Hong Kong’s tourism revival is well underway in 2025, though not yet back to pre-2019 peaks. In the first half of 2025, the city welcomed 23.6 million visitors, an 11.7% YoY increase[3]. This puts 2025 on track to beat the 44.5 million arrivals of 2024, although total visitation still trails about 20-22% below the 2018 peak[1]. Notably, Mainland Chinese travelers (historically ~70% of visitors) have returned more slowly, as China’s focus on domestic travel and economic headwinds temper outbound tourism[4][5]. On the positive side, non-Mainland international segments are growing double-digits, diversifying Hong Kong’s visitor mix[6]. High-profile events and government campaigns (e.g. “Hello Hong Kong”, major sports and cultural events) have boosted leisure demand[7][8].
Hotel occupancy has recovered to robust levels. Citywide occupancy averaged 85% in H1 2025, up from 83% a year prior[9]. This is only ~4 percentage points shy of the ~89–90% occupancy highs seen in 2018[10][11]. In fact, current occupancy (~84–85% YTD) is comparable to 2015–2016 levels, underscoring Hong Kong’s historical norm of very high room demand[12]. STR forecasts that absolute occupancy could eventually re-attain ~90% by late this decade, though the “last 5%” may come slowly as weekday business travel still lags (Sunday–Wednesday demand remains softer than 2018)[13][14]. On weekends and during events, hotels are filling up, but a fuller recovery of corporate and MICE travel will be needed to push occupancy to new heights[14].
Average Daily Rates (ADR) and Revenue per Available Room (RevPAR) tell a more mixed story. To rebuild occupancy, many hotels have discounted rates, especially in mid-scale segments. In the first five months of 2025, high-tier luxury hotels actually achieved an ADR of HK$2,145, essentially back to the 2018 high of HK$2,149[15]. However, across all hotel tiers the ADR in H1 2025 fell about 10.8% YoY to HK$1,220, as more cost-conscious regional travelers returned[2]. Consequently, RevPAR in H1 2025 was HK$1,037, down 8.6% YoY[2]. This is roughly 10% below the 2018 pre-pandemic RevPAR peak (~HK$1,250)[16]. In 2024, RevPAR had already climbed back to ~90% of 2018 levels[17][18], driven mainly by higher rates, but 2025 saw rate growth pause as hotels prioritized volume[19][20].
Takeaway: Hong Kong’s hotel recovery is in its “final leg” – occupancy is strong (mid-80s%) and inching up, while ADR remains a work in progress. Revenue metrics are improving but have not fully regained prior peaks, especially in the mass-market tiers. For investors, this suggests upside potential still exists if Hong Kong’s inbound tourism continues to normalize. The Bay Street Hospitality Index (a benchmark for sector performance) indicates room for further RevPAR growth, which could translate to NOI growth for new owners. Importantly, top-tier assets are outperforming: luxury/upper-upscale hotels have already exceeded 2018 ADRs by ~4%[18], buoyed by wealthy travelers and less reliance on tour groups. Meanwhile, mid-scale hotels are more challenged, having seen the steepest rate declines in 2025[21]. This bifurcation creates an interesting brownfield play: investors can target underperforming 3–4 star properties for repositioning, betting that as Mainland group travel picks up and/or via a brand upgrade, these assets can close the RevPAR gap.
To illustrate, The Peninsula Hong Kong (an iconic luxury hotel) saw double-digit occupancy gains in H1 2025, but its ADR actually dropped versus 2024 due to a large one-off corporate booking in the prior year[22]. The net result was stable RevPAR. This exemplifies how even top hotels are balancing rate vs. volume in the recovery. As business mix normalizes (with more corporate and high-spending guests returning mid-week), there is headroom for ADRs to rise. Private investors should underwrite a continued ADR rebound in 2026–2027 as Hong Kong recaptures premium business travel and international events – a key lever for boosting cash flows in acquired assets.
