Luxury hotels rise to meet strong economic growth (hktdc.com)


Opening soon in Central, Hong Kong, is the largest Four Seasons Hotel in the world

Hong Kong is witnessing the splashy opening of two new five-star hotels, part of a rapid build out of the sector to cater for a surge in mainland tourists and strong growth in business travellers.

The new Landmark Mandarin Oriental and the Four Seasons will offer the ultimate in high-end luxury in Hong Kong's Central district. But they are merely the headline acts in a wider story of how Hong Kong has responded with remarkable speed to a rising tide of mainland tourists following Beijing's easing of restrictions on individual travel.

According to Hong Kong Tourism Board data, the number of hotels in Hong Kong will jump from 101 with a total of 39,128 rooms at the end of 2004, to 131 hotels with 53,152 by end 2006.

"The rising number of hotels is attributable to the phenomenal spending power of the Chinese mainlanders coming to Hong Kong," said Tony Chan, a property analyst and executive director of Vigers Appraisal and Consulting.

Strong economic growth in Hong Kong and China in the past two years has fuelled a boom in hotel building, which requires a large commitment of capital and long payback times.

Capital investment surges


William Mackay, vice-president and general manager of Four Seasons Hotels and Resorts, says Hong Kong's hotel industry is in full swing

"The industry in Hong Kong was severely battered by the Asian financial crisis and then SARS. Now it is in the process of making up for lost time in capital investment," said William Mackay, vice-president and general manager of Four Seasons Hotels and Resorts.

"It has been 15 years since a major hotel was launched in Hong Kong. The industry has recovered extraordinarily fast."

Chinese people love to shop on their holidays - and a growing number have the desire and cash to do it in the myriad of classy malls that stud Hong Kong, providing a ready-made client-base for hoteliers.

Visitor arrivals in the city are projected to rise from 23 million this year to 27 million next year, with mainlanders accounting for much of the growth, said James Lu, executive director of the Hong Kong Hotels Association. But there has also been strong growth in business travellers coming to the city as the outsourcing-to-China story gathers pace. This is the segment which Four Seasons is mainly aiming at, said Mr Mackay.

"Hong Kong is a major worldwide city. I think there is a very bright future because of the extraordinary growth in China," he said.

Solid tourism drivers

There are some concerns that the rush of new hotels coming on stream could outpace the growth of visitor arrivals. That could put pressure on room charges and occupancy rates, which have been at a high 83 per cent across all classes of hotels in the city this year. But there are plenty of future tourism growth drivers around, ranging from the likely rise of Hong Kong as a hub for low cost airlines to nearby Macau's meteoric rise as a centre for leisure and gaming.

"There are so many good stories to tell," Mr Lu said.

Most recently there has been opening of Disneyland in September, which should spur the next leg of growth in mainland tourist arrivals. The individual visitors' scheme has been rapidly extended across the country since it was introduced two years ago but "there are still more provinces asking for their people to be allowed to come down here," said Mr Chan. "Their spending power is very high. They are looking for brand names, leather goods, jewellery and gold watches."

Visitors all need somewhere to stay the night and back in 2003, the government was worried that the hotel sector would be overwhelmed by the influx of mainland visitors. It even considered turning some government flats into guesthouses.

Private sector rallies

But, with government encouragement, there has been a remarkable response from the private sector. Many of the new hotels are located in non-prime areas in Kowloon and the New Territories, sometimes on sites which are converted from disused industrial premises, underlining Hong Kong's move up the value-added ladder from a manufacturing to a services economy.

The boom in building hotels which can take an average of 10 years to repay the capital invested has surprised some analysts.

"In terms of cashflow, investing in a hotel is not an ideal choice for a developer," Mr Chan said. "You can build and sell offices and residential units quickly but hotels lock up your upfront investment in land and building costs. Then you have to recoup your investment slowly through room charges, food and beverage and shopping."

Some of the new hotels are as a result of incentives from Hong Kong's Town Planning Board, which has encouraged developers to include hotels in residential housing projects or industrial site conversions.

Hong Kong's solid, business-friendly legal structure and government machinery have also encouraged the investment in hotels by keeping developers' options open in terms of selling the project rather than a lengthy wait for payback.

Innovative business planning

Some innovative business planning has gone into the Four Seasons and the Landmark Mandarin Oriental - both are trying the new concept of attaching a hotel to a shopping mall packed with luxury brand name stores. The proximity of the mall is expected to attract shopping-minded guests, while the five-star hotel, in turn, adds a touch of extra class and draws more shoppers to the mall.

The Landmark mall is charging rents of HK$200 to HK$400 (US$26 - $51) per square foot per month for retail space but, if hotel is a success, Mr Chan believes that could double.

"This is an experiment that will certainly work in the minds of the operators," he said.

The Four Seasons Hotel is also tapping into a new trend among upper-end hotel guests who are "blurring the lines" between business trips and vacations, added Mr Mackay. Guests on business are often adding some extra leisure time to their trips while holiday makers nowadays do not want to completely lose touch with the office.

The trend explains why the Four Seasons in Hong Kong has gone to the expense of including one of the most sophisticated urban spas in Asia, as well as equipping rooms with top-line communications facilities, said Mr Mackay.