes it easy to meet new people and build a community. Weave has received more than 300 applications for 160 rooms -
a clear signal that the company is targeting a niche sector that has been largely underserved.
A long-term mega trend
Future demand prospects for affordable co-living concepts are looking promising. Given that 31%, 1.24 million of the overall
workforce in Hong Kong are millennials, who are well prepared to join such a living-concept that combines comfort, convenience
and community under one roof, the business model is expected to be highly sustainable without the fear of an oversupply.
16 Are you checking in or checking out? | Colliers International | Radar Report 2018hotel categories is publicly available for the upcoming
4. New hotel pipeline, we estimate that the category shares of
the upcoming hotel room supply through 2021 will be
similar.
opportunities for Chart 13: Hotel Room Supply in Hong Kong
Supply Projection Unclassified Hotel
hotel investments Medium Tariff Hotel
High Tariff A Hotel
High Tariff B Hotel
Total New Supply (YOY growth)
on the horizon Number of hotel room supply
100,000
YOY growth
20%
80,000
15%
We have reviewed the recent historical and current
performance of hotel market and investment 60,000
10%
sentiments in Hong Kong throughout the report. So, 40,000
what is next? What are the assets with potential 5%
20,000
upside? Where to invest? What are the key
considerations for hotel investments? 0 0%
4.1 An imbalanced pipeline
Since 2008, the number of hotels in Hong Kong has Source: Hong Kong Tourism Board, Colliers
almost doubled. Over the same time, the number of hotel The planned supply through 2021 in Chart 14 shows that
rooms increased from 54,804 to 79,944 as of June 2018. the Southern and Eastern districts on Hong Kong Island
Almost a third of all hotel rooms are categorised as should provide the highest number of new hotel rooms
medium-tariff. By 2021, tourists will likely have the on a district level. The new Marriott Hotel at Ocean Park,
choice between 327 hotels in Hong Kong. As shown in if developed as planned, will account for around 25% of
Chart 13, the number of hotel rooms is scheduled to those rooms.
grow to about 90,900 by 2021. 35
On a regional level, new planned supply will concentrate
Although no detailed information on the future share of in Kowloon, with Yau Tsim Mong remaining one of the
Chart 14: Upcoming Hotel Supply by District 2018-2021
Source: Hong Kong Tourism Board, Colliers
35
Hong Kong Tourism Board
17 Are you checking in or checking out? | Colliers International | Radar Report 2018top districts for new supply. Meanwhile, new hotel supply core districts hold higher potential for hotel investment.
in decentralised districts should remain limited. We have summarised our recommendations, based on
our market findings.
By 2021, we project Kwun Tong’s Grade A office stock to
reach a net floor area of 9.7 million sq ft (901,159 sq m), Potential opportunities – medium-tariff hotels
comparable to the scheduled Grade A office stock of
Medium-tariff hotels have been bouncing back more
Wan Chai and Causeway Bay of 10.8 million sq ft
strongly from the previous downturn, showing robust
(1,003,353 sq m) combined.
RevPAR growth rates since Q3 2016. In our opinion, the
Kwun Tong district is scheduled to double the number of performance of this segment, coupled with the supply
its current hotel room supply by 2021, the district’s shortage of medium-tariff hotels in the next couple of
absolute number of hotel rooms is planned to still be less years, provides good investment opportunities.
than 25% of Wan Chai’s hotel room supply. We believe
Numerous government initiatives, major transportation
the emergence of Kwun Tong as a new business hub
infrastructure, together with a high number of budget
should create demand for hotels. Therefore, the district
conscious millennial travellers, supports the need for
holds potential for hotel investments. Moreover, Tuen
medium priced hotels. The changing requirements of
Mun and Yuen Long in the New Territories, particularly
millennials and their desire for lifestyle entertainment are
targeting mainland Chinese travellers, will likely face a
shaping several industries, including the hotel sector.
shortage of hotel room supply, given the scale of the
Therefore, owners and potential investors should put an
planned and upcoming transportation infrastructure as
emphasis on offering an experience, such as smart
illustrated in Chart 15.
applications of technology, superior and value add
services or special themes to build a competitive edge.
Potential Government land supply (tender) for
hotels
Potential locations – New transportation hubs
Between fiscal years 2013 and 2018, only five parcels of
Apart from shopping – one of Hong Kong’s top activities,
government land were granted for hotel or commercial/
visitors are becoming highly interested in the cultural
hotel mixed-use, including the Murray Building site in
heritage, outdoor activities, and entertainment.
Mid-Levels Central. In the current fiscal year 2018-2019,
Therefore, tourists have been increasingly drawn to
three mixed-use sites with hotel components, all of which
alternative districts outside of established tourism spots.
are located in the Kai Tak area, are scheduled to come
Hong Kong's transportation infrastructure is efficient and
to the market by public tender. 36 New government land
commuting to tourist attractions does not deter visitors,
supply for hotel use has been limited in recent years and
particularly younger ones, from staying in alternative
highly concentrated in the Kai Tak development area.
districts. Moreover, we found prices for the same
Thus, with the exception of Kai Tak, we do not expect
medium-tariff hotels to be around 20% lower in the New
sizable land for decent-sized hotel development to be
Territories compared to Central/Western districts. New
available in the coming years.
interest, together with lower hotel prices have led to
more visitors choosing decentralised districts – a
4.2 Hotel investment opportunities development which Stan Group has clearly picked up on.
Based on our analysis we conclude that the local hotel As shown in Chart 15, we have listed five hot spots
investment market and its prospects provide numerous which we recommend investors pay attention to:
opportunities for new investors to enter the market as
(1) Tuen Mun area,
well as existing owners to hold on to their investment.
(2) Tung Chung area,
Given that Hong Kong's tourism industry has likely
(3) West Kowloon Cultural District area,
entered a new growth cycle, we see few reasons for
(4) Kwun Tong area and
owners of existing hotel assets to exit the market.
(5) Island East area.
Rather, owners should strategically improve their
positioning to be ready for the rising number of inbound The above selections should benefit from the future
tourists. As for the reverse strategy of converting hotel infrastructure developments, new town development and
assets into office use, we believe this does not represent commercial hub expansions. At the same time, we
a trend for the entire market. Given the supply deficit in believe that these hot spots will lack hotel rooms to
the CBD and fringe CBD areas, the conversion to office support demand arising from this new development.
can allow short-term profit maximisation. However, non-
36
Lands Department, The Government of the Hong Kong SAR
18 Are you checking in or checking out? | Colliers International | Radar Report 2018Chart 15: Potential Hot Spots for Hotel Investments
New Town Developments
in Tuen Mun
Kwun Tong (CBD2)
West Kowloon Cultural
District/Express Rail Link
Tung Chung/HZMB/Third Runway
Island East Commercial
Hub Expansion
R O AD / B R I D GE L AN D R E C L AM A TI O N R A I L W AY
Source: Hong Kong Tourism Board, Colliers
19 Are you checking in or checking out? | Colliers International | Radar Report 2018Valuation and Advisory Services:
413 offices in Vincent Cheung
Deputy Managing Director | Hong Kong
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69 countries on Vincent.cheung @colliers.com
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Senior Director | Hong Kong
+852 2822 0589
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Research Services:
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EMEA: 131 Executive Director | Asia
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Andew.haskins @colliers.com
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billion in Daniel Shih
annual revenue Senior Director | Hong Kong
+852 2822 0654
2 Daniel.shih @colliers.com
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under management
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About Colliers International Group Inc.
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