For USD-based investors, Hong Kong offers a uniquely stable currency environment in Asia. The Hong Kong dollar is pegged to the U.S. dollar (in a tight band around HK$7.8 per USD), which means FX volatility is minimal relative to other APAC markets. In Bay Street’s Bay Macro Risk Index (BMRI) – a composite country risk score integrating sovereign spreads, currency volatility, political risk, tourism trends, and repatriation rules – Hong Kong scores well on currency and capital flow factors[23]. There are no capital controls or repatriation restrictions on foreign investment returns in Hong Kong[23], so USD investors can freely convert and remit profits. This lack of FX friction contributes to a low “FX drag” in Bay Street’s quantamental model. In effect, unlike an investment in, say, Thailand or Korea (where currency swings can erode USD returns), an investment in Hong Kong hotels faces little exchange-rate loss upon exit – assuming the USD/HKD peg holds.
That said, a strong USD (and thus strong HKD) cuts both ways. Tourism spending power is affected by currency strength. The HKD’s peg to a historically strong USD has made Hong Kong an expensive destination for Mainland Chinese and other non-USD tourists. Indeed, the RMB’s depreciation against the HKD in 2024–2025 was cited as one reason Mainland visitors spent ~6% less per capita on Hong Kong shopping and leisure in early 2025[24]. A firm HKD can be a drag on visitor volumes and spending (FX drag in an operational sense), especially if regional competitors (e.g. Japan, Thailand) have seen their currencies weaken and become cheaper to visit. Investors should be mindful that Hong Kong’s appeal to price-sensitive tour segments may remain subdued until currency conditions normalize. However, for an investor’s financial perspective, the peg provides confidence that the capital value of a Hong Kong hotel (in USD terms) won’t be suddenly impaired by FX moves – a significant advantage for risk-adjusted returns.
Repatriation and Policy Risk: Hong Kong historically scores near the top for investor-friendly legal and financial systems. Capital freely moves in and out, and the common law framework protects property rights. However, the BMRI also accounts for political and regulatory changes. In recent years, some observers note that rule-of-law risks once confined to Mainland China have “increasingly become a potential concern in Hong Kong”[25]. The U.S. State Department’s 2025 Investment Climate report flagged that Hong Kong’s business climate uncertainty has risen post-2020, alluding to the National Security Law and its implications[25]. The Hong Kong government vehemently disputes these claims[26][27], and indeed for day-to-day commerce, Hong Kong remains a very open market. Still, a Bay Street macro risk overlay would modestly discount Hong Kong’s score for political risk and U.S.-China tension. This is less about any immediate threat to hotel operations (which continue normally), and more about a higher perceived risk premium. For example, global institutional investors might require a slightly higher expected return (or illiquidity premium) for Hong Kong assets now than they did a decade ago, to compensate for tail-risk scenarios (e.g. sanctions, sudden policy shifts). Bay Street’s Liquidity Stress Delta (LSD) metric – which stress-tests exit conditions – would incorporate this by penalizing the Bay Score if an asset’s repatriation risk or political risk rose[23][28]. In Hong Kong’s case, repatriation risk is essentially nil, but political risk and interest-rate volatility (due to the U.S. Fed linkage) are the macro factors to watch. Overall, Hong Kong’s macro profile still ranks as one of APAC’s more stable for investors: a hard currency peg, strong banking system, and reliable legal recourse underpin a favorable BMRI relative to emerging-market capitals.
Bottom line: Currency and capital flow conditions support an investment case in Hong Kong now. The FX stability removes a layer of risk (and hedging cost) that USD investors would face in markets like Bangkok or Seoul. An investor’s dollar goes further in Hong Kong in the sense that nominal hotel income in HKD is essentially dollar-denominated income. This also means Bay Street’s AHA (Adjusted Hospitality Alpha) calculation – which subtracts an illiquidity premium partly based on FX volatility – would impose a smaller haircut on Hong Kong deals than on otherwise-identical deals in unpegged currencies[29]. In other words, a 12% projected IRR in Hong Kong might retain more of its alpha after adjustments than a 12% IRR deal in Thailand, where currency volatility might force a higher required premium (often 1–7.5% depending on LSD factors)[29]. Investors should still keep an eye on interest rate differentials: earlier in 2025, USD weakness and capital inflows briefly pushed HKD to the strong side of its band, prompting the HKMA to intervene[30][31]. As U.S. rates potentially ease in 2025–26, Hong Kong’s rates will follow, likely relieving some upward pressure on the HKD. A softening USD would improve Hong Kong’s affordability to foreign tourists (positive for RevPAR) while also lowering borrowing costs locally – a win-win scenario for hospitality investors.
