I was about to relocate to Hong Kong when the SARS epidemic hit Asia. It was 2003, and I did not have much of a sense of the city, having only been there a couple of times prior. One of my strongest memories is walking to our office in the morning rush hour, among thousands of people shoulder-to-shoulder, all wearing a face mask.
It was a weird experience that did nothing to allay nerves about my imminent move.
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Damien Little |
This time marked the scariest period faced by the Hong Kong hotel market in recent history. Occupancy performance across the market dropped to below 20 percent and in many cases to single digits.
However, the Hong Kong hotel market is one of the strongest and most consistent performers in Asia and the city itself one of the most dynamic. The city’s response to the SARS disaster speaks volumes about the locals’ ability to respond to crisis and adapt to conditions – the same qualities that are key to Hong Kong being one of the region’s true financial powerhouses.
Like all global cities, Hong Kong is a market that all major hotel companies seek to enter and is viewed as a very strategic city in which to plant a flag. However, like most global cities, such opportunities are few and far between due to Hong Kong’s lack of land availability. In addition to being one of the world’s most densely populated cities with very high land costs, Hong Kong is dominated by a very small number of large-scale local developers.
These developers are extremely savvy. What the market has witnessed over time is a very strong flexibility in changing a building’s use when other uses present a higher return opportunity. This may explain why some very prominent hotels in the city including the Hilton, Furama, Hyatt Regency and most recently the Ritz-Carlton have given way to office or retail developments. The Hilton disappeared in 1995 close to the peak of the hotel market and as a brand has yet to make a return to the market.
Such high barriers to entry have created a stable operating environment for the hotel market. From 1991 to 2007, occupancy performance in the city has only dropped below 80 percent for six of the 17 years and only below 75 percent on one occasion: 2003.
The zenith of occupancy performance during this time occurred in 1996, when occupancy hit 88 percent. That year also saw the peak of room rate performance with a market-wide average of HKD 1,218 (US$157). It was bettered in 1997 at HKD 1,225 (US$158), but occupancy dropped significantly in 1997 to 76 percent with the onslaught of the Asian financial crisis. In 1998, ADR took a big hit and recorded a massive decline of more than 40 percent falling to HKD 719 (about US$93). As such, RevPAR peaked in 1996 at HKD 1,072 (US$138) and the market has yet to return to this level.
The Hong Kong hotel and tourism industry’s response to the Asian financial crisis is a reflection of the city’s ability to continually readapt to the situation and emerge stronger for it. A good example of this is the increased efficiency achieved by the industry with a reduction in the number of staff per room across all hotel categories without a decline in service standards.
An analysis of hotel market segmentation prior to the financial crisis and after the market recovery presents a very different picture. In 1996, at the peak of the hotel market, Japanese guests accounted for 24 percent of total room nights on average across the Hong Kong hotel market. By 1999, toward the end of the crisis, this had fallen dramatically to 12 percent. In regard to the top-tier of hotels exclusively, visitors from Japan declined from 34 percent of total room night demand in 1996 to 19 percent of demand by 1999.The Japanese market represented a high-yielding demand source for the Hong Kong hotel industry, and its rapid decline became one of the key challenges for the industry at this time.
With transfer of its sovereignty to China in 1997, Hong Kong turned to Beijing for help. Changes in tourism policies resulted in a significant growth in the number of mainland arrivals into Hong Kong. This resulted in mainland China accounting for 18 percent of total room nights across the Hong Kong hotel market in 1999, up from 10 percent in 1996. Again, looking at the top-tier market, in 1996 guests from the mainland accounted for only 3 percent of room nights and by 1999 had increased to 7 percent.
While this strategy did not necessarily do much for the average room rate in the market, it did at least shore up occupancy performance and allow the industry to get back on a healthy footing.
By 2003, mainland China accounted for a significant 29 percent of total room night demand on average across the Hong Kong hotel industry and 12 percent of room nights for the top-tier market. In 2003, after SARS decimated the Hong Kong hotel industry, the Chinese government again set in place a range of policies making it easier for mainland residents to visit Hong Kong. Policies aimed at encouraging individual travel to Hong Kong gave the market a significant boost. Wealthy individuals from the mainland flocked to the city and had a positive impact on average room rates. Such policy changes clearly cemented in place the mainland as Hong Kong’s dominant source market.
In 2008, market performance continues to be strong and by year-to-date October, a 6-percent increase in RevPAR had been recorded. While occupancy was affected by the Olympics and changes to the visa policy for visitors to mainland China, hotels across the market again recorded solid room rate gains.
As the world is in the midst of trying to understand how deep and long the impact will be of the current financial crisis, I am confident the Hong Kong hotel industry has the strength and ability to adapt and see it emerge in a healthy state and with a bright future.
Note: Data for this article has been sourced from the Hong Kong Hotels Association and from the Hong Kong Hotel Industry Study published by the Hong Kong Tourism Board and Horwath HTL.
Damien Little is the Director of Horwath HTL's Beijing office and has previously been based in both the Singapore and Hong Kong offices of Horwath HTL.