Far East H-Trust joins Sentosa hotel project

It will pay S$138.5m for 30% stake under deal with sponsor FEO

Published Mon, Sep 22, 2014 · 04:00 PM
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FAR East Hospitality Trust (Far East H-Trust) has entered into a joint venture deal with sponsor Far East Organization (FEO) to develop a S$443.8 million Sentosa hotel project, said to be the last such hotel project on the island "at least in the foreseeable future".

The real estate investment trust (Reit) will hold 30 per cent of the project, which amounts to an investment of S$133.1 million, or S$138.5 million after adding other Reit expenses.

The development integrating two distinctive hotels - Outpost Hotel Sentosa and Village Hotel Sentosa - sits on a heritage hotel site at Artillery Avenue, won by its sponsor in March this year for about S$100-150 million, a sum which includes an upfront land premium and annual "rent" payments over its 60-year lease.

The site comprises a cluster of conserved buildings which have been repurposed as hotels.

It is not usual for Reits to acquire assets which are being developed, but Far East H-Trust said it will be able to lock in a lower cost of investment by entering at an early stage, as opposed to Reits' usual practice of buying completed developments.

The acquisition cost translates to just S$522,000 per key, versus an industry average of S$846,000 per key for earlier hotel transactions done in 2013 and 2014 (excluding five-star and boutique hotels).

In other words, it is S$324,000 cheaper per key as compared to if it had purchased a new hotel.

"This will help to also bring down our overall average cost for this entire project if we were to acquire the remaining 70 per cent down the road," CEO of the Reit manager Gerald Lee told reporters.

The Reit intends to acquire the rest of the stake when the hotel is completed since it has a first right of refusal to its sponsor's completed assets. Prices would have to be assessed and negotiated based on the market conditions at that time.

Outpost Hotel and Village Hotel will cater to the upscale and mid-tier visitors respectively. The Reit has found that the bulk of the hotels on Sentosa, about 60 per cent, served the luxury market, followed by 30 per cent in the upscale category, leaving the mid-tier segment underserved with only two hotels: Siloso Beach Resort and Costa Sans Resort.

Outpost and Village will have 230 and 620 rooms respectively, adding to the 3,000 or so rooms across 16 hotels on Sentosa. For the 12 months ended March 2013, the number of visitors to Sentosa grew 8 per cent to 20.5 million people.

According to Mr Lee's estimates, mid-tier hotels on Sentosa charge rates from low to mid-200 Singapore dollars per night, while upscale hotels charge high-200 to mid-300 dollars per night. By far, Resorts World Sentosa's rates would be among the highest - from mid-300 to 500 dollars a night. Its occupancy rate, north of 90 per cent, also surpasses its counterparts' of about 80 per cent.

Buying and re-zoning sites for hotel development have become difficult since the government stopped releasing hotel sites this year and tightened its approval of new applications for re-zoning land for hotel development.

Mr Lee sees the authorities' move as a natural progression to clamp down on rampant hotel building, after a hotel sector boom followed the opening of the integrated resorts in 2010.

"There was a proliferation in conversion in the last few years and if left unchecked, there can be a lot of supply in some unintended places.

"The government has also been quite concerned about labour requirements. With more hotels, more foreigners will also be needed, given the shortage of Singaporeans in this sector, so this is one key consideration for them to slow down the release of land sales for hotel development," Mr Lee said.

He believes that hotel supply will become more controlled three years from now (taking into account the fact that projects take three to four years to complete) and will "eventually smooth out".

While the latest deal, to be entirely debt-funded, is unlikely to affect its distribution to unitholders, the Reit has seen its revenue per available room (RevPAR) bruised by the unstable economic recovery in Singapore and a series of unfortunate external events which dampened visitor arrivals to Singapore in the first half of this year.

Units of the Reit rose to a high of S$0.825, before ending half a cent lower at S$0.81 on Monday.

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