"Hostels in the City" scheme offers cost-effective hotel conversion option: CBRE

With minimal hotel supply growth projected (just 0.1% CAGR from 2025 to 2030), the overall hotel stock is expected to decline under the scheme.

The new “Hostels in the City” scheme, recently introduced by the Development Bureau and Education Bureau, presents significant opportunities for the conversion of lower-tier hotels into hostels, according to CBRE.

Hannah Jeong, Executive Director and Head of Valuation & Advisory Services at CBRE Hong Kong, noted that the scheme offers a cost-effective solution for the hotel sector, requiring only minor adjustments such as adding common facilities like kitchens and installing bunk beds.

This makes the conversion of hotels more feasible compared to commercial buildings, which demand higher capital investments due to the need for room subdivisions, E&M upgrades, and compliance with fire safety regulations.

The scheme also aims to allow the conversion of car parking spaces and loading bays in commercial buildings into common areas, although enclosing these spaces requires significant investment.

Jeong anticipates a higher volume of applications for hotel conversions than for commercial properties, with location playing a critical role. Areas near schools and MTR stations are likely to see the most interest, particularly in Hung Hom, Western District, and Shatin.

One key aspect of the scheme, Jeong highlighted, is the sales restriction clause. If a hostel is sold, the current owner must provide six months' notice to the government and tenants, and the buyer must commit to continuing the property’s operation as a hostel.

Whilst this clause serves as a safeguard to protect students and residents, it is an important consideration for investors and should be factored into any acquisition plans.

The scheme also includes a non-alienation clause, which prohibits strata-title sales of hostel rooms.

However, since this clause is not enforced through government lease conditions, Jeong noted that investors could still revert the building to its original condition and sell it on a strata basis in the future, meaning the clause is unlikely to deter investor interest.

Jeong also pointed out that 3.4% of hotel stock has already been converted into co-living or student accommodation.

With minimal hotel supply growth projected (just 0.1% CAGR from 2025 to 2030), the overall hotel stock is expected to decline under the scheme, which is likely to drive room rates upward by an estimated 5% annually over the next three years.