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Returning Interest In Hotel Sector

Returning Interest In Hotel Sector
Saturday, March 08, 2003
New Straits Times

By Shela Singam

An increase in hotel transactions has been noted over the past few years, indicating a returning interest in the industry among visitors.

Value Hospitality Group general manager Dennis Tan said Klang Valley hotels have generated the most interest among investors, while hotels in other areas have attracted mostly domestic buyers.

He said between 1999 and 2001 alone, there were 10 hotels transactions, some sold by Pengurusan Danaharta Nasional Bhd and others through private treaty.

"After 1997, the performance and profitability of hotels declined compared with the peak in '92. Many hotels lost money, leading their owners to put them up for sale. Investors out for a good deal have seen the advantages of buying in a downmarket and reselling when the market peaks again," said hotel turnaround specialist Tan, adding that he expects to see more transactions in the next couple of years.

Tan said based on his experience, there are three criteria for pegging the value of the hotel. The first is based on the replacement cost of the hotel; the second is to value it at 10 times the hotel's current profitablity; and the third is to price it according to the value per room.

He cited his own experience in 1998, when he represented a group of investors taking over the 300-room Prince Hotel (now Melia Hotel) in Kuala Lumpur, which they purchased for RM60 million, a value based on the cost per room. He and his team managed to turn around the hotel and 18 months later, sold it for RM97 million, or about 10 times the year' expected profit of RM 10 million.

"Most foreign investors now are value buyers who peg the price according to the profitablity, which entails less risk," he said, adding that in his opinion. this is the best method to ensure a safe investment.

However, he said there are a number of domestic purchasers who tend to be "very optimistic" about the potential for capital appreciation for the property they are eyeing, and are willing to pay a price of around 30 times the profitability.

Tan cautioned against this, saying that it would reduce their profit when they decide to sell and would also cause a decline in hotel transactions.

"Many of these buyers have little experience in running a hotel, By pricing it thus, they are setting a higher base price for transactions. When the time comes to sell, they will find it hard to find willing buyers, and the number of transactions will go down," he pointed out.

Tan said the hotel market is moving from a consolidation phase to a building phase and he expects to see new buildings coming up in the next five years.

"Mlaysia's hotel industry has been running on an eight- to 12-year cycle starting from the 60s. The last market peak was in '97 and before that, '86. the next boom will be expected to be around 2008.

"It takes about five years from the planning to operating stage, meaning that now's the time to start planning, so the hotel will be ready for the boom," he explained.

He said although currently, the demand for hotel rooms does not match the supply available, he expects the equation to balance out in the next two years.

"Since'98, hotels have not seen a great improvement in performance, although tourist arrivals have increased. This is due to new supply coming onstream, which negates the effect of increased demand. However, construction of new hotels has eased - there are only four in various stages of completion in KL and Petaling Jaya - meaning that in time to come, as demand grows further, there mya be a need for more hotels," he said.

He said this could be likely in the face of increasing efforts by the government to woo foreign investment as well as tourists from Asian regions such a the Middle East, India and Korea.

For those planning to embark on hotel development, Tan advised them to not just consider the location and timing, but also to put a lot of thought into the cost structure and operational strategy.

Tan will be delivering a paper entitled Market Conditions and Prospects for the Hotel Industry in Malaysia at the 14th National Real Estate Convention 2003 to be held on March 24 and 25 in Kuala Lumpur. The seminar is jointly organised by the Association of Valuers and Property Consultants in Private Practice Malaysia, the International Real Estate Federation's Malaysian chapter and the Institute of Surveyors Malaysia.

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