What’s Next for Hong Kong’s Hospitality?
Despite an impressive number of 25 million overnight visitors in 2016, Hong Kong remains one of the smallest Airbnb markets among the world’s major cities. In the decade that this biggest home-sharing platform has been around, cities like London and New York managed to build up a database of almost 50,000 rooms to rent, while in Hong Kong the official figure stands at just 6,400 listings. Given that Hong Kong’s homeowners are facing one of the highest rent prices in the world and that the current tourist flows to the city are at a long-time low after the ‘Occupy Central’ protests in 2015 — we are looking at a space where home-sharing should fit right in and solve market imbalances. Yet, for some reason, it’s not.
We decided to analyse what is happening in Hong Kong’s hospitality sector and what are some of the early trends that are bound to shake things up in 2017.
1. The Airbnb Problem
As the official definition states, a hotel or guesthouse in Hong Kong must be a licensed premise, where sleeping accommodation is provided to those who are willing and able to compensate the owner. This is rather standard around the world, however the “licence” is what varies from city to city and can ultimately make or break its Airbnb potential.
Especially with the emergence of startups with innovative business models, some of the more friendly governments around the world are open to talk to the main stakeholders and even adjust the all too rigid laws to create exceptions where needed. In Hong Kong, that’s not the case yet. According to the current hotel licensing rules, a chain like Hilton and an individual host on Airbnb both require the same licence, which starts from US$600 per year.
An additional factor that compounds this problem is that due to the paucity of land in Hong Kong, an average 3-bedroom flat can be priced at more than U$2 million and can take at least 10 years to recover using income earned through Airbnb. These circumstances not only make it almost impossible for an average Joe to join the platform, but also contribute to the emergence of what is probably one of the very first instances of oligarchy in the sharing economy. According to Insideairbnb.com, 60.5% of the 6,124 listings were from hosts with more than one room or property listed on the site. This means, there is a small, wealthy group of property owners or speculators, who happen to own empty flats and illegally use the platform to reap substantial profits until they find a long-term buyer. In fact, the “top host” rented out as many as 31 flats in one building.
This situation is disappointing for an outside observer, if we consider the potential that a properly managed and integrated homestay sector could offer to solve Hong Kong’s current problems.
First of all, after years of positive growth in the tourism industry, the recent drop in visitors caused by the political protests will impact a lot of businesses that rely heavily on income earned from tourism. Secondly, the traditional hotels are reaching near-full occupancy rates and room supply is decreasing. This drives the prices up and may discourage even more travellers from putting Hong Kong on their itineraries. Thirdly, a study conducted by Airbnb found that travellers who stayed with hosts rather than in hotels typically spent double the time in their destination. It also means that they injected up to twice as much money into the country’s economy during their stay. It’s a win-win, as 48% of the hosts reported that the income earned from Airbnb actively contributed to their daily expenses like rent and groceries and improved the overall standard of living.
Airbnb study found that travellers who stayed with local hosts rather than hotels, usually stayed in the city 2 times longer and injected up to 2 times more money into the local economy.
Clearly, creating a new category of hotel licences, adjusted to the wallets of regular citizens, would make it possible for Hongkongers to list their space online, put downward pressure on the room prices by increasing supply and make the city more attractive for tourists again. Especially for the most desired type — the millennial, who considers travel as their top priority as well as the highest spending category.
The emergence of the sharing economy has also created a market for new types of businesses that provide services specifically for Airbnb hosts, like profit management or apartment servicing. One of the biggest players is GuestReady, which recently raised U$750,000 in seed funding to strengthen their presence in Hong Kong, Singapore, Kuala Lumpur, London and Paris.
We asked their Hong Kong Managing Director, Lou Chan, whether they were worried about the problematic status of Airbnb hosts in Hong Kong and possible backlash against the monopolistic attempts. “The alternative lodging wave is here to stay — he says confidently. “If hoteliers do not work with the government to make it attractive again to travel to Hong Kong and invest into more personalised experiences or more channels, everyone will suffer from deadweight loss.”