Hong Kong’s hotel supply outlook is extremely constrained, which bodes well for owners on a multiyear view. The city simply isn’t adding many new hotel rooms, and in fact the available room count is shrinking in some segments due to conversions. As of March 2025, Hong Kong had 320 hotels with ~92,907 rooms[32]. The growth rate of supply has decelerated markedly: from a 2.3% annual CAGR in 2013–2018 (pre-pandemic construction boom) down to about 1.3% annually from 2018–2024[33]. Looking ahead, only four new hotel projects are confirmed from 2025 onward – representing a minuscule 0.3% CAGR over the next five years[34]. In absolute terms, the pipeline is about 1,250 rooms total (per STR/CoStar) – “a tight market” by any definition[35]. Essentially, Hong Kong will see near-zero net new supply through 2028, barring unforeseen major developments.
Crucially, these pipeline figures exclude hotels being removed from traditional lodging use. A notable trend is the conversion of lower-tier hotels into alternative accommodations such as student housing, co-living residences, or budget housing for workers. Hong Kong’s government launched a “Hostels in the City” policy in mid-2025 to streamline hotel-to-student-accommodation conversions, aiming to address housing shortages while absorbing excess tourist hotel capacity[36][37]. Several deals in H1 2025 underscored this trend: for example, Hotel Ease Mong Kok sold for HK$435 million and The Henry for HK$185 million, both intended for student or long-term lodging conversions[38]. In total, over HK$3 billion of hotel assets changed hands in H1 2025, much of it driven by investors pursuing higher-yield repurposing opportunities[38]. While these properties retain hotel licenses (in case owners want the flexibility to revert to hospitality in peak times), for all practical purposes they are subtracted from tourist room supply for the foreseeable future[39]. Bay Street’s framework recognizes that such conversions ease competitive pressure on remaining hotels[39]. Fewer economy hotel rooms in the market means mid-range demand can shift upward to fill vacancies in traditional hotels, supporting occupancy and room rates.
From an investment standpoint, this environment creates a scarcity premium for well-located hotels. With supply growth effectively capped at <0.5% annually, any demand growth flows straight into higher occupancy or pricing power for existing assets. Hong Kong’s hotel owners will not face the oversupply cycles seen in markets like Shanghai or Bangkok. In fact, if visitor arrivals continue to climb back toward pre-2018 levels (which were ~65 million annually when including same-day visitors), the supply-demand balance could tilt into undersupply by late this decade. High occupancy in the high-80s% coupled with constrained new supply signals potential for ADR expansion – especially in the upper tiers where pent-up affluent travel demand meets limited room inventory[40]. CBRE forecasts that if Hong Kong sustains its recovery, premium hotels (High Tariff A) stand to benefit most, with strong ADR growth as customers compete for scarce luxury rooms[40]. This suggests investors might find greenfield development attractive in theory (to capture that demand). However, in practice, building new hotels in Hong Kong remains very challenging: land is expensive and zoning is competitive, construction costs have surged post-pandemic, and projects face multi-year lead times. The economics often only pencil out for ultra-luxury or mixed-use developments, or if government provides incentives. It’s telling that virtually no new projects are on the books despite the market’s recovery – indicating that replacement cost far exceeds current hotel values in most cases, a deterrent to new entrants.
