Global property markets have cooled this year. Leasing activity and transaction volumes have slowed as investors turn cautious and demand from occupiers weakens.

However, in Hong Kong’s hotel market, a modest decline in occupancy and room rates in the first half of the year has exploded into a full-blown crisis as the mass anti-government protests that erupted in June descend into violence.

The city’s tourism industry, a pillar of the economy, is experiencing its sharpest downturn since the Sars epidemic in 2003. A 5 per cent year-on-year drop in tourist arrivals in July rapidly accelerated to a 40 per cent plunge in August, the steepest decline since May 2003, according to data from Bloomberg.

What is more, the number of tour groups from the mainland – which usually account for almost 80 per cent of arrivals – plummeted 63 per cent year on year in August, and fell 90 per cent in the first 10 days of September.

At a time when the Asia-Pacific and Middle East are driving the growth in international tourism, a trend fuelled by Chinese outbound travel, Hong Kong has fallen dramatically out of favour. The city’s own government, which has been eager – too eager, in fact – to highlight the negative impact of the unrest on the economy, has acknowledged the scale of the damage.

In a blog post last week, Financial Secretary Paul Chan Mo-po said the protests had severely tarnished Hong Kong’s “image as a safe city and an international commercial, trade, aviation and financial hub”.

He was even more blunt about the consequences for the tourism industry, saying that “hotels in some locations had seen occupancy rates drop to about half, while room rates plunged 40 to 70 per cent”.

The speed and severity of the deterioration in the performance of Hong Kong’s hotel market is staggering. Last year, Hong Kong showed the strongest growth in revenue per available room, or “RevPAR” – one of the hotel industry’s main performance metrics – in the Asia-Pacific, according to data from London-based consultancy Whitebridge Hospitality.

He was even more blunt about the consequences for the tourism industry, saying that “hotels in some locations had seen occupancy rates drop to about half, while room rates plunged 40 to 70 per cent”.

The speed and severity of the deterioration in the performance of Hong Kong’s hotel market is staggering. Last year, Hong Kong showed the strongest growth in revenue per available room, or “RevPAR” – one of the hotel industry’s main performance metrics – in the Asia-Pacific, according to data from London-based consultancy Whitebridge Hospitality.

Indeed, even in the first half of this year, RevPAR was still growing in certain segments of Hong Kong’s hotel market, underpinned by a citywide occupancy rate of 90 per cent, more or less the level at which it has stood for the past few years, according to data from real estate firm CBRE.

Despite the escalation of the trade war and the continued weakness of China’s economy, Hong Kong was on track to welcome a record
number of visitors this year.

Nearly 35 million people visited the city in the first six months, a year-on-year increase of 14 per cent. Arrivals from the mainland stood at 27.6 million, representing a year-on-year rise of more than 16 per cent, with Chinese tourists driving the growth in overnight stays, data from CBRE shows.

Yet, in the space of a few months, these strong fundamentals have had the rug pulled out from under them.

The collapse in hotel bookings, which is mostly attributable to the steep fall in arrivals from the mainland, led to a 13 per cent year-on-year decline in RevPAR in July alone, data from CBRE shows. The drop in revenue is likely to have accelerated since then.

As reported in the Post last Friday, Sun Hung Kai Properties, Hong Kong’s biggest developer, has seen occupancy rates at its hotels plunge
by an average of 30 to 40 per cent since the mass protests began.

The city’s hotel industry is now a proxy for the perceived stability of Asia’s leading financial centre, with the number of mainland tourists – who fear they could be targeted by hard-core protesters – constituting a key gauge of the performance of the sector and the wider economy.

The stakes are high, particularly given the growing supply of new rooms this year and next. Last year, Hong Kong’s hotel sector recorded the second-highest “average daily rate” (another key performance metric) in the Asia-Pacific, after Singapore. In Greater China, Hong Kong boasted the highest number of overnight visitors, followed by Macau and Taipei.

The only question now is how much more damage is likely to be inflicted on Hong Kong’s hotel market. With the protests turning increasingly violent, and the acuteness of the social and economic problems that have contributed to the unrest becoming ever more apparent, the performance of the industry is likely to continue to deteriorate.

Global real estate markets may be slowing, but Hong Kong’s hotel sector has gone into free fall.

* Nicholas Spiro is a partner at Lauressa Advisory