Colliers Radar Report 2018 - Colliers International

 
Colliers Radar Report 2018 - Colliers International
Colliers Radar Report 2018
Colliers Radar Report 2018 - Colliers International
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.
Colliers Radar Report 2018 - Colliers International
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

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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

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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

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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

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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

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Chart 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

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compared 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

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2.2 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

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medium-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 2018
2.3 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 2018
also 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 2018
Learning 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 2018
Interview 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 2018
hotel 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 2018
top 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 2018
Chart 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 2018
Valuation and Advisory Services:

413 offices in                                                                       Vincent Cheung
                                                                                     Deputy Managing Director | Hong Kong
                                                                                     +852 2822 0527
69 countries on                                                                      Vincent.cheung @colliers.com

6 continents                                                                         Hannah Jeong
                                                                                     Senior Director | Hong Kong
                                                                                     +852 2822 0589
United States: 145                                                                   Hannah.jeong @colliers.com
Canada: 28
Latin America: 23
                                                                                     Research Services:
Asia Pacific: 86
                                                                                     Andrew Haskins
EMEA: 131                                                                            Executive Director | Asia
                                                                                     +852 2822 0511
                                                                                     Andew.haskins @colliers.com
$2.7
billion in                                                                           Daniel Shih
annual revenue                                                                       Senior Director | Hong Kong
                                                                                     +852 2822 0654
2                                                                                    Daniel.shih @colliers.com
billion square feet
under management

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