Hotel Industry Performance in Hong Kong

• Fastest growing Hotel market in Asia up-till 2018
• 2019 witnessed a full-blown crisis amidst anti-government protests
• 2020: the impact of global pandemic Coronavirus

Hong Kong’s tourism industry is one of the major pillars of its economy. In 2017, it contributed 4% of the GDP and accounted for 7% of the total employment in the country.  The Hotel industry is a mainstay of the tourism sector and as of data for August 2019, Hong Kong had 83,100 hotel guest rooms spread across 299 hotel properties. The Country is a growing hub of business tourism and ranked 13 out of 141 countries in terms of Travel and Tourism Competitiveness Index (showing promise in Health and Hygiene, safety and security, international openness, Infrastructure, ICT readiness and business environment).

Historically, visitor arrivals in Hong Kong increased continuously from 2009-2014 after the implementation of multiple visa entry system in 2009, driven by strong growth in mainland Chinese Visitors (which formed the majority of the total visitors). However, 2015 & 2016 remained a difficult year for Hong Kong with decline in visitors by 2.5% and 4.5% y-o-y respectively, which was largely attributable to the decreasing number of mainland Chinese tourists, as political protests and anti-mainland sentiment impacted the relationship between Hong Kong and mainland China. However, the tourist arrivals again picked up in 2017 (led by 3.9% increase in mainland Chinese visitors), as Hong Kong remained the undisputed number one choice for mainland tourists given its proximity, accessibility and reputation for shopping. Hong Kong was also the strongest performer amongst its peers regarding overnight stays from mainland travelers.

Having reached a low in 2015 (86% Occupancy), the recovery of Hong Kong's overall hotel occupancy rate has been encouraging and it reached 91% in 2018. Medium-tariff hotels have been consistently outperforming other categories over the past 10 years with their occupancy reaching an average of 92% in H1 2019 in comparison to 88.5% in the same period last year.

Further, the total visitor count rose by 11.4% y-o-y in 2018 to reach 65.15 million (highest ever) fueled by the commencement of operation of the Hong Kong section of the Guangzhou-Shenzhen-Hong Kong Express Rail Link in late September 2018 and the Hong Kong-Zhuhai-Macao Bridge in late October 2018 and with this Hong Kong remained the fastest growing hotel market in Asia in 2018.

After a stellar performance in 2018, the momentum continued in the first half of 2019 driven by mainland visitors, with modest decline in Occupancy and Room rates (still better than historical rates).

Performance in 1H2019

• Visitor arrivals to Hong Kong gained further momentum in H1 2019, rising to 34.87 million (27.57 million  from mainland China), an increase of +13.9% y-o-y (+16.4% y-o-y  from mainland China).
• Long haul arrivals declined by -0.4% y-o-y, led by a fall in visitors from the UK (-0.6% y-o-y), Canada (-4.6% y-o-y) and France (-5.4% y-o-y).
• Arrivals from short haul markets (excluding China) increased by +8.6% y-o-y, driven by higher number of visitors from Japan (+9.5% y-o-y), Macau (+52.4% y-o-y), the Philippines (+13.3% y-o-y) and Thailand (+11.4% y-o-y).
• Overnight visitors totaled 14.92 million, an increase of +7.7% y-o-y. Overnight visitors from China rose by +11.0% y-o-y but when these numbers are excluded from overall figures, growth in overnight visitors rose by just +1.2% y-o-y.
• Weaker markets for overnight visitors included Canada (-6.4% y-o-y), the UK (-1.7% y-o-y) and Taiwan (-1.5% y-o-y).
• Citywide occupancy fell by 100bps compared to the same period of last year, declining to 90%. 1,700 new hotel rooms were added.
• Room Nights Sold (RNS) increased by +2.60% y-o-y in H1 2019 while Room Nights Available (RNA) increased by +3.75% y-o-y, primarily due to slower growth in visitor arrivals.
• Revenue per Available Room (RevPAR) performance varied across different segments, although it had been displaying signs of decline since early 2018 itself. RevPAR fell by about -1.98% & -0.79% y-o-y for high tariff A hotels & medium tariff hotels respectively and rose by +0.31% y-o-y for (high tariff) B hotels

2019 which began as a strong year, witnessed a full-blown crisis in just a span of few months starting Aug 2019 as the anti-government protests that erupted in Jun 2019 (related to extradition bill) descended into mass violence. Further, the situation was aggravated by weak global business sentiments amidst the U.S. - China trade war. The visitor arrivals nosedived by 40% in Aug-19 (recorded steepest decline since SARS in 2003). The hotel occupancy rates declined substantially leading to room rates plunging by 40% to 70%. Initial numbers for H2 2019 show overnight visitor per capita spending to be around HKD 6,010, a decline of -13.6% y-o-y, with numbers for Chinese visitors even worse, at -18.5% y-o-y. Further, Hong Kong’s economy entered into its first recession in over 10 years, with the economy shrinking by 1.2% in 2019.

While the Hong Kong economy, which was already badly hit in 2019 and was just regaining some stability after more than six months of frequent violent pro-democracy protests again received a blow from , the pandemic Novel Coronavirus (COVID-19) that struck mainland China in the early 2020, infecting hundreds of thousands of people and killing thousands across the globe. This led to a decision by the Hong Kong SAR government to restrict mainland Chinese tourist visitors, resulting in a sharp fall in visitors from mainland China in early 2020. As the virus spreads to other parts of the world with major economies taking historic measures and putting restrictions on travel non-essential travel, hotel performance is expected to decline further in the coming months and investment activity is expected to weaken.

The forecasts for 2020, however, vary significantly, signaling just how uncertain analysts are as to how the virus pandemic could affect the economy. The government has been proactive and have taken numerous steps to boost tourism through large infrastructure investments over the years. Major infrastructure projects are currently under construction such as the Hong Kong-Zhuhai-Macau-Bridge (HZMB), the Hong Kong section of the Express Rail Link (XRL), the Shatin to Central Link and the construction of a third runway at Hong Kong International Airport (HKIA), which hold enormous potential for the local economy and the hospitality industry. New Hotels supply has historically grown at a 4.3% CAGR (2007-17), while it is estimated to grow at a slower rate of 2.4% (2018-22). Over the medium to long-term, the steps undertaken by the government are likely to bear fruits, though near-term issues mainly due to Coronavirus pandemic are expected to hurt the industry and the economy badly, both in Hong-Kong as well as other regional tourist destinations.