THE grand tower of the Ambassador Hotel will be gone from its prime site in the Tsim Sha Tsui shopping area after the hotel block is knocked down in the coming months. The 313-room hotel was one of six doomed for demolition last year by the news that developer Stelux Properties had joined the recent trend to convert hotels into commercial buildings. The trend did not stop this year, with hotels continuing to fall like dominoes. Five hotels, or 1,256 rooms, have closed this year; two more proposed closures - including the Hilton in Central - will take out another 1,000 hotel rooms in town. These are in the high tariff B and medium tariff categories, mainly in the secondary area of Causeway Bay, Wan Chai and Tsim Sha Tsui. The decision by landowners to convert hotel properties into commercial projects has been triggered by relatively low yields, which do not justify their continued operation. According to hotel investors, yields are far from that of the commercial rental market. Peter Yu, a senior executive of Regal Hotel, pointed to this trend at an investment analysts' meeting in May on the outlook for the territory's hotel industry. Mr Yu said that a 184,000-square-metre site which houses a 450-room four-star hotel would generate an annual revenue of $340 million, and pre-tax income of $130 million. That represents a yield of five per cent with an investment cost of $2.62 billion. That yield would go up to 8.2 per cent if the site were zoned for the development of a commercial tower. He said pre-tax earnings for the same size site could reach $196 million because costs for a commercial project would be 8.4 per cent lower than hotel investment. Lower plot ratio, higher construction costs and more labour expenses have combined to trim hotel yields. A hotel project is restricted at a plot ratio between 12 to 13 times, lower than the development potential of a commercial building which allows a plot ratio of 15. Escalating labour costs incurred by the high demand for experienced hotel managers has also eaten into profit margins. This accounts for about 45 per cent of a luxury hotel's revenue. Gordon Crosby Walsh, hotel analyst at Nomura Research, elaborated on the benefits of investing in a commercial property. A commercial building was more convenient for a developer - they could sell or lease it - while a hotel has continuous daily operations which need a lot of labour, he said. The advantage of a hotel development was that it provided a steady flow of cash income while a commercial building could be a one-off earning - when it is sold. However, hotel analyst of Sassoon Securities, Vivian Kwok, predicted that in 1995 there would be an 'end to this cycle' of converting hotel projects into commercial buildings. 'As more hotels in town are redeveloped, the shortage of room supply will boost the potential earnings of hotel groups,' Ms Kwok said. Moreover, land owners would reconsider investment in commercial properties in view of the increasing office supply arising from property developments on the new airport railway, she said. The Government is considering increasing the plot ratios of hotels as well as having zones for their development. However, analysts say zoning will not make it less difficult for a hotel to be built unless the land was priced differently. 'If the cost of purchasing the land for a hotel development is less, then the yield for the developer will be greater or the same as for a commercial building,' said Mr Crosby Walsh.