Investors buying hotels in China, Hong Kong and converting to other use

Rosedale Hotel Hong Kong, Causeway Bay, China. Photo credit: Rosedale Hotel Group(Image: Rosedale Hotel Group)

Higher hotel transaction volumes in mainland China and Hong Kong are being attributed to investors buying hotels with plans to change their use, according to a JLL report.

China's hotel market has been facing oversupply for some time now. Ling Wei Tan, JLL’s Hotels & Hospitality Group in Greater China, said in a statement, “A few years ago, we saw a trend of hotels being converted to office space, but more recently hotels have been bought with the intention of creating apartments for long-term leasing.” Older hotels, especially those with local brands, are main targets for conversions because they cannot compete with newer hotels and international hotel brands.

These hotel conversions have been receiving government support, as the long-term residential rental sector allows young people to live in first tier cities. “Converting a hotel to rental apartments is relatively easy and cheap to do,” she said. “Apartment buildings in Shanghai for example can achieve 90 percent occupancy, compared with mid-70s for hotels in the city. The tenancies are also longer.” For example, InfraRed recently sold Shanghai's Graceland Hotel to Nova Property Investment. InfraRed originally planned to upgrade the hotel from a three-star to a four-star property, but decided instead to sell the property to Nova, a property management firm founded by U.S.-based private equity firm Warburg Pincus.

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So far, the trend has only been occurring in top tier cities, such as Beijing and Shanghai. “In second- and third-tier cities, there is oversupply of hotels still, but often also high supply of offices and apartments, so conversions do not add up,” Tan said.

Last year, Hong Kong experienced one of the highest numbers of transactions in Asia-Pacific. Investors spent HK$12.9 billion in hotel transactions, several of which will be converted. However, Hong Kong's hotel oversupply and degree of government intervention does not match those found in China. The higher value of other uses, especially in office space, has driven several hotel sales with plans of conversion. For example, Shun Ho Property Investments acquired North Point's 317-room Grand View Hotel, formerly named the Newton Inn, for HK$1 billion from Henderson Land Development and Causeway Bay's 300-room Rosedale Hotel from Bank of China in a HK$1.6-billion deal. The firm has already requested permission to convert both properties into office buildings. William Cheng Kai-ming, chairman of Shun Ho Property Investments told the Sun China Morning Post, “It does not mean we will convert the two properties right away. We are still optimistic as the hotel market has climbed out of a three-year depression since the middle of 2017. Hong Kong’s overall hotel revenue has increased by 10 percent last year as the trend of tourists from the mainland is on the rise."

Last year's sale of the Murray Road Car Park site in Central Hong Kong for HK$23.28 billion to Henderson Land Development piqued investor interest in sites with potential for office space. Mandarin Oriental Group joined in on the trend and began seeking offers for the Excelsior Hotel in Causeway Bay. The hotel has already obtained permission to convert into commercial space. The property was expected to sell for HK$30 billion, but Mandarin Oriental suspended the sale in September after receiving too-low bids. However, if office values continue to rise in Hong Kong, the Excelsior might go return to the market.