Budget hotels offer room for growth

But developers' rush to erect discount lodgings could create a supply glut similar to the office and home markets

Faced with stagnant demand in the office and residential sectors, Hong Kong's struggling developers have in recent months been turning their attention to the rather unconventional area of budget hotels.

The wheels are in motion on numerous projects that look set to create thousands of hotel rooms in industrial areas of Kowloon that are more accustomed to warehouses and container trucks than busloads of excited tourists.

Huge complexes are being constructed in Kwai Chung, Tsing Yi and Kowloon Bay courtesy of property giants such as Cheung Kong Infrastructure and Sun Hung Kai Properties. According to Deutsche Bank property analyst Andrew Lawrence, 'budget hotels out in the boondocks' are the latest trend amongst Hong Kong's army of developers.

They are being built to cash in on the stampede of mainland tourists expected to flock to Disney Land when it opens in two to three years on Lantau Island.

In these lean times, property companies have been searching for new areas to expand into. 'There was an oversupply in residential, so they turned to the office sector, then that got oversupplied so they turned to luxury residential,' Mr Lawrence said.

With so many high-end apartments empty, developers are now all looking at low-end hotels. It is not hard to see why. Mainland tourists are the growth market for Hong Kong tourism. They accounted for 41 per cent of all visitors last year, sending arrivals soaring by more than 20 per cent to a record 16.6 million.

Surveys have shown that while mainland tourists are big spenders, they prefer to save on accommodation so that they can splash out on retail products, with the lower-end hotel sector booming as a result.

According to Hong Kong Tourism Board figures, of the HK$5,000 the average mainland tourist spends per visit, more than 50 per cent is on shopping and just over 15 per cent is spent on accommodation. This contrasts sharply with the average United States visitor who spends almost half on their hotel and just under 30 per cent on shopping.

Tourism board spokesman Simon Clennell said remote areas suit mainland tourists as they usually visited in tour groups. 'It doesn't really matter where they are if they arrive together by bus and leave together in the morning.'

Kwai Chung is one of the most popular new development areas. Among the projects there, Windsor Properties plans to turn a former factory site into a 440-room hotel; Chinachem Group is looking at a 300-room project and Cheung Kong is planning a 299-room hotel. Sun Hung Kai has applied to build a huge hotel nearby in the Cheung Sha Wan industrial area. In addition, Glorious Sun is building a 960-room, 41-storey project in Kowloon Bay, and Wharf plans to take an industrial site in Tseun Wan and turn it into a 1,400-room budget complex. Such abundant construction activity leaves Mr Lawrence concerned that another oversupply situation may arise.

'The problem is that everybody is rushing for the same market,' he said. 'Hong Kong is a small market, the developers watch one another, and once one makes a move the others tend to follow.' Developers' return on equity has been in decline for a number of years, and Mr Lawrence fears the new projects will do little to arrest their slide in profits.

However, Wharf property development chief manager Ricky Wong said he did not believe the budget-hotel market would reach saturation because some of those applying would likely drop out once the land premiums had been assessed. 'All the developers are working on planning applications. Once they know the land premium they will do their own calculations and feasibility studies to see whether the project is viable or not,' he said.

Town Planning Committee chairman Bernard Chan said industrial land in Hong Kong had been under-used for so long, the government was desperate to facilitate any form of redevelopment. He said office promotions met with muted success so now 'other uses' were being encouraged and hotels fitted into that category.

CLSA property analyst John Saunders said there had not been any great blanket change in planning regulations. 'It's more on a case-by-case basis that the government has been able to re-zone in order to try and improve the look of areas,' he said, adding that the present situation could actually help both parties.

'The developers want to make a profit out of the government's desire to clean up urban areas. That sort of works, we have a budget deficit and we don't want tax payers to finance the clean-up so there's something in it for both sides.'

Hong Kong's hotel market has traditionally focused on high-end five-star properties, mainly catering for business clients in the central business districts. The glut of two-star properties catering to mainland visitors is changing that, but hotel analysts say luxury hotels like the Mandarin and the Peninsula are unlikely to get squeezed by their new mid-range rivals.

'They belong to a totally different market, said BNP Paribas analyst Mohan Singh. 'People who stay in two or three-star hotels will not stay in a five-star and vice versa,' he said.

Merrill Lynch analyst Clifford Lam said the hotel market was simply adapting to changing times, but agreed that five-star properties would not be affected too much. 'Businessmen will not want to stay in Kowloon Bay,' he said.

Wharf's Mr Wong said that after mainland tourists, the next growth area would be medium-term visitors seeking serviced apartments.

Wharf's project in Tseun Wan - 70 per cent hotel rooms and 30 per cent serviced apartments - was being designed with that in mind.

But Mr Lawrence said there was already an oversupply of serviced units and was sceptical many buyers could be found for homes based in industrial areas.

'There is no shortage of serviced apartments because the government changed the planning rules. And that opened up some loopholes where companies could build serviced apartments, but effectively sell them as residential. But now they've closed the loophole there are too many serviced apartments,' he said.

Mr Lawrence said it was difficult to fathom what the property companies would do once the budget hotel boom was over. 'Retail is flat. The office market has been dead for a while. Luxury residential is probably dead as well. They're going to struggle,' he said.