An excess in supply has cooled performance in Hong Kong—a market at risk for overcapacity in the coming years, according to one report.

　　Though barriers to entry remain high in Hong Kong, some experts think an influx in supply is posing a threat to the market’s traditionally stable base of demand.

　　The risks were exposed in great detail in a recent study from the School of Hotel & Tourism Management at the Hong Kong Polytechnic University, which found that demand forecasts indicate a significant shortfall in likely booking when compared to rooms available.

　　In the report, researchers estimated the annual optimal room capacity for Hong Kong hotels will increase from the 46,577 in 2010 to 50,584 in 2013. Comparing these figures with the actual numbers of rooms available, they concluded that “the industry will experience serious overcapacity” because of a discrepancy between the actual number of rooms available and the optimal number of rooms.

　　The result is faltering pricing power and an overall drag on performance, the report concludes.

　　Data from STR Global, sister company of Hotel News Now, points to that hypothesis.

　　"If you look at it from the middle of June last year, you had almost a 5% increase in supply, which they haven’t seen in the last two years,” said Naureen Ahmed, manager of marketing and analysis for the London-based data firm. “At around the same time you had that rate drop.”

　　Amid that supply increase, average daily rate was down 2.9% in Chinese yuan during the first half of 2013. Revenue per available room was down 3.5%. Occupancy, though down 0.6% through June, still was relatively high in absolute terms at 83.1%, according to STR Global.

　　STR Global counts six projects in the total active pipeline, and 378 rooms under construction.

　　"Hong Kong has seen an increase in supply—the largest on record in 2013—and further strong growth (in supply anticipated for) 2014. In addition to hotels, guesthouses and serviced apartments, which are not captured in official statistics, add further pressure on the market,” Daniel Voellm, managing director of HVS Hong Kong, wrote in an email.

　　"Particularly independent hotels without a strong distribution system are affected and engage in value-based pricing to maintain high occupancy levels,” he added. “Furthermore, new hotels are added in fringe locations or submarkets at a distance from core business districts, decompressing the market and affecting operators ability to yield. Hotels in those fringe locations are also often positioned at a lower price point, which has as a negative impact on market-wide average rates, although hotels in core areas might not be directly impacted.”

　　A different take

　　Not everyone agrees with the dim prospects.

　　Gloria Chang, director at Horwath HTL’s Hong Kong practice, does not think the market is at risk for oversupply. The cost of land makes new development in the downtown core difficult to come by, she wrote in an email. And most new development in those fringe locations and submarkets targets a different customer base: price-sensitive consumers and groups/tours, she said.