These are Hong Kong’s three key hotel investment deals in H1 2024

The transactions had a total value of nearly USD200 million.

Real Capital Analytic’s (RCA) data shows Asia Pacific’s (APAC) H1 2024 hotel transactions surpassed USD 7 billion, up 21% YoY. 

According to a Colliers report, in Hong Kong, three noteworthy transactions reflected a total deal value of HKD 1.54 billion (c. USD 198 million), or 2.8% of APAC's total and roughly 15% of Hong Kong's foremost real estate investment transactions.

Here’s more from Colliers:

Private equity fund PGIM and Dash Living acquired The Sheung Wan by Ovolo for HKD 320 million. It is now the Dash Living on Queens. Hong Kong Metropolitan University acquired the newly developed 255-key Urbanwood Hung Hom Hotel for HKD 1 billion. It will be operated as student accommodation offering 400+ beds. Crystal Investment acquired The Hotel Ease Access in Lai Chi Kok to tap into the tourism recovery story while potentially targeting students.

In July, the 63-key Popway Hotel in Tsim Sha Tsui was sold for HKD 180 million, just HKD 7,331 per square foot. The hotel boasts a gross floor average of 24,551 sq. ft. and had an initial guidance of closer to HKD 320 million earlier in the year. The new owners will likely reposition the hotel to target students, given its proximity to The Hong Kong Polytechnic University. 

Investment sentiment is cautious, yet certain investors have ample dry powder. All eyes are on the US Federal Reserve as it appears to be heading towards rate cut.

High interest rates make it challenging for many owners and operators to service their debt obligations, resulting in downward pricing pressure. Some of that pricing pressure may ease slightly as and when interest rates trend down, although that may still take time to filter through.

The financial secretary has asked banks to provide more support for SMEs to stave off receivership sales, with the Hong Kong Monetary Authority establishing a task force to this end. However, certain hotel and non-hotel deals are heading in that direction as pressure to reduce the debt burden increases.

Investors ultimately do not want to be negatively geared – whereby the Net Operating Income (NOI) remains insufficient to cover the cost of debt. Deals are proving difficult for private equity funds to underwrite, where leverage is often critical to hitting their internal rate of return (IRR) and equity multiple targets. Access to debt from mainstream banks is essentially non-existent as they seek to clear some non-performing loans (NPLs). As a result, more investors and funds are looking at the distressed or credit space.

Cash-rich investors hold the cards in this market, as ample capital remains in the system to acquire rarely traded assets or take advantage of any pricing dislocation. In the current market decision-makers feel little pressure to deploy, so unless a deal makes sense, it may not transact. Increasing operational costs have tightened margins and affected underwriting and return projections, while impacting operators’ bottom-line.