Hong Kong hotel sector recovery elusive for unprepared investors

Signs of recovery in Hong Kong’s real estate industry are becoming more apparent, so much so that key indicators in parts of the sector are experiencing some of the fastest growth rates in the Asia-Pacific.

In the hotel market, average daily rates, which were declining in annualised terms for most of 2025, grew 9.5 per cent in the first half of this year. This was the third-fastest growth rate among 14 leading markets across the region, according to data from CBRE.

Another sign that the recovery has taken hold is the sharp increase in tourist arrivals which, according to a report by Citigroup on July 21, are expected to reach 55 million this year. This would be almost on par with the number of visitors in 2019, although still significantly below the 65 million in 2018, just before Hong Kong suffered a succession of domestic and external shocks.

This makes the performance of its luxury hotels all the more impressive. According to data from STR, part of CoStar Group, average daily rates for luxury and upper upscale hotels in the first half of this year were 1.3 per cent higher than in the corresponding period in 2018. For the market as a whole, rates were just 1.3 per cent lower. “There were three months – January, February and May – when rates were actually higher,” said Jesper Palmqvist, regional vice-president for Asia-Pacific at STR.

Key catalysts for the recovery include the dramatic revival in Hong Kong’s capital markets, which has supported corporate occupier demand. Moreover, the reassertion of the city’s role as a hub for mega-events has helped boost occupancy. JLL said Hong Kong has become “one of Asia-Pacific’s most watched hotel investment markets”.

The question is whether investors have the patience to keep watching and, if not, whether they have the expertise to exploit opportunities that involve repositioning and even repurposing hotels.

The recovery in the hotel sector is an unbalanced and somewhat elusive one. The biggest beneficiaries are owners and operators of prime hotels in the most sought-after locations. This is partly because their properties are best placed to capitalise on premium segments of demand, such as long-haul and wealthier regional travellers as well as the meetings, incentives, conferences and exhibitions (MICE) business.

However, it is also because the supply of new hotels in Hong Kong has shrunk dramatically since the eruption of the Covid-19 pandemic. JLL expects supply to stagnate in the next few years. The lack of new projects under development is attributable to higher construction and financing costs as well as a dearth of suitable sites in core locations.

Limited competition from new assets is a boon to owners of high-end hotels, increasing the value and pricing power of well-located properties. For investors, however, acute supply constraints amplify the high barriers to entry in the sector. Prime hotels are tightly held by local conglomerates and long-term strategic owners, “resulting in a shallow pool of investible opportunities, particularly at scale”, JLL said.

The liquidity in Hong Kong’s hotel investment market is instead coming mainly from the conversion of ageing and operationally challenged properties into student housing as the surge in non-local student enrolment fuels demand for professionally managed accommodation.

According to CBRE, 18 per cent of hotels in Hong Kong have pivoted to a hybrid operating model, allowing them to tap into new revenue streams from longer-stay accommodation. “Many underperforming assets would not have made it as stand-alone hotels. However, the threshold for converting hotels into student housing is high,” said Cleavon Tan, senior vice-president in the hotels and hospitality group at JLL in Hong Kong.

This is partly because the stock of hotels available for sale and suitable for conversion is diminishing sharply. It is also because not all investors have repositioning expertise. The lack of traditional hotel acquisition opportunities in Hong Kong underscores the divergence between a sector that is enjoying a stronger recovery and an investment market that is constrained by limited availability of prime properties in core locations.

This does not mean there are no compelling opportunities. For investors willing to get their hands dirty by upgrading or repurposing hotels, Hong Kong is an attractive market. “Investors with smart real estate asset management strategies are best placed to succeed,” said Shaman Chellaram, senior director, hotel advisory, at Colliers in Hong Kong.

Given the acute challenges posed by higher operating costs and lower profitability – most hotels’ operating profit remains below 2018 levels – investors can help owners restructure their debts and enhance the value of their properties. Those who are patient enough might even be able to acquire a trophy asset.

As JLL rightly points out, Hong Kong’s hotel market is not a “high-liquidity trading environment”. Even so, as the recovery takes shape, those investors who can extract value from asset enhancement strategies are at an advantage.

Nicholas Spiro