Greenfield vs. Brownfield: Given the pipeline scarcity, the more feasible route is brownfield acquisitions – buying and repositioning existing assets. This can include renovating an older hotel to a higher category, changing the brand/operator to improve performance, or even converting use (either fully, like to residences, or partially, like adding a co-living wing). Hong Kong’s history shows that repositioning can unlock significant value: many older industrial buildings have been converted to hotels in the past, and now the reverse (hotel to residential) is happening. A hospitality investor focusing on hospitality use would likely target hotels in good locations that are currently undercapitalized or mis-positioned, upgrade them, and reap outsized RevPAR gains as the market upcycle continues. For example, a 3-star property in Tsim Sha Tsui or Mong Kok running at 80% occupancy but with rock-bottom ADR could be acquired and renovated into a 4-star lifestyle hotel, targeting higher-paying travelers. With overall room stock down and barriers to new competition high, a successful repositioning could quickly achieve high occupancy at much better rates. Bay Street’s Adjusted Hospitality Alpha (AHA) would capture this upside as excess return above the sector benchmark[41]. In quantamental terms, the alpha opportunity in Hong Kong now is in spotting assets where current performance (and pricing) is based on depressed 2020-2022 conditions, but future performance (with renovations and full tourism recovery) will markedly exceed the baseline.
In contrast, pure greenfield development in Hong Kong in 2025 is likely a contrarian play – one would be betting on a severe undersupply down the road to justify the high development cost. Unless an investor has unique access (e.g. a land parcel coming cheap or a partnership with government on a tourism project), brownfield appears more attractive. It’s worth noting that even global hotel brands are opting for conversions or reflagging existing hotels rather than new builds, given the hurdles. The pipeline’s four new hotels are mostly high-end projects started years ago or special cases (perhaps extensions of integrated projects). The lack of oversupply risk means investors can underwrite future cash flows with more confidence – a critical input for Bay Street’s Bay Score. A low-risk supply outlook contributes to a higher Bay Score (all else equal) because it improves the Market Structure Score component (stability of competitive environment) and reduces volatility in projected RevPAR (feeding into a better BAS, Bay Adjusted Sharpe)[42][43].
Summary: Hong Kong’s tight development pipeline and ongoing removal of hotel stock via conversions create a landlord-favorable dynamic. Unlike some markets where one worries about overbuilding, here one might worry about under-building. For private investors, this scarcity underpins long-term value – owning Hong Kong hotels is akin to holding a scarce commodity. As tourism demand grows and peers add few new rooms, the existing assets should appreciate both in income and capital value. In the near term, the wave of conversions may temporarily indicate stress in the 3–4 star segment (owners exiting the hotel business due to weak performance). But for those who remain or enter now, fewer competitors remain in that space. This plays into a “buy low” strategy on struggling assets with confidence that market recovery plus prudent CapEx can drive a strong rebound in earnings. Bay Street’s quantamental analysis would view limited new supply as reducing the downside risk (part of LSD modeling for exit liquidity[28]) – in a soft market you can still maintain share, and in a strong market you enjoy outsized pricing power. Overall, Hong Kong currently carries very low oversupply risk and potentially a scarcity premium, a point in favor of investing sooner rather than later.
A critical question for any private equity investor is whether entry pricing allows a feasible IRR given the cost of capital. In Hong Kong’s hotel market, cap rates (initial yields) have historically been low – reflective of the city’s high real estate values and investors’ expectations of growth. Pre-COVID, prime hotel cap rates in Hong Kong could be in the 3–4% range, especially for luxury assets or those with redevelopment angles. During the pandemic downturn, effective yields spiked in some distressed cases (simply because income collapsed), but there were few transactions to truly re-price the market. As of 2023–2024, a wide bid-ask spread persisted: sellers anchored to pre-pandemic values (low cap rates), while buyers demanded discounts to offset higher financing costs and uncertainty[44][45]. This led to a drop in deal volume – JLL reported only ~$770 million USD of Hong Kong hotel transactions in 2023, and forecast about $500 million in 2024, a ~35% decline, as many deals stalled over pricing[44][45]. Buyers gravitated to prime locations and priced cautiously, while secondary assets struggled to find buyers without heavy discounts.
