February 14, 2017 10:00 pm JST

Hong Kong tourism downturn prompts rush in hotel sales

More hotels will be converted into offices, student flats for better returns

JENNIFER LO, Nikkei staff writer

Tycoon Lee Shau-kee, founder, chairman and managing director of Henderson Land Development, poses in front of a building model during a news conference in Hong Kong in January 2015. © Reuters

HONG KONG -- Nearly half a billion dollars' worth of hotel properties in Hong Kong have changed hands since the start of the year as owners see better opportunities elsewhere amid a slowdown in tourism from mainland China.

Hong Kong-based Henderson Land Development is the latest to join the trend. The developer controlled by property tycoon Lee Shau-kee has agreed to sell a hotel in Kowloon East to a local investor for 2.3 billion Hong Kong dollars ($296 million), according to recent local media reports. 

Opened in 2007, the Newton Place Hotel is located in Kwun Tong, an emerging commercial district across the harbor in Kowloon. It was the first industrial-turned-hotel project in the district offering about 600 guest rooms, serving primarily mainland tourists.

Apart from Newton, several major hotel deals were recorded in Hong Kong recently, including the sales of Sika Hotels in West Kowloon for HK$400 million and a hotel near the shopping district of Causeway Bay for HK$450 million.

The flurry of sales comes on the heels of a sector-wide downturn as there has been fewer mainland tourists to Hong Kong since 2014. Last year, mainland tourist arrivals fell 6.7% from a year ago to 43 million, still accounting for three-quarters of all tourist arrivals in Hong Kong. This was despite a recent rebound in mainland tourist numbers, which rose 6% in December.

Industry observers expect some hotel properties to be converted into office buildings, co-working space and even student flats for better yields. As tourist arrivals normalize and hotel revenue falls, "this will be the new way forward," said Francis Li, head of greater China investment and advisory services at property consultancy Cushman & Wakefield.

"In the past few years, grade-B offices were changed into serviced apartments and hotels when there was a shortage of supply. Now, it's just a reversal of that," Li told Nikkei Asian Review on Tuesday.

A tourism boom in Hong Kong a few years ago led to a surge in hotel supply. According to official data, there were 257 hotels providing 74,000 rooms by the end of March last year, compared with 158 hotels with 58,000 rooms in mid-2009.

Some hotels in urban locations were put up for sale recently at about HK$10,000 per square foot, which Li said was "inexpensive," at a time when conversion into office space would offer more attractive returns.

Cushman & Wakefield forecasts 3-6% rental growth in grade-A offices in Hong Kong for the year, citing strong demand from mainland tenants that want to expand their footprint in the territory. In the last quarter of 2016, one-fifth of the prime office space in the business district of Central was occupied by mainland companies, up from 13% five years ago.

The consultancy expects hotel conversion projects to accelerate. "A lease in London typically lasts for 20 years, which is comparable to two or three years in Hong Kong," said Tom Ko, executive director of investment and advisory services at the consultancy. "So whether it's tenants or owners here, they react a lot more quickly and creatively to market changes."

Asia300

Henderson Land Development Co. Ltd.

Hong Kong

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