2. Are hotels in trouble?
Another recent trend that we have been seeing in Hong Kong is a decline in the revenues of the hotel industry, as a result of the 2.5% drop in the overall tourist arrivals last year. Specifically, the number of visitors from Mainland China — who make up almost half of all tourists and are mainly high-value, overnight business guests — dropped by 3% compared to all-time high from 2015. The Chinese customer is a particularly bad one to lose. They are reported to be the most frequent outbound travellers in the region, with around 50% of them being likely to book 3 or 4-star hotels when they travel abroad. Hong Kong’s hoteliers should find a way to refresh their value proposition - and do it quickly.
Raphael Cohen, the Co-Founder and CSO of HotelQuickly, a mobile booking platform that lists last-minute hotel deals in the APAC region, has some thoughts about what hotels should be doing to up the ante. “Bigger players should emphasise their loyalty programmes and benefits for the customers for booking directly through their website. For smaller sized hotels, driving direct sales is a lot more challenging and costly.” According to his prediction, collaborating with online and mobile travel agents should be a no-brainer, especially for small and medium-sized hotels, in order to reduce sales costs. After all, the fee for getting listed on a booking aggregator is not higher than the savings that a hotel can make by using the OTAs’ channels and SEO ranking.
That is not to say that there has not been innovation in hospitality as a response to the alternative lodgings revolution. The two, major ones, have been M&As and mobile technology. Hyatt recently invested $15M in onefinestay, which is the main competitor to Airbnb, following the well known adage “Keep your friends close, your enemies closer”. Marriott is planning to consolidate its Marriott Rewards, Starwood Preferred Guest and Ritz-Carlton Rewards loyalty schemes under one program in order to drive back sales to direct channels by enabling their best customers to book rooms in any of the 4,400+ hotels at the lowest rate. It also aims to update their mobile app The Perfect Travel Companion with AI technology that can predict guests’ needs and enable them real-time messaging through beacons placed around the hotel.
In Hong Kong , hospitality innovation is gaining traction among entrepreneurs especially with the global success of the local startup TinkLabs. Their travelphone called handy is a smartphone that comes with a hotel room and allows guests to make free calls and use mobile data without the need to pay for roaming. With Starwood, Accor and Shangri-La among their early adopters, TinkLabs recently raised US$125,000 to expand beyond Asia and has an estimated value of around US$500 million.
Another one is stayplease, founded by a group of mavericks from the traditional hospitality industry, who created a chat service for hotel guests. Inspired by the profile of a modern, connected and tech-savvy customer, this chat can be used by guests to communicate with the staff, order services or report complaints using their own mobile phones. Solutions like these are more incremental than disruptive, but perhaps this is why they enjoyed early adoption by the hoteliers, who can already start offering small, personalised services and save some time to think up a more long-term customer experience strategy.
The government is also trying to reverse the downturn in the industry, as tourism is officially one of the four pillars of Hong Kong’s economy. In a move to subsidise operational costs and enhance the city’s attractiveness and competitiveness, the Financial Secretary announced an investment of US$ 240 million into big-scale events and cultural marketing in order to restore the tourism numbers to the pre-2015 levels.
But no matter how capital-intensive, this plan might not suffice to boost the hotel revenues, if they do not try to look outside the box to refresh the end-to-end experience that guests have with their brand. The adventure-seeking millennial travellers might flock back to Hong Kong, prompted by effective advertisements, but will generic hotel chains be their first pick?
3. The rise of serviced apartments
Yet, it’s not all that bad. Markets tend to balance themselves and where the two extremes of the accommodation spectrum are struggling, there is a growing player in the abandoned middle, who is gaining momentum in its niche.
Meet serviced apartments.
This increasingly popular type of accommodation effectively fills the gap between short-term home rentals and generic hotel chains. What started out with focus on the corporate market and the business traveller is now making its way into the commercial travel sector and delivering a more luxurious and exclusive homestay experience for visitors.
What exactly is the value proposition of serviced apartments? Fast Wi-Fi, modern amenities, catering and cleaning services as well as gym membership — all located within the main business areas of Hong Kong. As a city with high numbers of expats and increasing inflow of foreign entrepreneurs, the market of serviced apartment has seen growth of 25% over the past 10 years in the Asia-Pacific region.