However, the equation is improving in 2025. Interest rates and financing costs, which had surged in 2022–2023, are beginning to ease. Hong Kong, being pegged to the USD, imported the Fed’s rapid rate hikes – the local prime lending and HIBOR rates rose sharply, making debt quite expensive for hotel acquisitions in 2023. By mid-2025, with inflation moderating, Hong Kong’s cost of debt dropped by an estimated 200 basis points from its peak[46]. This ~2% reduction in borrowing rates (one of the largest declines in APAC) significantly helps deal feasibility. Suddenly, a hotel asset yielding (forward) 4% that would have been negatively levered at a 5.5% interest rate could be closer to break-even leverage at a 3.5% rate. JLL noted that by Q2 2025 the bid-ask gap was narrowing, and while few deals closed in early 2025, momentum was building for more transactions as the financing environment improved[47][48]. Indeed, H2 2025 is expected to see increased deal activity, with some sellers adjusting expectations and more buyers confident in underwriting future growth[44][49].
It’s instructive to compare cap rates vs. required returns. Let’s say a private equity investor targets a ~15% gross IRR on a value-add hotel investment. With moderate leverage, this might equate to needing an entry cap rate plus growth that together get to 15%. In Hong Kong, a stabilized asset might currently trade at a 4–5% cap on 2024 earnings (if not lower for trophy properties). On the surface, a 4% yield is far below a 15% target. The investor must believe in either strong NOI growth (through market RevPAR gains or asset improvements) and/or a favorable exit (cap rate compression or sale at a higher multiple) to bridge that gap. The good news is that such growth is plausible: as detailed, RevPAR could see double-digit percentage uplift as tourism fully recovers and ADR normalizes. If an asset’s NOI is expected to grow, say, 8-10% per year over the next 3 years (combination of occupancy, rate, and ancillary revenues returning), the going-in yield understates the forward yield. Bay Street’s model would incorporate CoStar/STR forecasts at the submarket level for RevPAR growth and volatility[42][50] – in Hong Kong, those forecasts are moderately bullish with improved confidence (given the strong occupancy trend)[51][52]. Thus an investor might underwrite that a 4% cap today could become a ~6% yield on 2027 stabilized earnings, through both market recovery and any property-specific value-add. A 6% yield on cost with low supply risk could indeed produce a mid-teens IRR if coupled with 50-60% leverage at ~4% interest. The math begins to work in 2025 where it did not in 2022.
For greenfield development, the cost of capital vs. return dynamic is tougher. Construction financing is still expensive and not readily available without strong sponsorship. A developer would need to achieve a yield on cost well above market cap rates – often 7-8% – to justify the risk. In Hong Kong, hitting that is difficult when land and construction costs are extremely high. This is another reason few new hotels are being built; developers see better risk-adjusted returns in converting or building residential/other uses. Private investors considering development would likely require patient capital and perhaps a view that by opening (say in 2028), the market RevPAR will be at record highs justifying premium pricing. Most are not taking that bet right now, hence the thin pipeline.
Cap Rate Outlook: Cap rates in Hong Kong may actually compress again as the recovery solidifies. If interest rates fall further in 2025–2026 and global investor sentiment turns positive, we could see yield-hungry capital (particularly from Mainland China or Middle Eastern sovereign funds) bidding aggressively for marquee hotel assets. Hong Kong’s status as a gateway city means trophy properties often command frothy valuations. For example, past sales of luxury hotels often implied sub-3% yields by Western standards, justified by redevelopment potential or billionaire trophy collectors. We’re not immediately back to that era, but as an investor, one should anticipate exit cap rates could be equal to or even lower than entry if the cycle goes well. In Bay Street’s framework, the Illiquidity Premium (IP) and public-private spread analysis are useful here[53][54]. Public market hotel REITs or companies trade at different implied yields and often at discounts to NAV. In Hong Kong, the public-private valuation gap is striking: one major hotel owner (Hongkong & Shanghai Hotels, owner of the Peninsula) has a net asset value of ~HK$21–24 per share, yet its stock trades around HK$6[55] – a 70%+ discount to asset value. This suggests that private market values have plenty of room to rise (or conversely, public investors are skeptical of full recovery). If one believes the public market is overly pessimistic, buying assets privately at a fair 4–5% yield could be wise, since eventually either earnings or market sentiment could improve and compress that yield further (thus boosting asset values). On the other hand, the public market discount also signals caution: it implies expectations of slow recovery or structural challenges. A savvy investor would account for this by not over-leveraging and by seeking an entry basis at or below replacement cost. With some smaller hotels trading for repurpose value (as seen in the student hostel deals), opportunistic investors can still find discounted entry points – e.g., paying maybe HK$3–4 million per key for a three-star property in urban Kowloon that, once refurbished and repositioned, might be worth HK$5–6 million/key to a long-term holder or as part of a larger portfolio.
