GHN MARKET REPORT Hong Kong 2012 Darlena Zhai Senior Consultant Horwath HTL Hong Kong Office INTRODUCTION This report presents the historical performance and dynamics of the overall hotel market in Hong Kong from 1991 to 2011. Please note that all of the information and analysis featured in this report are based on aggregate data collected by the Hong Kong Tourism Board (HKTB). Since 1987, Horwath HTL and HKTB have jointly produced an annual Hong Kong Hotel Industry Report. For this report and analysis purposes, hotels in Hong Kong are divided into three categories as per HKTB: High Tariff A High Tariff B Medium Tariff We note that hotels are classified into various tariff ratings by five major criteria: facilities, location, staff-to-room ratio, achieved room rate, and business mix. Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 1
HOTEL SUPPLY The following table summarises the hotel supply in Hong Kong from 1991 to 2011: HONG KONG HOTEL SUPPLY BY TARIFF, 1991 2011 High Tariff A High Tariff B Medium Tariff Total Hotels Hotels Rms Hotels Rms Hotels Rms Hotels Rooms 1991 17 9,340 28 12,905 27 5,368 72 27,613 1992 17 9,490 26 13,039 33 7,949 76 30,478 1993 19 9,668 26 12,541 33 9,066 78 31,275 1994 20 10,677 23 11,606 32 8,973 75 31,256 1995 18 10,066 24 11,704 33 9,043 75 30,813 1996 18 9,710 25 12,137 33 9,130 76 30,977 1997 18 9,532 25 12,212 31 8,740 74 30,484 1998 18 9,294 26 12,646 32 8,736 76 30,676 1999 18 10,001 27 13,756 34 9,816 79 33,573 2000 18 9,999 28 14,314 35 10,365 81 34,678 2001 17 9,391 29 14,850 33 9,999 79 34,240 2002 17 9,365 30 15,329 40 10,756 87 35,450 2003 17 9,318 29 14,293 37 10,057 83 33,668 2004 17 9,473 33 16073 42 11,038 92 36,584 2005 21 10,808 39 18616 49 11,475 109 40,899 2006 21 10,809 41 18,478 53 14,435 115 43,722 2007 21 10,855 43 18,951 60 15,496 124 45,302 2008 24 13,570 48 18,468 66 16,735 138 48,773 2009 27 15,116 55 21,638 71 17,342 153 54,096 2010 29 16,052 58 21,432 72 17,591 159 55,075 2011 32 17,181 67 24,218 75 16,495 174 57,894 YOY 7% 13% (6%) 5.1% CAAG 3.1% 3.2% 5.8% 3.8% Source: HKTB (Total Hotels category includes ONLY hotels that have responded to HKTB s supply survey) Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 2
HISTORICAL OPERATING PERFORMANCE The following table illustrates ADR (in Hong Kong Dollars) and occupancy from 1991 to 2011: HONG KONG HOTEL ADR AND OCCUPANCY, 1991 TO 2011 High Tariff A High Tariff B Medium Tariff Overall Market ADR Occ. ADR Occ. ADR Occ. ADR Occ. 1991 1,007 72% 571 78% 405 75% 661 75% 1992 1,025 78% 581 86% 420 82% 675 82% 1993 1,132 80% 697 90% 505 89% 778 87% 1994 1,346 82% 901 88% 687 85% 978 85% 1995 1,552 81% 966 89% 771 84% 1,096 85% 1996 1,631 86% 1,209 91% 813 88% 1,218 88% 1997 1,755 75% 1,177 80% 742 72% 1,225 76% 1998 1,112 70% 633 81% 413 75% 719 76% 1999 1,018 75% 584 83% 380 79% 661 79% 2000 1,197 82% 643 84% 426 84% 756 83% 2001 1,290 74% 663 81% 399 81% 784 79% 2002 1,088 80% 612 86% 401 85% 700 84% 2003 1,009 67% 612 72% 388 70% 670 70% 2004 1,213 84% 701 89% 489 89% 801 88% 2005 1,525 84% 815 86% 464 87% 935 86% 2006 1,691 85% 999 88% 582 87% 1,090 87% 2007 1,964 84% 1,057 88% 616 86% 1,212 86% 2008 1,977 79% 1,007 87% 666 86% 1,216 85% 2009 1,573 72% 785 81% 522 80% 960 78% 2010 1,856 81% 848 88% 650 90% 1,118 87% 2011 2,229 85% 1,129 91% 710 93% 1,356 89% CAAG 4.0% 3.5% 2.9% 3.7% Source: HKTB (data includes ONLY hotels that have responded to HKTB s survey) The following points discuss the performance of the Hong Kong hotel industry in the past decade: The years prior to 1997 were considered to be a booming period for hotels in Hong Kong. In 1996, High Tariff B hotels recorded 91 percent occupancy at a rate of HKD 1,209. In the second half of 1997, hotel demand fell drastically due to Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 3