“The emergence of the alternative lodging industry made the market more aware and competitive. Although we do not find direct competition from Airbnb, it has benefited the end-users with various options. The guest are more educated in their options and so they value our good product more” — says Pilar Morais, the CEO at CHI Residences, one of the leading serviced apartments providers in Hong Kong.
A teaser of their new rooms, scheduled to open in Wan Chai this summer, proves that as medium-sized players, they can respond to the market shifts faster than the siloed hotels and by nature, provide a highly personalised experience for each guest. That’s a package that might be hard to beat. Just some of the technologies that will be provided to the customers include — Smart Living Automation, sensor-based air-conditioning, energy saving facilities, graphic touch screens and even the travelphone mentioned before.
It is hard to predict whether serviced apartments will take over the accommodation space in Hong Kong, given that so far, they still mainly cater to the high-end customer sector. And we’re talking US$8,000 for a room per month.
“Hotels and professional alternative lodgers have a lot to learn from each other, or even to work together on”
There is however a possibility that as they gain popularity, they will diversify their offering and start catering to more middle-class or backpacker type of travellers. There is also a third scenario, in which their successful rise and good response from tourists will warm up the regulators to the idea of updating their licence laws and aid the efforts of the likes of Airbnb so that Hong Kong tourists could “belong anywhere” too.
“Hotels and professional alternative lodgers have a lot to learn from each other, or even to work together on” — emphasizes Chan and points to the value that potential collaboration could have over competition.
4. So, what’s next for Hong Kong?
The multi-layered hospitality situation in Hong Kong seems to be screaming that changes are inevitable. We looked at some of the latest news and found out three directions, in which we might see the market move this year:
- More cross-industry collaborations
Some of the best solutions we saw came from AccorHotels and Airbnb. Accor recently unveiled two partnership plans — one with LinkedIn, to let the guests find accidental business opportunities during their hotel stay and the second one with airlines, to offer them flight deals during the room booking process on their website. Airbnb already joined forces with Delta in the US for the same reason. Why does this work? Instead of obsessing over a re-design of the UI of the mobile app or gathering more data from the loyalty programmes, these two players reached out to the industries with whom they share customers and in effect created a new, more holistic and exciting value proposition.
- More High-tech
Perhaps we are still years away from hotels like this Japanese one, staffed with humanoid robots, but there is a lot of technology out there that is commercially viable and can be powerful for the brand image. Shangri-La and Marriott are betting on Virtual Reality. The first one, allows guests to use their own VR set at home to take a 3D look at their hotels around the world and have a feel of the room they’ll be staying in on the upcoming trip. Marriott is piloting a VRoom Service, which enables guests to rent the VR set for 24 hours and immerse in an experience of touring the world from their bed (only inChile, Rwanda and Beijing at the moment). It seems like Hong Kong will not be able to shy away from this trend for long, especially as Chinese Intercontinental is taking a step further and already partnering with HTC to provide “Vive Zone” — gaming and entertainment as an interactive 3D experience with VR.
- …and more startups!
Lastly, we are inevitably going to see more startups in the travel space. First, there’s money. Investment in travel technology reached over US$3 billion in almost 200 deals last year, while in Hong Kong alone, the Chief Executive just announced a US$250 million fund to support innovation and technology. Second, there’s demand. Hong Kong is located within a 5-hour flight from 50% of world’s population and as the middle class gets richer, especially in South-East Asia and China, their demand for experiences increases and with this come many pain points to solve. Thirdly, there are talents. Ever since we started organising monthly TravelTech meet-ups (next one: Feb 28th!) we are constantly seeing a growing list of people who participate in our panel talks with experts and have a lot of genuine passion to change things around in travel.
What is the missing piece? We think even though Hong Kong is perfectly positioned to be the next hub for travel innovation, it is still lacking an integrated and well-communicated TravelTech ecosystem, which should be working together to create value along the end-to-end customer journey. That’s why we’re organising Hack Horizon — to get the industry, innovators and investors to talk. But that’s a story for another piece!
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PS 1: Want to know more about hospitality in Hong Kong? Our friends at Web In Travel are coming over to hold the second edition of their WIT Hospitality: REIMAGINE conference that focuses on the fast-changing and rapidly-consolidating hospitality space. JOIN: https://www.withospitality2017.com/
PS 2: You can also download our free “State of Innovation in Accommodation” report here.