In summary, cap rate vs. cost of capital dynamics are turning more favorable in Hong Kong. The compression of financing rates (~200 bps in 2025)[46], combined with anticipated NOI growth, means that deals can be structured to meet IRR hurdles where a year ago they could not. Bay Street’s Bay Adjusted Sharpe (BAS) focuses on return per unit risk[56][57]. Right now, Hong Kong’s improving fundamentals are increasing the “return” side of the equation (higher expected AHA) while slightly reducing risk (volatility easing as tourism stabilizes), thus boosting the BAS. The main caveat is to avoid overpaying solely on rosy projections – each deal needs a buffer. But compared to 2020–2022 when cash flows were near zero and uncertainty maximal, the current moment offers a much more solid footing to underwrite deals. If anything, there’s a window before everyone piles back in: once RevPAR growth visibly hits 100%+ of pre-COVID levels, asset prices may quickly adjust upward. Early 2025 still finds some owners willing to sell at modest discounts (perhaps motivated by debt or diversification reasons), so a well-capitalized buyer can secure a favorable entry yield relative to future stabilized yield. This positive spread is essentially what delivers IRR.
Bay Street Hospitality’s Bay Score is a unified metric (0–100 scale) that encapsulates an investment’s attractiveness by blending return potential, risk, and strategic factors[58]. Let’s break down how Hong Kong scores on the key Bay Score drivers relevant to a private hotel investment, and what that implies:
In summary, Bay Score components for a Hong Kong hotel deal in late 2025 are generally favorable. Macro risk (BMRI) is manageable; adjusted alpha (AHA) can be strong if you pursue value-add; risk-adjusted returns (BAS) look better as volatility abates; liquidity risks (LSD/FX) are comparatively low. All these feed into a higher composite Bay Score – Bay Street’s threshold is 70/100 for investment committee, and Hong Kong opportunities are more likely to hit that now than at any time in the past 4–5 years. The quantamental verdict would likely be that Hong Kong merits serious consideration in a hospitality portfolio, provided deal-specific due diligence checks out (sponsor quality, asset quality – which Bay Score also factors in).
To put a number on it illustratively: Suppose a hypothetical Hong Kong hotel acquisition gets an AHA of 5 (excess return), BAS of 0.5, high marks on liquidity (low LSD), BMRI of, say, 75 (out of 100 where higher = riskier, so 25 if inverted to a stability score). Combined with solid scores for sponsor and market, the Bay Score might come out around the investable range. While each firm’s scoring differs, the key is Hong Kong is no longer a failing grade; in 2020-2022 it would have scored poorly (negative AHA, high volatility, etc.), but now the tide has turned.
A notable aspect of Hong Kong’s hospitality market is the disconnect between public-market valuations and private-market transactions. Historically, listed hotel companies and REITs in Hong Kong/Asia trade at substantial discounts to the net asset value (NAV) of their properties. As mentioned, The Hongkong & Shanghai Hotels (owner of Peninsula hotels) had an NAV over HK$21 per share as of mid-2025[61], yet its share price has languished around HK$6 – implying investors value it at barely 0.3x book. Other hotel-owning conglomerates show similar patterns, often due to conglomerate discounts or poor short-term earnings. This public-private spread means that one could theoretically buy hotel assets far cheaper by purchasing stock than by direct real estate. However, unlocking that value is not straightforward (it may require corporate takeovers or asset sales which are not happening immediately).
