The global hotel investment market is bouncing back. As programmes of mass vaccination against Covid-19 gather momentum, allowing economies to reopen at differing speeds, transaction volumes in the sector last year surged 131 per cent year on year to US$66.8 billion, on a par with pre-pandemic levels, data from JLL shows. In the Asia-Pacific region, investment activity in 2021 increased almost 40 per cent to US$8.5 billion. While this was still 40 per cent below 2019 levels, the recovery is being driven by countries with strong domestic tourist markets and large pools of local capital, such as mainland China and Japan. In Australia, another popular market among investors, global private equity funds are among the most active sources of capital. However, one market in the region continues to suffer one calamity after another. Even before the virus struck, Hong Kong’s hotel industry had faced a succession of domestic and external shocks that caused it to enter the pandemic in a precarious position. While occupancy rates among upscale and midscale hotels were close to 90 per cent in January 2019, they dropped to roughly 60 per cent by January 2020, according to hotel data provider STR. However, it was the virus-induced imposition of draconian restrictions on cross-border travel that pulled the rug out from under the city’s hotel industry, causing a brutal collapse in tourism from the mainland, easily the sector’s most important source market. Revenue per available room, or revpar – the industry’s favoured performance measure – at luxury hotels, the hardest hit segment, plunged from US$286 in 2019 to just US$61 in 2020, data from STR shows. Severe operational difficulties stemming from staff shortages and supply chain-related pressures are adding to the woes of a sector that now faces its sternest challenge since the pandemic began. The tensions at the heart of the “dynamic zero Covid” policy pursued by Asia’s leading financial hub have become much more acute since the rapid escalation of the Omicron outbreak . Lock down or open up? Hong Kong is too crowded to do either The dramatic increase in infections, which have overwhelmed hospitals and quarantine facilities, is putting renewed strain on relations between Hong Kong and Beijing and delaying plans for quarantine-free travel with the mainland, the overriding priority for the government. For the city’s battered hotel sector – whose performance metrics had been improving due to a combination of quarantine business, extended stay offerings and demand for staycations – the grim realisation that a clear exit strategy from the pandemic is still a long way off has dealt a further blow to sentiment. Transaction volumes had already fallen off a cliff, dropping from US$1.8 billion in 2017 to US$400 million in 2020, on a par with last year’s level. Moreover, there is a sizeable gap between the expectations of buyers and sellers across the Asia-Pacific hotel sector as a whole, with investors seeking discounts of 18 per cent on average, compared with just 3 per cent for sellers, according to a survey conducted by JLL last September. Yet, despite the unprecedented challenges facing Hong Kong’s hotel industry, it is not all doom and gloom. One of the few positive effects of the pandemic is that it has acted as a powerful catalyst in forcing operators and investors to rethink their strategies. Why Xi Jinping used ‘Communist Party chief’ title to direct Hong Kong’s Covid fight Some investors have seized opportunities to reposition hotel assets in the city. The virus-induced blurring of the lines between different types of real estate has led to more creative uses of space to maximise income potential. Last November, Hines, a global property investor, acquired the Butterfly on Prat hotel in Tsim Sha Tsui to convert it into a technology-driven co-living scheme managed by local residential operator Dash Living, one of several hotel conversion deals last year. Furthermore, while revenues are only a fraction of 2018 levels, occupancy rates have recovered sharply since the pandemic erupted, a remarkable achievement given the restrictions on cross-border travel. As has been the case in Singapore, quarantine business has helped offset some of the collapse in demand. The government’s announcement last week that it had secured an additional 20,000 hotel rooms to isolate patients and close contacts will help prop up the sector. More importantly, although Hong Kong has been hit particularly hard over the past several years, there is very little distress in the industry, mainly because of low leverage and owners’ strong relationships with banks. Many of Hong Kong’s hoteliers, moreover, are privately owned local conglomerates that can rely on other revenue streams, said Jonathan Law, vice-president of hotel investment sales, Asia, at JLL Hotels & Hospitality Group in Hong Kong. Last, but not least, there are few gateway cities in Asia that are as attractively positioned as Hong Kong. While the government’s zero-Covid stance may have left it cut off from the rest of the world, the city’s crucial role in the Greater Bay Area – a region whose population is larger than Germany’s and whose gross domestic product is bigger than New York City’s – gives it enduring appeal. The Omicron outbreak is a devastating blow to Hong Kong. Yet, it also sets up one of the most attractive recovery stories once the virus is brought under control and the border with the mainland finally reopens. Hong Kong’s hotel sector is down but not out. Nicholas Spiro is a partner at Lauressa Advisory