Hong Kong property

Fever to turn industrial buildings into hotels subsides

Construction costs, fewer mainland tourists are factors.

PUBLISHED : Tuesday, 31 May, 2016, 10:59am
UPDATED : Tuesday, 31 May, 2016, 10:59am

Developers’ demand to turn ageing industrial buildings into hotels has gradually died. Only about 50 per cent of the approved projects are getting off the ground as the tourism market outlook worsens and construction costs soar.

Industry experts said owners of these industrial buildings will likely suspend or abandon their redevelopment plans if there is no overall improvement in the hospitality industry.

“At present hotel operators see a less favourable operating environment ahead and that will cause them to hold back their redevelopment plans,” Charles Chan, a managing director at real estate company Savills, said.

The soaring construction costs could also stall hotel investment, he said.

In total, 21 hotel redevelopment projects have been approved following the government’s six-year industrial revitalisation campaign which ended in March, according to the Development Bureau.

Among them, 10 are either under construction or have been completed, five had been scrapped for hotel purposes and the remaining six have been left untouched, according to industry experts. The five abandoned projects would have had 1,400 rooms.

Vincent Cheung, executive director for valuation and advisory services in Asia at Colliers International said the owners are more likely to sell the site than proceed with the hotel development.

“But they may opt to abandon the hotel projects in view of the abrupt change in market sentiment,” he said.

Previously, industrial property owners chose to refurbish their buildings into three- or four-star hotels because of the continued rising numbers of mainland tourists visiting Hong Kong.

However, the market boom has gone as falling demand from mainland tourists who bypass Hong Kong due to a strong local dollar which is pegged to the US dollar.

From January to March, the number of visitor arrivals fell 10.9 per cent to 13.73 million from a year ago, according to data from Hong Kong Tourism Board. Mainland tourists account for more than 75 per cent of the total visitor arrivals.

Mainland tourist numbers fell 15 per cent to 10.42 million during the first three months this year.

Overnight visitor arrivals from the mainland, major clients for hotels in Hong Kong, declined 11.9 per cent to 4 million for the period between January to March, while same-day mainland visitors plunged 17 per cent to 6.42 million during the same period.

William Cheng Kai-man, chairman of Magnificent Estates, a medium-tariff hotel owner, notes the change in mainland visitors profiles would have a severe impact on hotels located in traditional industrial districts.

“Two years ago, half of the annual 20 million overnight tourist arrivals came from low-cost group tours. They stayed in these converted hotels in off-beat locations such as Tsuen Wan. As these tour group numbers continue to fall, they are gradually being replaced by mainland individual travellers who prefer to stay in urban areas,” he said.

The fall in demand has discouraged owners to convert industrial properties to hotels, Cheng said.

In addition, various technical difficulties could also dampen owners’ interest in proceeding with the conversion.

“As most industrial buildings are surrounded by neighbouring blocks, it will increase the difficulties in designing every room with a window. Alternatively, the owners will need to dig a vertical shaft in the middle of the building to make way for windows. But it come at the expense of a quarter of gross floor area,” Cheng said.

For a 300-room hotel, he said it would only need 100,000 square feet gross floor area in a raw development site in urban area.

But owners could only build 200 rooms for an industrial building which could yield a total gross floor area of 200,000 to 300,000 square feet, he said.

“It will increase the cost per room when converting industrial buildings into hotels,” he said.