_Knight Frank Launches the Hong Kong Hotel Report

2023 was a year of recovery, resiliency and growth for the Hong Kong hotel industry. Thanks to the full-border reopening in Hong Kong in early 2023, tourism gradually resumed. Nevertheless, even though tourists returned, the recovery in tourist spending and the number of international visitors rebounded slower than expected.

During the pandemic, the hospitality sector corrected appreciably and attracted huge interest from value-added investors in converting these premises into other uses, such as co-living or long-stay accommodation. In 2023, however, investment activity in the local hotel sector became subdued amid the high interest rate environment and prevailing global economic uncertainty.

Hong Kong’s tourism sector has shown signs of revival since the border reopened. However, the number of inbound visitors, especially international tourists, was still far below the pre-pandemic level. The number of international tourists reached 7,239,207 in 2023 whole year, up 3,055% YoY. But the number of arrivals was still much lower than the pre-pandemic level of 14,109,325.

Performance Overview

Given the steady return of Mainland Chinese tourists and the modest growth in international arrivals, hotel performance has been recovering and reported a strong YoY increase in occupancy and average room rates. The occupancy rate in 2023 as a whole increased by 20 percentage points YoY to 76% for High Tariff A hotels. The average daily rate (ADR) of High Tariff A hotels in 2023 as a whole was HK$2,347, soaring 37.5% YoY. The stronger rebound in High Tariff A hotel room rates suggests that international luxury hotel brands were more successful with their attractive online marketing campaigns on social media and in distribution channels.

Hotel Investment Landscape

In 2023, only four en-bloc hotel transactions over HK$100 million were recorded in Hong Kong, totalling HK$6.8 billion, up 9.2% YoY. Hotel transactions contributed 17% of total commercial volume, only 1 percentage point to retail volumes. Despite the weak market sentiment, the figures show higher resilience in the hotel investment market compared to other commercial segments, but we believe that high financing costs were the main reason for reduced market movement.

In recent years, we witnessed the prevailing trend of hotel conversions into student residences, as they provide lucrative returns for investors. With the significant growth in the number of non-local students and reliable rental income flow even in the stronger market, student accommodation has numerous enticing prospects.

Investors have spotted opportunities in acquiring medium-tariff hotels or stressed assets with reasonable prices for conversion, as they are often sold at a lower price than en-bloc residential buildings. Some hotels have been converted into student residences or youth hostels, given the inadequate supply of student accommodation offered by universities.

Market Outlook

Given the gradual recovery in visitor numbers and scarce supply of five-star hotels in 2024, we expect the occupancy level and hotel ADR to continue to pick up in the near term. With limited upcoming hotel supply in the pipeline, market demand should be able to absorb the new supply, especially in major tourist districts. High Tariff A hotels are expected to continue to outperform. Therefore, revenue per available room (RevPAR) should continue on the upswing in 2024, continuing to surpass the 2019 level and potentially rebounding back to the 2018 level.

Looking ahead, we expect the sector to continue its recovery, with more favourable demand-supply dynamics. Market momentum will be driven by improving inbound tourism, including leisure and Meetings, Incentives, Conferencing and Exhibitions (MICE) visitors.

In the hotel investment market, with High Tariff A and B Hotels continue to outperform the Medium Tariff hotels. Medium Tariff Hotels will be under pressured and they make good targets for student conversions. However, investment sentiment should remain conservative, with subdued transaction volume in H1 2024 amid the high interest rate environment and external economic challenges. Recent statistics show that the U.S. inflation rate slowed down significantly, and the labour market cooled down, so interest rates should be near their peak. The Fed indicated that rates should decline thrice in 2024. Thereby, we expect to see more Medium Tariff Hotels transactions latter in the year and more hotel conversion activities to accommodate the influx of newcomers.

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