China tourism drives opportunities at home and abroad

Hotel chains are expanding in China, but private real estate is more focused on what Chinese tourists do overseas.

China’s hospitality market is recovering strongly since the end of pandemic restrictions, but private real estate buyers are more likely to target Hong Kong than the Mainland.

Between early 2020 and late 2022, China went in and out of lockdown, stifling domestic travel, while inbound and outbound tourism ceased during the three-year ‘zero covid’ period. 

This put tremendous strain on the hospitality market in China, as well as its special administrative regions of Hong Kong and Macau, the two most popular destinations for Chinese tourists leaving the Mainland. However, domestic travel has recovered sharply since covid restrictions were abandoned in the Mainland in December, while both Hong Kong and Macau ended their restrictions by March. 

Domestic travel in China, which had not been impacted as much as overseas, nonetheless recovered sharply in early 2023. During the May Day holiday period, the nation’s hotels reported 90.9 percent occupancy, according to data company STR. 

Tao Zhou, head of JLL’s hotels and hospitality group for Greater China, says: “Chinese domestic tourists started traveling again this year, and we saw a huge increase in May, with travel to the main tourist destinations and new tier-one cities such as Hangzhou and Changsha. However, their spending was not as strong as expected.”

Meanwhile, Hong Kong and Macau, both of which rely on visitors from Mainland China, also saw a sharp recovery. Cuong Nguyen, head of Asia-Pacific investment research at PGIM Real Estate, the real estate investment arm of US insurer Prudential, says: “Hong Kong has seen tourist arrivals pick up quite strongly for the last six months or so and occupancy is at pre-covid levels, if not at 2015-16 levels. The recovery [of inbound tourism] in Mainland China is also quite positive, with 50 percent of pre-covid tourist arrivals expected this year, but it will take two to three years to get back to pre-covid levels.”

A range of options

The former Portuguese colony of Macau, which became the world’s biggest gaming destination, has also begun to recover, with casinos group Galaxy announcing in May that net revenues in Q1 had reached half of pre-pandemic levels, a similar performance to rival Sands China. However, the high rollers who brought massive profits have not returned after covid and a government crackdown on promoters who arranged trips for “VIP” gamblers. In future, Macau is expected to promote itself as more of a tourism and convention destination. 

Both domestic and international hotel brands have big plans for Mainland China. For example, 40 percent of Hyatt’s 110,000-room development pipeline is in China, Lodging Econometrics reports. There are a total of 472,396 rooms across 2,618 projects under construction in China. 

Meanwhile, The Ascott, the hospitality brand of Singaporean real estate investment manager CapitaLand Investment, plans to open a dozen hotels under various brands in China this year. 

The hotels sector in Asia-Pacific is gathering interest from private real estate investors, Nguyen says. “One of the key cyclical trends for us is the opportunity from the recovery of tourism. Hotels also look attractive because the replacement cost has risen due to rising construction costs in recent years and more recently the rise in financing costs.”

However, little of that interest has focused on Mainland China. A number of Asia-focused hotel real estate funds have been launched in recent months, such as the Paine Lake Asia Fund, which is raising $500 million to invest in Japan, Thailand and the Philippines. Most investors are targeting Australia, Japan and Southeast Asia.

Zhou explains: “Private equity real estate investors tend to be looking at cashflow, and hotels don’t stand up by that measure compared with other sectors. For example, there are often huge atriums which consume energy but do not generate revenue. China hotels are often not efficient: for example, a five-star hotel might have 170 square meters of gross floor area per room, whereas a similar hotel in the US might have 60 square meters of GFA per room.”

The market is also somewhat constricted due to the bid-offer spread, he says. “During the three years of the pandemic, a number of hotels suffered and some went bankrupt, so there are properties on the market available for sale. However buyers are looking for bargains and sellers are not that desperate so there is a huge gap between the seller and the buyer. We expect that to close over the next few years as both sides become more realistic.”