For a private investor, the spread is both a caution and an opportunity:
Bay Street’s quantamental approach would benchmark private deal IRRs against public market yields and factor that into Bay Score via the illiquidity premium (IP) and Adjusted Hospitality Alpha (AHA)[53][62]. Essentially, if public hotel equities are cheap, a private deal has to clear a higher bar to be worth it. Right now, public hotel stocks in Hong Kong (and even regionally) are indeed trading at lower multiples, which raises the required illiquidity premium. For example, if Hong Kong hotel REITs were yielding 5%, Bay Street might insist on, say, an 8%+ stabilized yield (or equivalent IRR) on a private deal to compensate for less liquidity and higher control risk. If such deals are not available, one might invest via public equities instead. However, given Hong Kong’s unique situations (few pure-play hotel REITs, many hotels embedded in larger firms), direct investment may be the only way to get exposure to certain high-quality assets. Also, public markets may be undervaluing those assets due to non-hotel factors (e.g., corporate governance issues, unrelated business lines). Thus, a discerning investor can still justify private acquisitions if they have a clear value creation plan that the public market isn’t pricing.
In short, investors should be aware of the historical public-private spread: it argues for disciplined pricing on entry and perhaps innovative exit options. One exit strategy could even be to bundle a portfolio and IPO it as a hospitality trust when market sentiment improves, potentially capturing a re-rating. Or sell to those listed companies looking to bolster their portfolios. The spread currently favors buyers (assets are effectively on sale in equity form), which again supports the notion that this is a buyer’s market turning toward equilibrium. As 2025 progresses and if hotel earnings ramp up, public sentiment could shift, narrowing that discount and thereby validating higher private values. Bay Street’s analysis would keep an eye on BSHI (Bay Street Hospitality Index) and public comps as a yardstick – if private deals can be done at yields/IRRs significantly better than what’s implied in public markets, that’s a green light for alpha. Hong Kong appears to offer that now, provided one is selective.
To put Hong Kong’s situation in context, it’s useful to compare it with a few other major Asia-Pacific city hotel markets. We consider Singapore, Seoul, and Bangkok – each a key regional hub with its own recovery pattern – to gauge relative attractiveness:
Comparative Summary: Hong Kong stands out for its combination of demand recovery and supply restraint. Singapore shares the supply restraint but has already recovered demand (hence high prices). Seoul has limited supply and strong recovery, somewhat akin to Hong Kong, and is a hot market for investors presently. Bangkok has huge demand potential but also more supply risk and volatility. If we rank by risk-adjusted appeal for an international investor now, one might put Singapore and Hong Kong as relatively safer (currency and legal stability), with Singapore being low-risk/low-return (core) and Hong Kong being moderate-risk/higher-return (value-add). Seoul is slightly higher risk than Hong Kong in currency/geopolitics but with high performance momentum – a solid competitor for capital, likely a growth market with moderate risk. Bangkok is higher risk but potentially high return if timed right – more opportunistic in nature.
In a Bay Street Bay Score sense, a deal in Singapore might score high on BMRI and LSD (great stability) but low on AHA (not much alpha left); a deal in Bangkok might score high on AHA (if you get a steal) but low on BMRI/LSD (lots of macro risk); Hong Kong and Seoul sit in between, potentially achieving balanced high scores across multiple dimensions (good alpha and manageable risk). Indeed, Bay Street’s quantamental approach allows for exactly such benchmarking across regions to ensure apples-to-apples comparison. If one were constructing an APAC hotels portfolio in late 2025, having exposure to Hong Kong could provide a nice complement to, say, an asset in Singapore (for stability) and one in Bangkok (for growth) – effectively blending core and opportunistic bets.
Is now an attractive time to invest in Hong Kong hotels, or will conditions worsen? Based on the above analysis, the balance of evidence leans toward now being a strategically opportune time to invest – with some cautionary notes. Here’s a breakdown of considerations for timing the entry:
On balance, the strategic guidance leans toward acting sooner with a well-devised plan, rather than later. Hong Kong’s risk-adjusted outlook has improved significantly, and many supportive factors (low supply, policy support, interest rates easing) are aligned today. Market conditions are more likely to improve than worsen over the next 2-3 years barring an external shock, meaning asset values and competition will likely increase. By waiting, an investor risks paying more for the same hotels once RevPAR is fully recovered and cap rates compress under renewed investor inflows. In other words, the current environment might be the “sweet spot” where enough recovery has happened to validate the investment thesis, but not so much that prices have fully rebounded.
