Hong Kong's City Centre School Project Drives 5% Annual Hotel Room Price Hike

The Hong Kong government has unveiled the "City Centre School Project," a strategic initiative aimed at converting existing buildings into school facilities. This plan has been met with optimism, particularly from the mid-to-low-end hotel sector, which sees it as a new opportunity.

According to CBRE, the timing of this project is particularly favorable for the hotel industry. The conversion of hotels into school dormitories is relatively straightforward compared to the extensive capital requirements for converting commercial buildings. Hotels only need to make simple modifications, such as adding central kitchens and installing flexible furniture like bunk beds. In contrast, commercial buildings require significant investments in room partitioning, upgrading mechanical and electrical systems, and ensuring compliance with fire safety regulations. Additionally, the plan allows for the conversion of parking spaces and loading areas in commercial buildings into public spaces, but this also requires substantial investment in adding windows, air conditioning, and fire safety equipment.

CBRE anticipates that applications from existing hotels will outnumber those from commercial properties. The location of the property is a critical factor for success, especially those near schools and MTR stations, which have higher feasibility for conversion. Not all buildings are suitable or willing to participate in this plan. Popular areas for this initiative include Hung Hom, Western District, and Sha Tin.

One important restriction of the plan is that if a dormitory property is intended for sale, the current owner must notify the government and existing tenants at least six months in advance. Potential buyers must also sign a declaration committing to continue operating the property as a dormitory. This clause aims to ensure the continuity and stability of operations for students and schools residing in the dormitories. However, it is a crucial factor for investors to consider and should be included in their acquisition plans.

Additionally, the plan includes a "no sub-division for sale" clause, prohibiting the sale of dormitory rooms on a per-unit basis. However, since this clause is not enforced through government land titles, investors retain some flexibility. If they later wish to sell the property on a per-unit basis, they can simply cease dormitory operations and sell the building according to its original conditions. Therefore, this clause is not expected to significantly impact investor interest.

Currently, approximately 3.4% of hotel inventory has been converted into co-living or student dormitories. CBRE predicts that hotel supply growth will be minimal between 2025 and 2030, with an average annual growth rate of only 0.1%. Under the "City Centre School Project," the overall hotel inventory is expected to decrease further, driving up room prices. It is anticipated that room prices will increase by approximately 5% annually over the next three years.