It seems the news isn’t changing that much from day to day so far in 2012. On Mondays someone’s stock exchange plunged to record lows and the sky was falling. On Tuesday, however, unemployment rates in A and B countries were at a record low and it was a clear signal an economic turnaround was imminent. Rinse and repeat.
For most of us it’s a lot of white noise. The only factors to bear in mind for Hong Kong property investors were how many multinationals had offices here, how many were coming and how many had staff they needed to house. The banking and finance sectors buoy the property market and when it gets wobbly, the rental market wobbles with it. Massive fire sales may not be on the horizon, but prices are sagging and sales volume is slowing. More importantly, free-spending, expensing executives are scaling back on extravagant rentals.
It’s not a storm the SAR hasn’t weathered in the past — and will again in the future — but investors are always on the lookout for ways to either protect themselves or diversity to cover as many bases as possible. It’s in that light that hotel investments are setting up to be the next big thing in property for the foreseeable future. The cocktail of limited supply and growing demand in the leisure travel sector are shining a new spotlight on hotel investing.
Tourism is a key ingredient of many cities’ economies and Hong Kong is no different. With residential rental yields hovering around 2.5 percent, hotel yields of 4 to 4.5 percent look impressive. Room rates are growing in the city at around 16 percent each year, and over 21 percent in mid-range hotels. As a result, “There are quite a number of private investors in the market looking for hotels,” states Antonio Wu, executive director of investment services Asia for Colliers International.
Research by Colliers indicates individual private investment in the hotel sector is on the rise in Hong Kong. The hotel industry is supported by rising inbound tourist traffic, which topped out at a record 42 million visitor arrivals in 2011 — up 16 percent over 2010 and predicted to continue on the same path for 2012. Visitors are, “Mostly [from] the Mainland [over 60 percent according to the Hong Kong Tourism Commission] and Southeast Asia, but the Hong Kong dollar is cheap now so everyone’s coming to shop,” notes Wu. “We’re seeing a lot of leisure travellers. Numbers have gone up mainly in shopping and leisure travel, which is beneficial to mid-range hotels. There’s still room for them to increase their rates. So that hotel category is strong compared to business hotels.”
To get an idea of how Hong Kong’s hotel room numbers stack up: Perennial reigning top tourist destination, Paris, had 153,000 according to the Paris Convention and Visitors Bureau Paris. The Las Vegas Convention and Visitors Authority reported that in 2010 convention hotbed Las Vegas boasted just shy of 149,000 hotel rooms. Regionally, the Tokyo Metropolitan Government’s Tokyo Tourism quoted 84,000 rooms in that city and Seoul Convention Bureau claimed 30,000. The Tourism Commission set the number here at just over 60,000. Occupancy in Hong Kong is averaging a staggering 90 percent. Clearly there is demand for hotel rooms, making hotel investment a smart move.
Business travel numbers are softening right now, and Wu agrees that business travellers will, “always stick with the Mandarin Oriental and the Four Seasons and the Hyatt.” Crucial to strong hotel investment is room rates, and with the internationally branded five-stars, “Their market rates are already high, so there’s minimal room for them to increase,” Wu says. Nightly rates in Hong Kong average $1,500 per night, but the major label hotels advertise rates beginning at almost double that in some cases.
Hong Kong is also a nearly ideal location for hotel investment too. Opportunities for hotel purchases outside expensive core locations like Central and TST (which also favour business travellers) are easier to find, and sustained growth in the hotel sector bodes well for the future. Colliers expects hotel supply will rise on average approximately 2.5 percent to 2016 for a total of 71,300 rooms. Seventy-eight percent of new stock will also be outside core districts in locations like North Point, Sheung Wan and TST’s fringes. But when compared to Seoul and Tokyo, Hong Kong’s “fringes” are hardly inaccessible.
Of all prospective hotel buyers (based on Colliers’ research) the majority are active private investors, with funds and passive private investors making up only 35 percent of the market. So what separates this kind of hotel investment from the popular resort purchases that involve buying a suite from the W, St Regis or the Ritz-Carlton (among others) in Phuket or Macau. It’s a hotel and owners get rental returns on the property. Wu theorises that those properties are popular with Western buyers more so than amongst ambitious Asian investors. “That kind of investment is more passive,” Wu begins. “We come across quite a lot of private investors — industrialists or other property investors — and they want to own a chain. They want to put out their own brand. So quite often we get requests that are ‘free of management.’ They want to take over the property and create a brand and manage it themselves. They may be buying more than one as well.”