Oversupply and low demand to see RevPAR drop 15-20% in Hong Kong
Tuesday, December 23, 2008: In a new analysis of the Hong Kong hotel sector, an industry analyst has predicted that Hong Kong’s hotels and properties are set to see RevPAR drop between 15-20% of current rates.
With the recent launch of Hong Kong Market Outlook, by Daniel J. Voellm, HVS Global Hospitality Services Director, the report tables a scene of potential oversupply of rooms in Hong Kong as demand continues to dry up from key source markets.
“If the new supply materialises as presented... the Hong Kong room count should reach approximately 65,000 by 2012. This increase in a time of slowing economic activity and demand can exacerbate the negative impact on hotel performance,” the report says.
“A marketwide downward correction in RevPAR of 15-20% is not unlikely assuming a bottoming of the [economic] downturn in two years’ time.
“In the last trough of the market in 2002/2003, average rate declined by double-digit figures over the two-year period. However, the period from 1997 to 2001 did not see a nearly as strong growth in average rate. This leaves room for speculation about a correction in the marketwide average rate,” the report adds.
The report summarizes the key areas of growth for Hong Kong’s hospitality sector, showing that 2009 will see the most active growth in the North Point area, with the 828-room Harbour Grand Hong Kong opening, while 2011 will see massive growth in the Kowloon area.
Comparing this data to figures seen in the early 1990s, when Hong Kong was seeing a slowing GDP and strong inflation, Mr Voellm finds that hotel occupancy levels dropped to the low 70% range.
He adds that, “the closing of a number of hotels during the same period compensated for any slowing demand”, and as such was predicting that current market conditions may need to act in a similar fashion to “limit an oversupply situation”.
Additionally, Mr Voellm’s report warns that one of the major issues yet to be faced is refinancing in 2009 and 2010, as cash becomes harder to come by, loan to value ratios will lower.
“The worst is yet to come, cashflows and profitability in 2009 and 2010 are likely to contract,” the report concludes.
In 2007, 17.2 million overnight visitors spent nearly HK$87.9 billion in Hong Kong, with a total of 56,600 rooms available, according to data from the Hong Kong Tourism Board.