Owning luxury hotels is tough but can be richly rewarding for patient capital

[SINGAPORE] The prestige associated with owning luxury hotels can appeal to the vanity of the super rich. However, hotel ownership is hardly for the faint-hearted.

Revenue may be volatile. When a pandemic, natural disaster or major terrorism incident strikes, room and event bookings can quickly vanish.

On the other side of the ledger, operating costs could be high, especially for hotels that are intent on pampering their guests. With the tight labour market, attracting and retaining talent is often challenging in Singapore’s hospitality sector.

Besides bearing operating costs, hotel owners, especially in the premier segment, need to invest heavily in maintenance and improvement works to keep their products competitive. Think of upgrading rooms every couple of years or changing dining concepts periodically.

Perhaps, managing hotels trumps owning them. 

Typically, the hotel management business runs on an asset-light model that generates recurring income from multi-year management contracts.

Owners who want to tap the networks, brand standards and services of major global hotel management groups such as Marriott International, Hilton Worldwide, Accor, IHG Hotels & Resorts or Hyatt Hotels might need to pay a pretty penny.  

Indeed, savvy hotel management groups may leverage their know-how to charge owners a whole suite of fees, and leave the risks of shocks affecting the hotel industry in specific markets largely with the owners.

Still, interest in owning hotels is strong.

Privatisations

Frasers Property succeeded in its second attempt to privatise Frasers Hospitality Trust (FHT). Stapled security holders approved the privatisation offer at a scheme meeting in August.

FHT was delisted in October. By privatisating the trust, ownership of FHT’s 14 hospitality properties in nine key cities transferred to Frasers Property. 

In October, a deal was unveiled for controlling shareholder Jardine Matheson to take Mandarin Oriental International private. Jardine Matheson’s wholly owned subsidiary, Bidco, will acquire the 11.96 per cent of the hotel group’s total issued share capital which Bidco does not already own by way of a scheme of arrangement.

Independent shareholders of Mandarin Oriental will vote on whether to approve the scheme at a court meeting on Dec 8. 

The offer to independent Mandarin Oriental shareholders of US$3.35 per share in cash comprises a US$2.75 scheme value and a US$0.60 special dividend from the hotel group’s sale of part of One Causeway Bay (OCB), a commercial development in Hong Kong.

It represents about a 52.3 per cent premium to the hotel group’s closing price of US$2.20 on Sep 29 – the last business day before the company announced the possible OCB sale.

Certainly, much value in luxury-focused Mandarin Oriental is tied to its hospitality management business. The group operates 43 hotels, plus residences and homes in 26 countries and territories.

However, while Mandarin Oriental has made moves to become asset-light, it is a major hotel owner. Prized assets where the hotel group has ownership interests include luxury hotels Mandarin Oriental Hong Kong, located in Central, and Mandarin Oriental Singapore, which overlooks Marina Bay.

For the first half, owned hotels contributed more to underlying profit attributable to shareholders than the management business.

Are groups such as Frasers Property and Jardine Matheson wrong to grow their exposure to owning hotels? Not in my view, provided they are patient.

Patient capital

Arguably, owning hotels, especially in great locations in major cities, can yield rich returns through capital appreciation of the properties. Also, robust returns might potentially be generated by redeveloping the hotels for other uses.

Post privatising Millennium & Copthorne Hotels (M&C), City Developments Ltd (CDL) divested various hotels in the M&C portfolio.

For example, Millennium Hilton Seoul, South Korea, near Seoul’s downtown business district, and its adjoining land plot were sold for about S$1.25 billion. CDL recognised a total gain on the disposal of S$526.2 million, net of taxes and related transaction costs. 

Mandarin Oriental’s former Excelsior Hotel was redeveloped into One Causeway Bay. Alibaba Group and Ant Group have struck a deal with Mandarin Oriental to buy the top 13 floors of OCB as their headquarters in Hong Kong, as well as the building’s rooftop signage and 50 parking spaces, for US$925 million. Around US$758 million from the sales proceeds will be distributed to the hotel group’s shareholders via a special dividend.

Over time, numerous hotels located in Singapore’s prime residential districts have been redeveloped into high-end condominium developments. 

The former Ladyhill Hotel is now The Ladyhill, the old ANA Hotel is now Nassim Park Residences, the Marco Polo Hotel is now Grange Residences, the Copthorne Orchid Hotel is now The Glyndebourne. What was the Hotel Equatorial is now The Equatorial, and the Cockpit Hotel has been turned into Visioncrest Residence.

The former Boulevard Hotel in the Orchard Road vicinity was redeveloped into The Singapore Edition hotel and Boulevard 88 residences. 

Owning premier hotels is hardly glamorous – hard work is involved and return on equity may be unexciting based on carrying hotels at market value. 

Still, owning premier hotels can pay off in the long term, especially hotels occupying large prime sites in cities whose economies have grown substantially.

Could owners of longstanding hotels that sit on large land tracts reap mega returns from future development works? Think of Shangri-La Asia’s Shangri-La Singapore along Orange Grove Road or Goodwood Park Hotel along Scotts Road, which is owned by the family of the late tycoon Khoo Teck Puat.

Much value in tycoon Ong Beng Seng’s Hotel Properties Ltd might be unlocked by redeveloping its Orchard Road-area hotel voco Orchard Singapore together with the neighbouring Forum and HPL House into a mega mixed development with gross floor area of about 1.23 million square feet. The trio of properties sits on freehold or 999-year leasehold land, with a combined area of 150,987 sq ft.

Singapore is home to numerous luxury hotels. These hotel owners invest heavily to ensure their hotels are competitive. Having top luxury hotels in turn helps the city-state attract high-spending visitors. 

Ultimately, owning high-end hotels here requires deep pockets and patience. Mega gains from redevelopment or selling to buyers seeking trophy assets in an increasingly important global city are possible, but will take time to materialise.