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Hong Kong property

Hotels outside Hong Kong’s flashy areas should avoid the rush to convert to offices, Colliers says

Eight hotels are converting to office space – or taking steps to make it an option. But while eye-watering office rents are tempting, Colliers says hotel owners outside ‘core’ areas could regret converting and miss out on a big wave of tourists headed this way.

PUBLISHED : Wednesday, 05 September, 2018, 10:08am
UPDATED : Wednesday, 05 September, 2018, 10:08am

Tempted by soaring rents, some of Hong Kong’s hotel owners in upscale areas are converting their properties into office space. But one analyst is warning against a greed stampede.

Eight hotels are now being refurbished, redeveloped or on the drawing board for the shift, representing more than 2,000 hotel rooms, according to a Colliers International report released on Wednesday.

Seven of them are located in what the Hong Kong government calls “core” areas -- Sheung Wan, Central, Wan Chai, Causeway Bay and Tsim Sha Tsui -- which are upscale and appeal to businesses. Central especially stands out -- it is the world’s most expensive office address. The exception is one hotel being considered for conversion in North Point.

The properties could rake in more in office rent than what they fetch for hotel rooms.

But hotels in “non-core” areas -- where office rents are lower -- could miss out on an expected run-up in tourist arrivals if they convert, a misstep that occurred in 2009 when a similar hotel-to-office rush left some hotel owners worse off, Colliers said.

“The move to convert into office space is driven by soaring office prices and rents in core locations due to a long-term shortage of office supply, together with high demand,” Colliers said.

Of the eight hotels, four have already begun converting or are knocking down their property to make way for redevelopment: Hotel LKF by Rhombus in Central, which has 95 rooms in 92,460 square feet, is being converted for use by WeWork. 338 Apartment in Central is being reworked for small businesses. King’s Hotel in Wan Chai will be remade into standard offices. And J Plus Hotel has already been torn down to be redeveloped into offices.

In addition, the Hotel Excelsior and Crowne Plaza in Causeway Bay have been given green lights to convert by the government.

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Meanwhile, the owner of two other hotels has submitted applications to the Buildings Departmentfor permission to convert, but the owner is waiting to decide whether to move ahead.

These owners of hotels in core areas can gain from an office market that is “exceptionally good at this moment,” Colliers said.

Hong Kong assigns offices grades, with Grade A being the choicest, with spacious, luxury lobbies, lifts and professional management.

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Less swanky Grade B offices in Central charge about HK$60 per square foot a month. That is a 20 per cent higher annual return than a medium-pricedhotel in Central offering rooms at HK$1,500 (about US$190) per room per night would fetch, Colliers International said.

But hotels in non-core areas that “respond too quickly” and rush to convert to offices could be sorely disappointed, said Hannah Jeong, senior director of valuation and advisory in Asia at Colliers.

“Mid-tariff hotels in non-core areas, such as Kowloon East’s three-star hotels that charge HK$500 to HK$800 [about US$64 to US$102] per night, can earn 15 per cent higher return than [they could fetch for] grade B office [space] that asks for about HK$30 per square foot [in the same area],” Jeong said.

She noted that Hong Kong’s tourism market is recovering , with rising tourist arrivals and rapidly expanding government infrastructure.

“The number of overnight visitors to Hong Kong should grow at an annual rate of 7 per cent, reaching 36.6 million by 2021, up from 27.88 million in 2017,” Jeong wrote.

The average length of stay of overnight visitors was 3.2 nights last year, according to the Hong Kong Tourism Board.

The growth in tourist visits is likely to be driven mostly by millennials and the emerging middle class in mainland China, with medium-priced hotels in high demand, according to the report.

“As a result, the analysis shows that the demand for medium-tariff hotels should outstrip supply by 21.5 per cent by 2021.”

A similar rush to convert hotel properties happened in 2009.

“After a decline in overnight tourist arrivals in Hong Kong in the second quarter of 2009, investors

rushed to convert medium-tariff hotels into other uses, resulting in a decrease in stock in the last quarter of 2010,” Jeong wrote in the report. “Consequently, they were unable to catch the optimum market when tourism arrivals rapidly recovered in the second quarter of 2010.”

However, there is debate on the point.

“It is a very right thing to convert non-core district hotels to commercial,” said William Cheng Kai-man, chairman of Shun Ho Hotel Investments, which controls nine hotels, including the Grand View Hotel in North Point.

“Non-core district hotels are [leasing] for less than HK$300 a room [per night] to get occupancy despite high operating expenses,” Cheng said.

Cheng has submitted applications to convert two of its hotels, the Rosedale Hotel in Causeway Bay and Grand View Hotel, into office space to provide an investment alternative should there be an abrupt change in hospitality industry.

Cheng’s family bought the Rosedale Hotel for HK$1.6 billion from the Bank of China June last year.

He said such hotels in non-core areas can generate hardly any operating profit, which makes the property almost worthless, with little buyer interest.

“These hotels should convert to other usages with [lower] operating expenses, such as commercial and offices,” Cheng said.

Hotels that charge less than HK$300 a night on weekday include Winland 800 Hotel in New Territories, which charges HK$225 for a room a night, according to Trip.com.

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