Jones Lang LaSalle Hotels releases New Hotel Research on Hong Kong and Macau Hotel Sector

Latest research by Jones Lang LaSalle Hotels (JLL) shows that Hong Kong five-star hotels remain the rate leaders in Asia while Macau, currently undergoing the most significant transformation in the region into "Asia's Las Vegas", will be home to a new generation of world-class hotels in a few years. Notwithstanding the significant new hotel room addition in the pipeline, JLL believes both Special Administrative Regions have a compelling though different mix of elements that will help the hotel markets to sustain growth in the medium term.

Ms Chee Hok Yean, Executive Vice President of Jones Lang LaSalle Hotels in Asia explained the reasons for JLL's optimism. "On a macro level, Hong Kong's tourism and hotel industries are well supported by the SAR's position as one of Asia's premier business and financial centres, international airline hub and gateway to the Pan-Pearl River Delta region. International arrivals, which reached a record high in 2006, are projected to increase further, providing a growing demand base from both leisure and corporate travellers," Ms. Chee said.

"In anticipation of the growth in tourist arrivals the Hong Kong Tourism Board is rolling out its tourism master plan which will reshape the city's tourism landscape. The hotel industry too, is responding with more innovative product concepts from boutique hotels to affordable hotels for the value-conscious traveller. Collectively, these developments will increase the depth and breadth of the Hong Kong tourism and hotel industries," added Ms Chee.

Hong Kong's hotel sector sterling performance in 2006 is evidence that the city is doing something right. Despite the total net addition of around 8,000 rooms and strong double-digit growth in room rates over the past two years, hotels in Hong Kong have consistently achieved high average occupancy levels in excess of 80% in 2005 and 2006.

"Five-star hotels in Hong Kong are the most expensive in the region and yet leisure and business travellers keep coming. The MICE segment, which is an important source of corporate demand, has continued to expand in tandem with Hong Kong's growing reputation as a key MICE destination in Asia. Coupled with limited supply increase in the five-star sector, average daily rates and occupancy levels at five-star hotels reached their highest levels in ten years in 2006," pointed out Ms. Chee.

In the first four months of 2007, room rates of five-star hotels continued to rise relative to the same period last year, with occupancy slightly lower but still in the high-70%. JLL expects room rates to grow by 10-15% annually in the immediate term while hotel occupancy levels are expected to register moderate increase within five percentage points.

In the meantime the broader tourism and hotel market is benefiting from the wave of Chinese tourists landing on Hong Kong's shores. Mainland China was the city's top source market in 2006 and will remain an important market for Hong Kong, boosted by further extensions of the Individual Visit Scheme (IVS) to more cities in Mainland China.

Macau, the only place within the People's Republic of China where casinos are legal, is also benefiting from the growing number of Chinese outbound travellers. With the progressive makeover of this once laid-back city into a multi-faceted destination, the prospects of Macau tourism and hotel industry are looking bright.

"Once associated with the image of a Chinese gambling enclave, the new Macau will feature new tourist attractions, improved transport infrastructure, large-scale entertainment and gaming developments, new MICE facilities and world-class accommodations. These new developments are rapidly changing the dynamics of the local tourism and hotel industry, and form a solid foundation for the medium to long-term sustainability of the tourism industry," Ms. Chee said.

Like Hong Kong, international arrivals to Macau are projected to increase further. "Demand for hotel accommodation is expected to be strong on the assumption that more visitors will stay overnight in Macau and that more will extend their length of stay, given the changes in tourism product offering. This would form a demand base for the anticipated surge in room supply over the next few years," added Ms Chee.

According to JLL's research, there are approximately 37,600 new hotel rooms under construction in Macau or being planned from 2007 onwards. If all of these projects materialise Macau's room inventory will triple the present stock. Over the next three years, tourists to Macau will be spoilt for choice; international-standard hotels that will enter the Macau market include the Venetian Macau, Shangri-La, Traders Hotel, Four Seasons Hotel, Sheraton, St. Regis, Hilton, Conrad, InterContinental, Holiday Inn, Sofitel, Mandarin Oriental, Marriott and Ritz Carlton.

Said Ms Chee, "Taking into account the quality and quantity of the upcoming supply we expect average hotel occupancy levels to stay within the 70-80% band over the next few years while room rates are expected to reach new benchmark levels."

Average room rates in Macau have been rising since 2003 and the first four months of 2007 indicate a positive momentum in the market, with both occupancy and room rates higher than the same period last year.

Hong Kong and Macau remain Very Attractive to Hotel Investors

The strong trading environment, coupled with strong economies and tourism markets, makes Hong Kong and Macau very attractive investment destinations. "Hong Kong is a perennial favourite with regional and international investors given its strategic location, sound economic fundamentals as well as open and transparent market and regulatory framework. Yet the volume of hotel transactions have been low as there has been limited number of investment opportunities available as owners prefer to maintain ownership over their assets in order to benefit from the expected positive hotel trading momentum," said Mr Tom Oakden, JLL's Senior Vice President, Investment Sales in Asia.

Given the strong weight of demand for Hong Kong hotel assets investor interest is being fuelled by a range of buyers including international investment funds, hotel owner-operators as well as high net worth individuals.

"With assets continued to be tightly held by owners in the foreseeable future and the anticipated strength in the hotel market, those assets that are marketed for sale are expected to attract strong interest and aggressive pricing from local, regional and international investors alike," Mr Oakden added.

The Macau hotel investment market, on the other hand, registered the highest level of investment activity on record in 2006. JLL's research revealed that the preferred investment strategy in Macau is principally development-led, given the current limitations on existing room stock in the market. About 70% of the SAR's 2006 transaction volume comprised land projects that featured mixed-use schemes with integrated hotel, casino and entertainment components.

Mr Oakden said, "With existing owners likely to retain their hotel assets in view of the positive sentiment for the hotel market and with over 20 tourism projects currently planned and under construction with a total commitment of more than US$20 billion land acquisitions and development projects are expected to dominate the investment landscape in 2007."

While investor interest during 2006 originated in most part from public companies investing out of Hong Kong, the market also saw cross-border investment activity.

"As Macau's imprint on the world stage continues to gain prominence investor interest is expected to diversify and further inflow of capital is anticipated from markets such as the US, whilst the SAR's primary investment feeder markets of Hong Kong and Mainland China will remain active," Mr. Oakden added.

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