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Hong Kong needs to unlock China's tourism

Hong Kong likes a plan. Its success is largely built on having direction that interlinks the real estate and business sectors. This year, the outbreak of COVID-19 coupled with the social unrest has created a wait and see attitude and it’s now determining the direction of the hotel, leisure, tourism, and pretty much every other sector.

While we can’t predict the full course of the pandemic, we do know the economic outlook is expected to remain muted in the near term given surrounding uncertainty. For investors, real estate could provide a range of opportunities to either buy, sell, reposition, or even look to enter traditionally difficult-to-enter sectors.

For Hong Kong, the hotel sector is facing unprecedented times as the travel restrictions and lockdown measures have seen tourist arrivals drop by 81% YOY in Q1 2020. To glean context and understand the main drivers, and more importantly the related opportunities, we need to look at China’s tourist industry, current investment trends and what needs to be done from an operational perspective to prepare to return to normal.

Unlocking China’s tourism

To understand the impact of COVID-19 on Hong Kong’s hotel sector, we need to look at the rise of China’s tourist industry as a whole. It’s currently the world’s largest source of outbound travel which is underpinned by the country’s strong economic performance and growing affluence of its population. The main destinations since 2010 include Macau, Taiwan, and importantly Hong Kong. Collectively, these three destinations accounted for approximately 59% of the total outbound travel.

The economic benefit for destination countries doesn’t stop at travel and hospitality. Outbound tourism spending has increased sharply, eclipsing the United States to become the world’s top source of outbound tourism spending since 2012, reaching approximately US$277 billion in 2018, and expected to reach US$365 billion by 2025.

While international travel might stall for the remainder for the year, the flow of footfall from across the border is a key indicator which owners and operators will be monitoring. Hong Kong’s heavy dependence on the Chinese tourist industry is apparent. As restrictions get lifted, and business travel, and later leisure travelers return, Hong Kong’s hotel sector could witness the start of a recovery.


After enjoying three years of successive growth in investment sales, the thought of a ‘V-shaped’ recovery is hard to predict which is seeing some of the hotel sector’s stakeholders consider their position, and for others, creating unprecedented opportunity.

Despite Hong Kong’s total hotel investment volume being down for the six months of October 2019 to March 2020 compared to the six months prior, there is a window of opportunity for investors to take advantage of any pricing dislocation in the market. The reality is that while there may be a narrowing of the bid-ask spread, many of the players in the Hong Kong hotel space are well capitalised and the notion of ‘discounted’ or ‘distressed’ assets as such has not materialized.

More established hotel operators and investors, especially those who have yet to set up their footprint in Hong Kong due to the previously high entry costs, may find the current cycle a good time to enter the market. Investors and private families with a long investment horizon and scalable portfolio may also seek to partner with strong operators or consider merger and acquisition opportunities to expand their footprint.

On the flip side, certain hotel owners, whether individual or smaller groups, especially non-hoteliers with limited operational expertise, may find it more challenging to navigate through the current market cycle, given the operationally intensive nature of this sector. Whilst the downside impact brought by COVID-19 will likely dampen hotel demand into H2 2020, tourist arrivals will likely take more time to fully recover. Hence, we believe this group of investors mentioned above may be better-off exploring disposal opportunities to limit any possible downside and secure any gains accrued since the previous cycle.

The longer-term prospects of tourism in the Hong Kong remains positive, on the back of bigger picture demand including the Greater Bay Area initiative and new infrastructure like the High-Speed Rail and Hong Kong-Zhuhai-Macao Bridge.

Operational, management and investment recommendations

Lifting of social restrictions and the opening of the borders with China are important, but it doesn’t guarantee an instant return of footfall. Consumer travel confidence is going to be important factor with a dramatic shift in the needs and expectations of tourists. Hotels will need to adopt a proactive approach towards communication to create confidence amongst stakeholders and make sure both Chinese and international travelers know it is safe to visit, and for local citizens, to make sure that all precautions have been taken.

In terms of room and non-room revenue, we do not encourage hotels to drop the room rates dramatically, as it is unlikely to drive occupancy in the current market as the inflow of guests is not there yet. However, at a certain point this may be a factor for certain hotels, especially in the 3-star and 4-star category to stimulate demand as travelers return.

With many travel plans on hold for the Summer, well-priced ‘mini-breaks’ or ‘experiential packages’ for ‘stay-cations’ will give the hotel sector a much-needed boost. We have seen a number of hotels introduce various packages to cater for couples and families alike, as well as wider promotions for F&B, spas and other hotel facilities to stimulate non-room revenue.

What is clear is that owners and operators will need to create revenue management strategies appropriate for each market segment – the local travel segment, business guests, then groups, and finally international travel.

Operationally, we have seen owners close hotels or at least close unused areas experiencing low occupancy to optimise manpower and utilities. As the market picks up, the advice would be to stagger the opening of certain areas during the recovery phase based on demand, as well as formulating a safety plan to ensure the hotel is compliant to governmental safety guidelines and perhaps beyond, to give guests that extra level of confidence.

Hong Kong is well-known to be resilient and the sentiment in the market is when, not if, the recovery will take place. The pace and extent of any recovery will be dependent on the opening of China’s borders and international air travel.

For Hong Kong’s hotel investment market (and perhaps the wider region), it’s about understanding the current position and mastering what opportunities are available. It is about being thorough on the risk-analysis and underwriting and being able to take a slightly longer-term view to enable demand to recover. While the interest rate environment remains low, access to traditional funding is tightening. The current market favours cashed-up family offices and investment groups with ample ‘dry powder’. By aligning buyers and sellers’ objectives to the right investment/divestment strategies we can arrive at a price point in the market that delivers value for both parties.


Shaman Chellaram

Senior Director

Valuation & Advisory Services