Pressure on hotel values could compromise deals

TheEdge Tue, May 12, 2020 06:00pm - 11 months ago

SINCE Malaysia implemented the Movement Control Order (MCO) on March 18, not a week has gone by without reports of a temporary, or worse, a permanent closure of hotels.

Just last week, there was news that Tun Daim Zainuddin-linked Plenitude Bhd was “closing operations” at three of its hotels, Tan Sri Lee Kim Yew’s Country Heights Holdings Bhd shutting the 544-room Palace of the Golden Horses for some time, and IGB Bhd’s G City Club Hotel ceasing its business permanently.

A recent survey by the Malaysian Association of Hotels (MAH) reveals that 50% of those surveyed would close their hotels — with 15% considering stopping for good and and 35%, temporarily. MAH projects that after the first six weeks of the MCO, the industry’s room revenue losses for 2020 will come to RM6.36 billion.

The recent closures have put into question the outcome of hotel deals that some parties are working on. Industry experts say there is a likelihood that purchasers may want to abort deals, especially those that were not completed prior to the MCO.

At the same time, developers with hotels under development may want to delay their projects or repurpose the hotel components as it may take longer to recoup their investments due to a potential oversupply of rooms.

Zerin Properties CEO Previndran Singhe tells The Edge that he expects the recent closures and potential increase in the number of hotels coming up for sale to place pressure on the value of some hotel assets. His firm has already been approached by owners to place their hotel assets up for sale since the second week of the MCO. And he anticipates that the list will get longer. However, these are not forced closure by banks, but hotel owners seeking to divest their assets as they require cash flow to sustain their operations.

Hotels are long-term investments and two months under the MCO is not a good indication of how the industry will fare going forward, Previndran says. However, he observes, “If we look back to previous crises, specifically the 1997/98 financial crisis, we did see prices drop by as much as 30%.”

LaurelCap Sdn Bhd executive director Stanley Toh describes the current pandemic as a “temporary setback” for the property market. “I do not see prices free-falling, but rather, a gradual drop over the next one to two years. I see the recovery may take about two to three years.”

For those who need the cash flow, they will have to think about probably slashing their asking prices by 20% to 30%, he suggests. “They have to be realistic about the current situation and be prepared for a lower valuation,” he says, adding that it is a buyers’ market.

Because hotels are sold as investment properties, the value is often directly tied to income, which, in turn, is a function of room rates and occupancy. MAH has projected average occupancy in 2020 to be at a historical low of 25.41%.

If the asset is worth less now, would the purchaser who is conducting due diligence on a hotel asset or has inked a deal that has yet to be completed, be compelled to proceed with it? Toh reckons that, where possible, the buyer may invoke force majeure.

“Depending on the type and nature of the deal, investors may be asking if they still want to pay pre-Covid-19 prices in a post-Covid-19 world. This may further slow deal flow, even for transactions that were in the advanced stages before the MCO was announced,” says Nabeel Hussain, Savills Malaysia’s deputy managing director and head of capital markets.

Last May, Indonesia’s Rajawali Group and US-based Marriott International, which own Sheraton Imperial Kuala Lumpur Hotel on a 51:49 basis, put the hotel up for sale. Industry estimates had placed the hotel’s price at between RM450 million and RM500 million. There has been no news of any sale, raising questions on whether it will proceed if it is not a done deal.

Another interesting deal is the sale of Royale Chulan Bukit Bintang hotel by Boustead Holdings Bhd to Singapore-listed Hotel Royal Ltd for RM197 million. The deal was inked in February 2018 and Boustead received 10% as deposit. Twenty-seven months later, the parties have not obtained all the approvals required from the federal and state authorities.

While the parties have mutually agreed to extend the completion period to June 30, will the purchaser still be keen on the asset if no approvals are obtained by then? Could the asset be worth less now? Singapore hotel operators have not been spared from the impact of Covid-19 either.

According to Nabeel, the thinking of some purchasers now may be, “Let me protect what I have got before I go expanding into other markets or areas or investments.”

Another area of concern is upcoming hotel room supply. “I think developers who are building hotels will think twice, delay construction or change the usage to a product better suited to the market,” says Toh.

Singapore’s Royal Group bought the former Wisma KFC from the Employees Provident Fund and plans to turn the former office building into a 430-room luxury-class hotel. It is unclear if the group will proceed with or delay the plan.

Moreover, if new room supply comes into the market, it could put further pressure on average room rates.

Permodalan Nasional Bhd (PNB), for example, is expected to open the 232-room Park Hyatt at PNB 118 and the 544-room Conrad Kuala Lumpur in Jalan Sultan Ismail next year. These are in the luxury hotel category. With some experts projecting recovery of room rates to take two to three years, MAH says the current losses sustained by hotels may extend into 2021. Thus, it would be interesting to see if PNB’s upcoming luxury-end hotels will be able to fetch the high rates associated with the brands when they open for business.

Which category of hotels is likely to be worst hit?

According to Nabeel, the most significant impact is felt within certain segments of the market, and not across the entire sector. “What we have seen so far is that the few properties that have shut down share a similar profile, that is, they are generally at the more affordable end of the market, non-branded and performing poorly even before the MCO.”

Previndran, meanwhile, opines that resort hotels are likely to be worst hit. “They would be the last hotels to be in demand,” he says.

He expects non-branded hotels to take a longer time to recover and that mid-range hotels, which are dependent on tour groups, to be hit.

Toh agrees that resort hotels may be affected more than business hotels in the city centres. “That’s because beach holidays will not be a priority and the cost to run such hotels is usually high. For most of the city centre hotels, due to their location, they are eligible to become quarantine centres. This will help cushion the impact during these trying times.


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