o o A tourism anti-climax following exceptional visitor build-up prior to Hong Kong s handover to China. The onset of the Asian Financial Crisis. Demand continued to weaken in 1998 (height of the economic crisis). The most dramatic manifestation occurred in the High Tariff B and Medium Tariff segments, where rates almost halved. A recovery began in 1999, attributable mainly to the improved regional economic environment and renewed tourism interest in the city. However, average rates softened due to hotel price wars in hope of regaining demand and competitiveness to other regional destinations. In 2000, demand strengthened and average room rates in the Medium Tariff market grew for the first time since 1997 by 10 percent. In 2001, most hotels found the first four months of the year to be reasonably strong. From May onwards, however, the market experienced a contraction in demand as a result of: o o The disappearance of the internet-related and telecommunications demand prevalent in 2000. Another global economic slowdown. Not surprisingly, demand following September 11 was weak particularly with the American and Japanese markets. This resulted in: o o Some properties cutting rates by up to 30 percent in order to capture groups from lower-tier hotels. Many properties seeking more business from Mainland China (the government increased the quota for Mainland groups to Hong Kong in response to calls for aid from the hotel and tourism sectors). In 2002, market-wide performance recorded strong growth (5 percentage points), pushing market occupancies to 84 percent the highest level since 1996. The increase in occupancy performance was relatively consistent across all tariff categories and reflected the renewed growth from key source markets and the continued growth of the Chinese market. However, room occupancy growth was at Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 4
the expense of average room rates, which recorded an overall decline of 10 percent in 2002. Nonetheless the year ended on a positive note with the last three months recording rate increases over 2001 (following negative growth for the first nine months of the year). In 2003, market-wide occupancy decreased significantly from 84 percent in 2002 to 70 percent in 2003 due to the impact of SARS, while ADR was more resilient with a decrease of only 4 percent to HKD 670. In 2004, the impact of avian flu spreading across Asia in February was minimal. Instead, the market experienced a strong recovery due to growth in the global economy (which had created a positive macro-environment for business travel) and the Mainland China s Individual Visit Scheme, which has boosted individual leisure travellers. Market-wide occupancy increased to 87 percent, the highest level since 1996, and ADR also increased to HKD 801. From 2004 to 2007, the market enjoyed four consecutive years of double-digit growth. Overall rates grew at a CAAG rate of 14.8 percent, from HKD 801 to HKD 1,212. Occupancy saw little change but remained at a very desirable level of 86 to 87 percent. In 2006, High Tariff B hotels broke the HKD 1,000 mark for the first time since 1997. Despite a 14 percent increase in room supply in 2007, market-wide occupancy only decreased by 1 percent, attesting to the strength of hotel demand in Hong Kong. In 2008, the hotel market s growth slowed down significantly (0.7 percent growth in comparison to double digit growth in the previous years). Hotel statistics showed that the months of January to July had been record months, but growth plummeted towards the end of the year with the onset of the global economic crisis. Nevertheless, High Tariff A hotels reached their highest average rate in 2008, ending the year at HKD 1,977. In 2009, the market further collapsed following the onset of the economic crisis and the spread of the A/H1N1 viral flu, which worsened the demand slump. Recovery began in the last quarter of the year. Despite a 7 percentage point decrease in occupancy from 2008 to 2009 and a 20 percent drop in overall ADR, the industry proved its resilience and swiftly Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 5