Actionable Insights for a PE Investor:
- Focus on Value-Add Acquisitions: Target hotels where you can actively improve performance (through renovation, rebranding, expense optimization). These are the deals that will score high on AHA by creating alpha beyond market growth. For example, older 3-4 star hotels in core locations, possibly family-owned, could be bought and upgraded to lifestyle boutique status to capture higher-paying customers. Bay Street’s approach of “brand and operator scoring” could be useful – selecting a strong brand/operator can uplift the asset’s Bay Score by improving sponsor quality and market appeal.
Conclusion: Hong Kong’s hotel market in late 2025 presents a compelling case for private investment, especially for those looking for a balance of relatively low currency risk and high operational upside. The city’s hospitality industry is in a recovery sweet spot, with demand climbing and supply constrained – conditions that favor owners. By applying Bay Street’s quantamental framework, we find that Hong Kong scores well across the board: the macro environment (BMRI) is sound enough, the potential alpha (AHA) is attractive with the right strategy, risk-adjusted returns (BAS) are improving as volatility falls, liquidity risks (LSD) are mitigated by market depth and flexible use, and FX drag is negligible due to the USD peg. While no investment is without risk, the risk-adjusted timing appears advantageous now. Savvy investors should move with strategy – focus on value creation, secure favorable deal terms, and position assets to capture the continued tourism resurgence. Waiting could mean a higher price later or missing the tailwind of the recovery. In our view, Hong Kong offers one of the more attractive risk-adjusted opportunities in APAC hospitality at this moment – a chance to acquire assets in a world-class city on the rebound, before the rest of the market fully catches on. As Bay Street’s integrated metrics would conclude: Hong Kong’s current Bay Score supports a calculated entry, with an expectation of both yield and appreciation as the market normalizes.
Sources: Recent market data and analysis were drawn from industry reports and news including CBRE Hong Kong[77][78], Colliers[2][38], JLL[44][74], STR/CoStar[12][79], and Bay Street Hospitality’s quantamental whitepapers[23][29]. These sources reinforce the quantitative trends and forecasts used in this evaluation. The combination of on-the-ground metrics with Bay Street’s proprietary framework yields a comprehensive, forward-looking assessment for investors. The consensus: Hong Kong’s hotel market is poised at an inflection point, and for those with a strategic playbook, the coming quarters could unlock substantial value. [77][2]
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[31] APAC Central Bank Mid-Year Outlook 2025: Navigating Tariffs and ...
[44] [45] [49] [60] [67] [74] Hong Kong hotel investments to reach USD 500 million in 2024
https://www.jll.com/en-hk/newsroom/hong-kong-hotel-investments-to-reach-usd-500-million-in-2024
[46] Global Real Estate Outlook – Edition May 2025 | UBS Hong Kong
[47] [48] Hong Kong Hotel Market Dynamics Q2 2025
https://www.jll.com/en-hk/insights/market-dynamics/hong-kong-hotel
[55] Hongkong and Shanghai Hotels Ltd Intrinsic Valuation and ...
https://www.alphaspread.com/security/hkex/45/summary
[63] [64] [65] [66] [68] [69] [70] [71] [72] [73] APAC Hotel Transactions and Market Snapshot – FY 2024 - H1 2025
https://www.globalassetsolutions.com/apac-hotel-transactions-and-market-snapshot
[76] Hong Kong hotel sector could fully recover by mid-2025
https://realestateasia.com/commercial-hotel/news/hong-kong-hotel-sector-could-fully-recover-mid-2025
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Bay Street Hospitality is a diversified hotel fund series for allocators seeking quant-driven exposure across top countries, operators, and hotel tiers. The fund targets a diversified portfolio in both high-growth emerging markets and stable developed markets, optimizing risk-adjusted returns. The leadership provides structured equity and pivotal strategic guidance to hotel-related investments. The fund establishes joint ventures with best-in-class partners, focusing on deal flexibility, currency considerations, tax efficiency, and clear exit strategies.
