By Clare Jim
HONG KONG (Reuters) - Hong Kong's distinction as a shopper's paradise used to draw tens of thousands of tourists to the China-ruled city every month, but a year of political unrest and the coronavirus crisis are driving some hotels to the brink of financial ruin.
Hotel occupancy rates in the recession-hit economy have plummeted since protesters took to the streets last June, angry with Beijing's perceived tightening grip over the city. The sometimes violent clashes with police scared away tourists, especially high-spending Chinese and business visitors put off by the political tensions.
The coronavirus outbreak was the final straw for Hong Kong's battered hotel industry as room revenues took a hit from travel curbs and flight cancellations
"Nine-and-a-half hotels out of 10 are losing money now because there're no more tourists and they need to solely rely on domestic demand, so they're just hanging in there," said property consultancy CBRE Executive Director Reeves Yan.
The industry posted an overall occupancy rate of 29% in February compared with 91% a year earlier, the Hong Kong Tourism Board said, as visitors to the financial hub plunged 98% for the month.
Now, with much of the border closed with mainland China and travel restrictions to contain the spread of coronavirus extended, some hotels are shutting their doors for good or taking time out to renovate.
Three and four-star hotels, many run by domestic investors including Casa Deluxe Hotel, Butterfly on Morrison and two branches of Empire Hotels, have closed down in the past three months.
The InterContinental Hotel overlooking Hong Kong harbour closed its doors last week to undergo a two-year facelift that will see it lay off around 500 people. Many 5-star international hotels recorded single-digit occupancy rates in February and March, but they have more cash reserves to keep them going than smaller hotels, industry participants said.
Boutique and budget hotels, however, need to reinvent themselves to survive, including by offering long-term stays, renovating or even converting into offices, property consultants said.
ASSET SALES ON RISE
The volume of commercial property transactions fell to new lows in the first quarter, real estate data showed. While there were no hotel transactions, realtor Cushman & Wakefield expects that to change from the second quarter.
"Sellers are now willing to lower prices by another 10% following an already 10% cut after the social incident (protests), and buyers are coming back to the market to look for bargains on emerging signs that the epidemic is cooling down," said Cushman & Wakefield Executive Director Tom Ko.
CBRE says there are around a dozen hotel assets for sale, not unusually high.
But negotiations could drag on, other realtors said, as buyers are asking for prices to be halved while sellers are not distressed enough to dump assets at a loss.
"Banks rarely recall hotel assets, because it's very hard to sell," Knight Frank executive director Thomas Lam said.
Potential buyers for hotel assets are mostly local private equity firms, developers and "co-living" operators.
Co-living operators will turn the properties into homes for shared living, where residents have their own rooms but share common areas such as the living room and kitchen. The 37-room Paris Hotel near a busy Kowloon shopping area gave up its lease, which was taken up by co-living operator LINKo Living in April at HK$230,000 per month.
Co-living investments typically offer yields of around 4% to 5%, more than other mainstream real estate investments, CBRE's Yan said.
A major player, Warburg Pincus-backed Weave which has two premises in Hong Kong and two more opening this year, said it's sticking by its expansion target to have 3,000 beds in the next five to seven years, up from 700 now, and it's looking at assets including boutique and budget hotels.
Weave's occupancy rate in the first quarter was 85%, down slightly from 95% in January and at the end of last year. Currently 50% of its residents are expatriates.
"When the market is not good we benefit from people who want flexibility, from people who've become a bit more price conscious," said Sachin Doshi, Weave founder and CEO.
Unlike traditional residential leases that require at least a one-year commitment, co-living offers the flexibility of shorter-term stays.
Oootopia, owned by Hong Kong-based Arch Capital and with three premises in the city all converted from 3-star hotels, said it won't rule out buying if it sees a bargain, although it will be prudent.
"You would want to observe more and whether prices will get more attractive. This is not the moment for fast expansion."
CBRE's Yan said many landlords have holding power and are hopeful things will improve after two to three months.
"Would they sell at a loss? We haven't seen that yet...I see many landlords and operators are still positive on the Hong Kong outlook."