rebounded in 2010, gaining a 9 percentage point increase in occupancy and a strong recovery in ADR of 16 percent. The strong recovery continued in 2011. While market occupancy continued to increase, to 89 percent, ADR for the overall market also increased by nearly 20 percent. GRAPH OF ADR AND OCCUPANCY TRENDS, ALL HOTELS, 1991 2011 SEASONALITY Source: HKTB, adapted by Horwath HTL The graph above illustrates three distinct periods in the history of Hong Kong, which adversely impacted the hotel industry for different reasons. The first is the Asian Financial Crisis, which began in July 1997, the outbreak of SARS in the first half of 2003 and the global financial crisis and H1N1 breakout in 2009. On the other hand, the graph also illustrates the Hong Kong market s strong resilience, particularly shown in its fast recovery after 2003 and 2009. Throughout a given year, there are certain peak periods of demand as reported by area hoteliers. Generally, these fall in the months of July, August, October, November and December. The second half of the year typically sees higher occupancies due to summer leisure demand and various large-scale conventions and exhibitions. Typically, the slowest months in the market are February and September. Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 6
However, since both corporate and leisure travellers are prominent demand contributors for the Hong Kong hotel market and their preferred travel seasons are complementary, monthly occupancy levels do not usually alter dramatically (except under extraordinary circumstances such as the breakout of H1N1 influenza in May and June 2009). The following chart illustrates the occupancy seasonality across different hotel room categories in 2010. Given that the Hong Kong hotel market is mature, occupancy seasonality does not tend to differ between years except under extraordinary circumstances. HOTEL AVERAGE MONTHLY OCCUPANCIES, 2010 Source: HKTB Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 7
The following chart illustrates the rate seasonality across different hotel room categories: HOTEL AVERAGE ROOM RATE SEASONALITY, 2010 The average rate commanded by hotels during the year also reflects the seasonality of the hotel market in Hong Kong, and follows a similar pattern across all hotel room categories. The summer season, which attracts more leisure visitors, has the lowest ADR, which is a reflection of the lower yield from the majority of leisure travellers when compared to corporate travellers. WEEKLY SEASONALITY TRENDS 2010 Market Mix Weekdays All Hotels (%) High Tariff A (%) High Tariff B (%) Medium Tariff (%) Business/Meeting 39 44 42 28 Tour Group 17 9 16 27 Others 44 47 42 45 Weekend Business/Meeting 31 37 37 21 Tour Group 21 14 19 31 Others 48 49 47 48 Occupancy Weekdays 83 79 85 83 Weekend 87 84 88 89 Source for both charts above: HKTB Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 8
As shown above, in a given week, hotel demand is slightly higher on weekends (an average of 4 percentage points). This trend is true across all categories of hotels, which is surprising for High Tariff A hotels, whose corporate demand tend to bolster weekday occupancies. However, in the most recent two years, there has been a notable increase in luxury leisure travellers, who have contributed to weekend occupancies for the city s High Tariff A hotels (which used to be lower than on weekdays). MARKET SEGMENTATION The following table illustrates the composition of room night demand across all tariff classes: MARKET SEGMENTATION, 2010 High Tariff A High Tariff B Medium Tariff Total Government Officials 0.1% 0.1% 0.9% 0.3% Business Travellers 41% 25% 17% 28% Individual Tourists 37% 46% 36% 40% Tour Groups 5% 12% 25% 13% In-House Meetings 4% 4% 2% 3% Other MICE 2% 2% 1% 2% Airline Crew 4% 2% 2% 3% Long Stay Guest 1% 5% 6% 4% Others 6% 6% 10% 7% Total 100% 100% 100% 100% Source: HKTB In total, individual tourists (or leisure FIT) accounted for