SINGAPORE and HENDERSONVILLE, Tennessee—2017 was a good year for the Hong Kong hotel industry.

The region ended the year with 224 hotels open with just under 70,000 total rooms and recorded strong absolute occupancy of 88.5% (meaning, on average, almost nine out of 10 rooms were occupied each night). After four years of rate declines, in 2017 Hong Kong hotels finally saw an increase in average daily rate (+2.6% to 1,381.26 Hong Kong dollars ($176.27). Revenue per available room increased 5.5% during the year, driven almost equally by increases in occupancy and ADR.

The Hong Kong tourism industry has had some rough times since the implementation of the “one-trip-per-week” measure for Shenzhen residents in April 2015. Not only did Hong Kong see overall F&B spend decrease with mainland China arrivals limited on a frequent basis, but room demand also dropped 1.4% in 2015. For the first time since then, room revenue increased in 2017. 

The drop in revenue affected ADR. Only in the later part of 2017—during peak meetings and events season in the fourth quarter—did the market ADR exceed the 2015 results.

The continued high occupancies are driven by very strong weekend demand. In 2017, hoteliers reported that weekend occupancies had actually surpassed 90%, in essence selling out every weekend. 

At the same time, operators were able to capitalize on this high weekend occupancy by demanding an ADR premium of more than HK$150 ($19.14) compared to weekday nights. Weekend ADR in 2017 was 1,462.79 Hong Kong dollars ($186.67).

In addition, we’ve seen the yielding capability of Hong Kong hotels improve over time. The graph below shows roomnights in which hotel occupancy in the city exceeded 95% between 2015 and 2017. Not only do we see that there are more roomnights with compression, moving from 31 to 52 in this time period, but the ADR premium during these nights—compared to roomnights with occupancy below 80%—improved from an average of 32% to 43%.

Given the volatile performance in the market lately, the development community seems to have been observing Hong Kong’s market conditions rather than acting quickly to capitalize on the very high occupancies.

That said, some developers were not deterred and broke ground during the turmoil of 2015 to open in today’s more favorable environment. Hong Kong reported supply growth at 1.6% in 2015 and 1.4% in 2016, but then the pace doubled in 2017 to 2.8%.

According to STR’s pipeline data, at the end of 2017, Hong Kong’s pipeline contained slightly more than 5,000 rooms in 12 hotels in all phases of development; roughly half of them are currently in construction.

Those 2,851 rooms in construction represent a potential supply growth of 4.1% if they all opened at the same time. Luckily, open dates are more spaced out, but nonetheless it is clear from our data that developers are very attracted to this market.

STR expects that the healthy increase in Hong Kong room demand will continue for the coming years. Supply growth will be well over 2% in the next few years, but occupancy growth should remain positive, albeit at a slowing pace.

ADR growth will make up the majority of the RevPAR increase, and we expect room rates to increase just over 3% for the next few years. This then will drive RevPAR growth to over 3% in 2018 and 2019. Our forecast, just like the Hong Kong’s economy, is heavily dependent on the continued influx of people coming over from mainland China.

Hong Kong will soon see some infrastructure developments come to fruition that will ease the existing entry points by land into the region. For example, the cross-border and sea-crossing Hong Kong-Zhuhai-Macau Bridge, which is currently expected to start services by Q2 2018, will be 55 kilometers long and make the drive between Hong Kong and Zhuhai take less than an hour. Hong Kong will also benefit from the completion of the Guangzhou-Shenzhen-Hong Kong Express Rail Link and Liantang-Heung Yuen Wai Boundary Control Point projects.

Of course, any macro policy change that affects visitor flow will materially affect the Hong Kong hotel industry. But given what we know today, we expect that the Hong Kong hoteliers can expect steady growth in the quarters ahead.

This article represents an interpretation of data collected by STR, parent company of HNN. Please feel free to comment or contact an editor with any questions or concerns.