New World venture with Abu Dhabi fund may prompt HK hotel industry shake-up
Sales and redevelopment on the cards as owners mull options to counter slump in tourist arrivals
New World Development's move to sell stakes in three top hotels to the Abu Dhabi Investment Authority (ADIA) may herald a shake-out in the industry amid a decline in tourist arrivals, industry experts say.
Facing declines in occupancy and room rates, hotel owners in prime tourist locations are weighing their options for weathering a market downturn.
While New World has opted to reduce its controlling stakes in three hotels in an HK$18.5 billion joint-venture deal, Mandarin Oriental International has signalled it may tear down the four-star Excelsior, a Causeway Bay landmark for 42 years, for a commercial development.
"Other hotel owners may sell their properties in the wake of market uncertainties," said Alfred Lau, an analyst at Bocom International. "They will sell if they receive a good price."
While it is unclear if a disposal trend might emerge, hotel owners are certainly struggling to attract tourists after enjoying a 10-year boom.
The number of tour groups visiting the city fell 10 per cent from a year ago to 260 during the Labour Day holiday weekend, according to the Travel Industry Council.
A strong Hong Kong dollar and community tensions over an influx of mainland tourists have taken their toll on the hotel business. Average room rates over the holiday weekend fell by "a single digit", the Hong Kong Hotels Association said.
While the industry's woes have been building for some time, New World's joint venture surprised the market. It is the biggest hotel deal in Asia in a decade.
New World and its controlling shareholder Chow Tai Fook Enterprises will inject the three hotels, including the flagship Grand Hyatt in Wan Chai, into the 50-50 venture with ADIA, the second-largest sovereign fund in the world.
The other hotels to be transferred into the venture are the Renaissance Harbour View in Wan Chai and the Hyatt Regency in Tsim Sha Tsui.
New World's interest in the three hotels will be halved to 32 per cent after the deal, as will Chow Tai Fook's to 18 per cent, giving ADIA a 50 per cent stake.
"We believe the proposal is good timing as it is only the start of the declining trend in the hospitality sector due to falling visitor arrivals," Deutsche Bank analyst Jason Ching wrote in a report.
The transaction would also help New World unlock value from its hospitality business, freeing up funds for possible land acquisitions, Ching said.
Kenny Tang Sing-hing, the chief executive of Junyang Securities, said the grim outlook for the sector would force some developers to consider converting hotels into offices to exact higher returns.
Tang expects office rents at grade A properties will be supported by growing demand from companies.
"More financial companies will seek to expand in preparation for the stock through train scheme that will connect the Hong Kong and Shenzhen markets," he said.
However, in a rare bright spot for the industry, there are still global investors keen on top hotels in the region.
"Hospitality is one of the preferred asset classes for sovereign wealth funds as hotels can provide significant cash flow if successfully operated," JLL said in a report on Asia-Pacific hotel investment.
The value of transactions in the region would increase 15 per cent to about US$8.5 billion this year from last year, the property consultancy said in the report released before the New World deal.
New World chairman Henry Cheng Kar-shun rejected suggestions the company is bearish about the hotel market outlook. "The partnership with ADIA will be the beginning of further cooperation beyond the hotel business," he said.
New World said HK$10 billion from the deal would be used to finance the HK$18 billion redevelopment of Tsim Sha Tsui's New World Centre.