Most Chinese hotels are either owned by state-owned enterprises (SOE) or by private investors, Zhou says. The latter could provide a useful supply of assets for private equity groups prepared to engage in value enhancement.

He says: “China hotels need to upgrade soundproofing, bed comfort, water pressure as well as being more space efficient. Hotels offer the opportunity of repositioning, rebranding and renovation to realize the rejuvenation of these assets.”

The option to change

Hong Kong is attracting more interest, not least because, according to Savills, there are around 30 hotels being marketed by owners who believe the recent tourism recovery heralds a good time to sell. The first quarter saw the sale of the Kimberley Hotel in Kowloon for HK$3.4 billion ($435 million; €397 million) in one of the region’s largest deals. It was bought by “bad bank” Cinda Asset Management from receivers. 

However, Jack Tong, research director at Savills Hong Kong, says: “While buoyant hotel sentiment has induced around 30 vendors to test the market, the high cost of capital – now reaching 5-6 percent – remains a major stumbling block to a rebound in volumes.” 

While the city has seen some substantial hotel investments from private real estate investors – for example, the Gaw Capital-led $940 million purchase of the InterContinental Hong Kong in 2015 – more recent activity has come from groups buying hotels in order to convert them to residential. 

As hospitality struggled during the pandemic, Hong Kong’s demand for affordable housing remained unsatisfied, leading firms such as Angelo Gordon and PGIM Real Estate to acquire unloved hotels to convert to co-living or student accommodation. Indeed, the majority of Hong Kong hotel sales in the past couple of years have been budget hotels acquired – often at a discount – for conversion to residential.

For example, the $200 million joint venture between PGIM and rental housing specialist Weave Living last year bought the former Rosedale Hotel in Kowloon, which is being converted to a 435-unit co-living facility. 

Vincent Chew, executive director and portfolio manager of Asia core strategy at PGIM Real Estate, says: “There was a good window of opportunity for buying hospitality assets as the sector suffered through the covid period, but that is closing as hospitality and travel returns. However, the longer-term trend of this tenant demand for co-living is always going to be there.”

Looking ahead, the Hong Kong hotel market is expected to remain tight, with few bargains, yet at the same time the tourism market is still quite a way off a full recovery. Private real estate investors are likely to see more value in residential uses for hotels, especially those in need of refurbishment. 

Meanwhile in Mainland China, the growth of the hotels industry will continue, but with relatively little input from private real estate groups. Again, conversion of older budget hotels to rental residential is more likely to generate deals for private equity groups than investment in hotels as hotels. 

Awaiting the return of Chinese tourists

In 2019, Mainland Chinese tourists took 155 million outbound trips and spent a total of $255 billion during those vacations 

With the end of covid restrictions, hoteliers and retailers all over Asia-Pacific are hoping for China to pack its bags again.While domestic travel in Mainland China has recovered well, overseas travel has yet to recover, although tourists have begun to return to the Chinese special administrative regions of Hong Kong and Macau.

Chinese tourists accounted for 20-30 percent of total visitor numbers around the region and were the largest visitor segment for most markets prior to the pandemic. However, a recent survey by consultancy McKinsey & Company found that, while they were keen to travel, a number of factors were putting them off, such as higher costs and lingering fears about covid. 

The most popular destinations, aside from Hong Kong and Macau, are Australia and New Zealand, Southeast Asia – especially Thailand – and Japan. A number of private real estate investors have bought assets in Japan in advance of the return of Chinese tourists. Foreign buyers spent $1.7 billion on Japanese hotels in the 12 months to end-March. 

PGIM Real Estate cited tourism-related retail as one of its cyclical investment convictions in its 2023 Global Outlook report, with returning Chinese tourists as one of the major drivers of both retail and hotels. It said: “The high street retail and hospitality sectors are set to benefit from the acceleration of recovery momentum, as overseas traveling from Chinese tourists gradually normalizes. The opportunity is most interesting in Hong Kong and Osaka, as they are still in the early stages of the recovery cycle.”