the largest source of demand for the Hong Kong market in 2010 overall, at 40 percent, followed by business travellers, at 28 percent. However, the proportion of business travellers increase significantly as we move from Medium (only 17 percent of demand from business travellers) to High Tariff A hotels (41 percent). This highlights that a greater portion of corporate travellers in the market are looking for high end accommodation and are willing to pay rate premiums for superior facilities and service. Also, the growing percentages of MICE demand from Medium to High Tariff A reflect certain similarities in preference between these two groups and the corporate segment. Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 9
In terms of individual leisure guests, in the past, High Tariff A hotels generally captured the lowest percentage of demand from this segment amongst the three categories of properties. However, in the most recent two years, this figure has grown significantly due to two reasons; one, the corporate market is still in the process of recovery post the 2009 financial crisis; two, luxury leisure travellers, particularly those from Mainland China, have contributed significantly to individual leisure demand at the city s iconic luxury properties. In addition, not surprisingly, tour group demand is mostly limited to Medium Tariff and High Tariff B hotels given their rate sensitive nature. NATIONALITY SEGMENTATION The following table details the nationality mix of hotels across all tariff classes for 2010: HOTEL DEMAND NATIONALITY SEGMENTATION, 2010 High Tariff A High Tariff B Medium Tariff All Hotels Asia 54% 67% 73% 65% Mainland China 20 30 40 29 Hong Kong SAR 6 10 9 8 India 2 2 2 2 Indonesia 2 1 1 1 Japan 8 5 3 6 Malaysia 1 2 2 2 Philippines 1 2 3 2 Singapore 4 5 3 4 South Korea 2 3 2 2 Taiwan 4 4 3 4 Thailand 2 2 1 2 Other Asian 0.1 0 1 0.6 America 16% 10% 11% 12% Europe 18% 14% 12% 15% Oceania 6% 6% 4% 6% Others 3% 1.4% 1% 2% Airline Crew 3% 1.2% - 1.4% Source: HKTB Europeans and Americans in general account for a larger demand proportion as we move up tariff classes, whereas the patronage of Asian guests decreases in the same direction. The Mainland Chinese market is a true cornerstone of the local hotel industry, accounting for more than a quarter of total room night demand in Hong Kong. This is also the segment Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 10
that has shown the strongest growth in the recent years, thanks to increasingly relaxed entry requirements and the strength of the Chinese economy. The only Asian country with travellers that seem to prefer higher tariff class accommodations is the Japanese, which make up 8.8 percent of High Tariff A demand and only 4 percent of Medium Tariff demand. Visitors from Oceania, driven largely by Australians, have shown a shift towards High Tariff A hotels (from High Tariff B hotels), which could be attributed to the strengthening of the Australian Dollar to the Hong Kong Dollar. AVERAGE LENGTH OF STAY The average length of stay of guests in Hong Kong in 2010 averaged at approximately 2 to 2.5 nights. This figure has remained relatively stable over the past. However, a slow downward trend is observed. In general, tourists from source markets within closer proximity to Hong Kong have shorter lengths of stay. The following table summarises the average length of stay (ALOS) of tourists by source market: HONG KONG, ALOS BY SOURCE MARKET AND DEMAND SEGMENT, 2010 Region High Tariff A High Tariff B Medium Tariff Overall Domestic (HK Resident) 1.8 1.7 1.8 1.8 Mainland China 1.9 1.8 1.9 2.1 Non-Mainland China 2.4 2.3 2.4 2.3 Source: HKTB Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 11
