The Covid-19 outbreak has had a detrimental impact on the hospitality industry and has continued to reshape the industry and its business models. Given the prolonged absence of inbound tourism, Hong Kong hotel operators have shifted their business models to adapt and adjust to and accommodate the unprecedented setback. In this report, we look at the performance of hotels in Hong Kong in 2022, new supply, key trends, challenges and strategies in the hotel sector, and the industry’s outlook and opportunities.

Hotel Performance in 2022

The stringent social distancing rules and travel restrictions have taken a heavy toll on the local hotel industry. Overnight visitor arrivals in Hong Kong bounced back to 175,852 for the first eight months of 2022, up 234% YoY. The occupancy rate for the first eight months of 2022 increased 15 percentage points YoY to 56% for High Tariff A hotels. The ADR of High Tariff A hotels for the first eight months was HK$1,671, increasing 16.5% YoY.

Key trends

1. Scaling down the hotel business

In the face of the subdued hospitality market, some hotel owners scaled down their hotel business, aiming to unlock property value by renovating hotels for other uses, especially residential use. At least seven planning applications were submitted to the Town Planning Board (TPB) for conversion to residential use since 2020, providing approximately 4,823 flats.

2. Hotel conversion into co-living space

With travel restrictions in place, the hospitality sector has corrected appreciably and is attracting interest from value-add investors interested in converting these premises into co-living or long-stay accommodation. Many of these investors are offshore funds, some of which have had limited investment exposure to Hong Kong. Going forward, we expect hotel investment volume to hold up. The co-living sector is expanding in Hong Kong, with more investors looking for en-bloc hotels or apartment buildings to convert to long-term rental accommodation, given favourable fundamentals and strong rental demand.

3. Repositioning and/or asset enhancement

For hotel operators, adding value through repositioning has been an important strategy to improve their return on investment. With tourist arrivals at an all-time low, we expect to see some hotel operators take the opportunity amid the downbeat market to upgrade and enhance their assets. This will provide more long-term benefits, such as higher room tariffs, a new and broader clientele, and new income streams from non-room revenue to hotel owners.

4. Hotel-themed-based elements as a growth driver

Hong Kong has one of the world’s toughest border control regimes against COVID-19. Given the ongoing travel restrictions in Hong Kong, many Hong Kong people have turned to local hotels for an equally enjoyable staycation or day-use experience. Theme-based elements play an important role in determining the popularity of a hotel, so as to increase the attractiveness and enhance the brand of a hotel. We expect theme-based hotels to be an alternative growth driver in the hotel industry amid the downbeat market.

5. Environmental, Social and Governance

Environmental, Social and Governance (ESG) measures have progressively become a strategic initiative for hotel operators. In general, ESG criteria in hotels may include energy and water efficiency, reduced carbon emissions, sustainable buildings, responsible and sustainable sourcing, social impact and transparent reporting. ESG measures are a growing priority for investors, hotel guests and other key stakeholders. Hotel operators should focus more on ESG measures to mitigate future risks.

Outlook

Despite the gradual reopening of the border and the relaxation of hotel quarantine rules to “0+3”, the outlook for hotel performance remains of concern. The overall tourism industry is expected to remain weak in the short term.In our view, the end of the hotel quarantine policy may not bring many visitors, especially short-haul visitors to Hong Kong in the short term.

Before the border fully reopens with the Chinese mainland, we expect the hotel industry to recover at a slow pace. In the short term, operators need to be more flexible in providing and adjusting their products and services to cater to domestic hotel demand to secure occupancy and cash flow. It is certain that the new normal for the hotel sector will focus on a quality guest experience and differentiated product offerings.

We expect more investors to eye hotel conversion to long-stay rental accommodation in partnership with co-living operators. At this stage, we consider the co-living sector to still be in the early stage of development in Hong Kong. The sector is expected to evolve over time to cater to a more extensive tenant base.

Lucia Leung, Associate Director, Research & Consultancy, Greater China at Knight Frank, said, “Despite the shortening of quarantine measure to "0 + 3" for inbound travellers, it is expected to have little effect on attracting international tourists and boosting Hong Kong's international status. The overall tourism industry will remain weak in the short term. At this stage, hotel operators need to actively seek ways to recalibrate and adjust their products and services to meet the needs of local demand. It is also an opportunity for hotel operators and investors to examine whether their hotel assets can provide long-term value growth.”