IN HONG Kong’s relentless property downturn, there is one bright area for investors: buying hotels and converting them into student housing or rental units. AEW Capital Management and PGIM Real Estate are among firms that have acquired hotels in the city after prices dropped during the pandemic, just as the government began a drive to attract tens of thousands of foreign students and talent.

The financial hub has seen HK$14.5 billion (S$2.5 billion) worth of transactions involving hotels since the Covid outbreak through the first quarter, and 61 per cent of those rooms have been converted into student living or rental properties, according to data consolidated by Colliers International Group.

Hotels are cheaper than residential properties on a per square foot basis, are fitted with the right layout, and already have the space for communal facilities.

That’s what attracted AEW to Hotel Sav. The asset manager bought the property in the Hung Hom district for HK$1.65 billion and started renovations to turn it into a student hostel early last year. Now called Y83, it still has many features of a hotel, including rooms with spacious bathrooms, sea views and keycards for power. Residents can also enjoy 20,000 square feet of shared space.

In a city known for its dearth of student accommodation, the property has quickly filled up. Its occupancy rate reached 80 per cent in its first school year and is now close to 100 per cent, housing almost 600. Prices range from about HK$7,000 to HK$12,500 a month.

“Residential products are always in chronic undersupply, and even more so for large-scale and professionally managed student housing,” Yian Wang, AEW’s Greater China head of acquisitions, said of Hong Kong. “We identified the trend with our operating partner and determined that this opportunity has ticked lots of boxes.”

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AEW is “certainly” exploring similar investments, she added.

PGIM Real Estate, which manages US$210 billion in assets, purchased two hotels last year and converted them into short and long-term stay residences. Their tenants are a mix of young professionals and students.

The investment firm bought the hotels at a “distressed pricing” due to the pandemic and current occupancy rates have exceeded projections, said David Fassbender, head of South-east Asia. While he would be “quite concerned” about investing in other real estate segments, Fassbender said he feels “comfortable about the long-term fundamentals and it’s a cashflow-producing sector”.

The deals come as Hong Kong’s broader property market is in a prolonged downturn. Office vacancies are at an all-time high as companies cut space. New-home sales dropped to the lowest since 2019 in the first half and values are falling.

Other transactions include New World Development’s PentaHotel, which was sold to Wang On Group and Angelo Gordon & Co for HK$2 billion. Wang On said in June that it intends to convert it into a student residence with about 720 rooms.

Colleges are also buying, with Hong Kong Metropolitan University acquiring Hotel Ease from the late Tang Shing Bor’s family this year.

The university president told local media earlier this year that it has contacted 80 hotels and picked 10 as locations to rebuild dorms. It is selecting sites and doing preparatory work.

“The investment theme is solid,” said Thomas Chak, Colliers’ co-head of capital markets. “The major thing that has changed this year is that the government is rolling out schemes aggressively to attract people back to Hong Kong,” he said, noting that there is a growing number of middle class people from mainland China who want to study in the city.

On top of that, the asking prices of hotels are now 15 per cent to 20 per cent lower than their pre-pandemic peak, and some owners may want to offload assets in a high interest-rate environment, Chak said.

More students

Hong Kong’s government has launched a slew of initiatives that fuel the demand for student housing and rental properties.

The city is evaluating a proposal that would double the number of non-local undergraduates newly admitted to publicly funded universities in the 2024-25 academic year to around 6,000, the South China Morning Post reported in July. For working professionals, Hong Kong has approved close to 50,000 applications across its talent programmes as at end-May. The city’s latest population figures reversed years of decline.

In the current property market, a typical return of 4 per cent for an asset wouldn’t even cover the high borrowing costs, said Adrian Tang, executive director of capital market transactions at Jones Lang LaSalle. So, investors are looking into buying properties that can generate revenue from their operations, he said.

Still, the number of upcoming deals is capped by limited supply, now that the weakest operators have already exited the market. With borders back open and some tourists returning, there may be fewer opportunities to buy hotels at the steep discount that’s necessary for such deals to make business sense.

“Investors are trying very hard to find properties, they are still looking for opportunities,” said JLL’s Tang. “It really depends on whether they can find a property with the right price, location – there are lots of considerations.” BLOOMBERG