NEW SUPPLY The following table details confirmed new supply from 2012 to 2014 with a room count greater than 100. This information is from the Supply Situation Report compiled by HKTB, as of December 2011. NEW HOTEL SUPPLY WITH ESTIMATED OPENING DATES Hotel Region Rms 2012 L hotel élan Kwun Tong 254 Rosedale Hotel Kowloon Tai Kok Tsui 435 IBIS Hong Kong Sheung Wan Western / Sheung Wan 550 Courtyard by Marriott Hotel Sha Tin 548 Dorsett Regency Tsuen Wan Kwai Chung 560 Best Western Hotel Harbour View Sheung Wan 460 Dorsett Regency Hotel Kwun Tong Kwun Tong 361 Discovery Bay Hotel & Conference Centre Lantau Island 325 Magnificent International Hotel Kowloon Tsim Sha Tsui 396 Kong Link Hotel Wan Chai 121 Express by Holiday Inn Hotel The Soho Sheung Wan 299 Austin Hotel Tsim Sha Tsui 100 Hotel Indigo Wan Chai 150 2013 Proposed Hotel (Era Success Limited) Kwun Tong 200 Proposed Hotel (Hillgold Limited) To Kwa Wan 161 Proposed Hotel (L & N Architects Limited) Tsim Sha Tsui 155 Proposed Hotel (Dragon Hill Properties Limited) North Point 351 The Kush Hotel Sheung Wan 199 Penta Kowloon San Po Kong 720 China Grand Hotel Sheung Wan 214 Proposed Hotel at Bonham Strand Sheung Wan 199 2014 Proposed Hotel (Tung Chun Company Limited) New Territories 380 Proposed Hotel (Golden Master Holdings Limited)Kwai Chung 596 Proposed Hotel (Lockia Development Limited) Aberdeen 168 Proposed Hotel (Wealth Will Investment Limited) Mong Kok 148 Proposed Hotel (China Resources) Wan Chai 120 Source: HKTB Due to limited availability of land and space constraints, the majority of new supplies on Hong Kong Island are located in the comparably under-developed Western district and to a lesser extent Wan Chai. These two areas proximity to Central and Admiralty grants promising demand potential in the next few years. Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 12
CONCLUSION In the past decade, the Hong Kong hotel industry has suffered through two significant downturns (2003 and 2009). Yet through these unfavourable circumstances, Hong Kong remained as one of the strongest markets in Asia. The following factors support a positive outlook on Hong Kong s hotel industry: Given the strong business links between the Pearl River Delta (PRD) region and Hong Kong, the governments of both regions will continue to promote a Pan-PRD regional co-operation focused on regional infrastructure development, cross-border transportation networks, and integration of economic fundamentals. Hong Kong will continue to benefit from the integration of the Pearl River Delta and Macau with itself to form a prominent commercial hub in southern China. On the other hand, Hong Kong s advantage as a highly accessible business hub may be compromised by increased competition with mainland cities that are implementing more direct regional flights. Ease of access and departure, coupled with competition from other Asian destinations, may diminish the need to stay overnight and continue the upward trend of same-day visits. The wealth of entertainment and leisure options continue to attract visitors, giving them compelling reasons to stay overnight. The emergence of Macau should also generate fringe benefits for Hong Kong, as it should boost the overall appeal of the immediate region. Demand from Mainland China will continue to be a cornerstone of hotel demand. The depreciating currency of certain source markets against the Hong Kong Dollar such as Europe may see inhibited growth in these demographics. In addition, hotels are still seeing decreasing number of arrivals from long-haul source markets, as global economies are still recovering from recession and there has been a significant slump in consumer confidence and expenditure in general, which has impacted long-haul arrivals into Hong Kong. Despite several factors that may suggest a cautious outlook on Hong Kong, its hotel market is still proving to be resilient. In the long run, Hong Kong will still remain one of the key performers in the Asia Pacific region; with its solid economic and financial base, and its connections to the Mainland, the hotel market is well-positioned for future growth. Copyright (c) 2012 Global Hospitality Resources, Inc., San Diego, CA USA All rights reserved. 13