When is a Hong Kong Hotel Not a Hotel

Hong Kong hotels offer a unique value proposition for investors and owners considering office conversions.

March 23, 2018

With Hong Kong's office property prices some of the highest in the world, some of the city's hoteliers are eyeing a shift in investment strategy by applying for permission to convert their hotels into commercial space. 

Current conditions favor conversion. The city's hotels are generally priced at a discount to offices in the Central business district.

"Business-minded investors and developers are looking at opportunities to acquire hotels at a 20-30% discount, compared to office equivalent pricing," says Corey Hamabata, a Senior Vice President with our Hotel and Hospitality Group in Hong Kong. "With this discount, investors see relative value in the hotel space and hope to either enhance their yield through future profitability growth or conversion of use." 

Looking for quicker returns on investment and lower operating costs, some existing hotel owners are doing just that. Hamabata points to the former Hotel LKF in the heart of the entertainment district as a recent example of the trend.  

But government approvals for conversion aren't always easy to obtain. The Crowne Plaza Hong Kong Causeway Bay hotel applied to Hong Kong's planners more than a year ago to demolish the 29-storey building and replace it with a tower filled with offices, retail and restaurants. The application closed for public inspection in December 2017, and so far no final approval announcement has been made. 

"There are lots of factors in play when you think about hotel to office conversions," says Hamabata. "Firstly, is the building suited to a conversion? Next, can you get the permissions required? And then are you willing to invest the capital? You need to have a clear sense of the time frame you want to operate in, because you will likely have to forgo income while the conversion is taking place."

Another factor: Hong Kong's hotel market is dominated almost exclusively by local buyers. 

"They are more likely to buy into relative value than have a finite strategy for the asset," adds Hamabata. "For them it is more about buying at the right time, price and location."

It's a delicate balancing act that the owners of Hong Kong's iconic Excelsior Hotel are familiar with. They reportedly explored the sale of their harbor front hotel for close to USD 6,000 per square foot (psf) last year, with a government-approved plan already in place to convert the hotel into a commercial building.

The market seemed primed for the change, with the Murray Road Carpark commercial development site fetching a record USD 6,500 psf last year, but the proposals Mandarin Oriental Group received did not fully meet their expectations. 

Investors wanting to hold their hotel assets over the longer-term should also consider the market cycle. While Hong Kong's hotels have had a tough time over the past few years as fewer mainland Chinese tourists traveled across the border, the trend began to reverse at the end of 2016. 

"Hotel occupancy in Hong Kong reached near historic peak levels in 2017," explains Hamabata. "Market wide Revenue per Available Room (RevPAR) rose by 2.4 per cent in 2017 and we expect average daily room rate growth to pick up this year."

The last time Hong Kong saw hotel owners consider conversion to office space was in the late 1990s and turn of the century when the old Hong Kong Hilton, Hotel Furama, and Ritz-Carlton were demolished and replaced with the office skyscrapers that dominate Central today.

Only time will tell if history will repeat itself.