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Investments in the hospitality industry i.e. hotels and resorts, are very unique because of the combination of real estate and business investments. Many attributes of a business is displayed together with a high capital outlay that is a norm in real estate investments. However, rentals of resort and hotel rooms have a short shelf life as guests stay for only a day, minimum. Rental rates can also rapidly increase (ie, during festive seasons.) This varies from other forms of real estate investments. Another factor that is alien to other forms of real estate investment is the management and the amount of labor involved in hotels and resorts. This can directly contribute to the value of the property, offering a fantastic turn around capability and therefore, a potential for real estate investments.

Hotels and resorts though complicated are very high cash-yielding investments that require specialized operation expertise. To help you make a sound hotel investment, we have outlined some basic criteria to ensure that the investment is a true winner.

Varied Market & Geographical Segments. Avoid hotels that depend on just one market segment (corporate, government or leisure). This provides relief from a downturn of either travel sectors. Likewise, ensure the hotel is not overly dependent on tourists from a single region as it runs a risk of low occupancy should any political problems arise.

Varied Source of Business. Ensure there is a varied source of dealers. i.e. from a variety of travel agents, internet engines and direct bookings. Just as above, you do not want to be overly dependent on one source.

Choice of Management Company. In many cases, the investor and the manager are two separate parties. You must fully understand the capability and reputation of the management company. The best way is to request for their portfolio of hotels and analyse the performance statistics i.e. revenue is maximized and expenses optimized.

Thorough Diligence. Caveat emptor and give yourself enough time to thoroughly "understand" the property. Conduct a thorough marketing, financial, legal and property audit that covers all licenses, approvals etc.

Market Positioning. Ensure the property is well positioned and attracts the correct market segment. You might not want your hotel perceived as a 'Meeting & Convention Hotel' when its capacity for such a market is limited or its a purely leisure hotel. You would need to investigate the markets and the properties positioning/branding in the market.

Easy Exit Strategy. Of course as an investor, you must also think of the eventual sale of your property. To attract a variety of buyers, ensure the structure of the purchase entails an easy termination of the management contract./franchise agreement, funding prepayment or assignment and minimal tax exposure.

Other Issues. Other pertinent issues to look at include accounting systems, maintenance and energy management, food and beverage quality and concepts and reporting systems.

But what makes a hotel successful? End users, that is hotel guests, are becoming more sophisticated. In Kuala Lumpur, where majorities of the hotel guests are business travelers, there is a need to tailor products to meet the more discerning and specialised needs of business travelers in order to achieve success. This includes business facilities and services, IT and multimedia facilities.

Other considerations for a successful product include:

  • Market driven design which is attractive and efficient
  • International accessibility
  • Highly service orientated which is personalised
  • High quality of facilities and services
  • Effective packaging and marketing
  • Easy access and egress
  • Technology orientation.

Though there are over 25,000 hotel rooms in Kuala Lumpur and 2,400 serviced apartments, at the moment, occupancies have been steadily picking up since the September 11th incident, SARs, Iraq War etc. Room rates have also remained stable last year with some hotels and serviced apartments recording increments. Anticipated yields for hotels and serviced apartments range from 6.5% to 11%, depending on category and locations.

Our hot picks are hotels, resorts and serviced apartments with the following traits:

1. Within or around KLCC, top resort destinations that are accessible (Penang, Langkawi, Kota Kinabalu, Kuching, Kuantan) and even suburbs of Kuala Lumpur for Serviced Apartments.
2. Functional Room Designs and General Layouts
3. High End and Medium End Categories (low end category provide cash flows but low yields for the same management costs)to cater for international and domestic tourism
4. Potential to offer products to the more discerning consumers

A word of caution though, hotels and serviced apartments would initially require some capital injection, but with the right management, these efforts are really lucrative.

Previn is the Chief Executive Officer of Zerin Properties, a Licensed and Registered Estate Agency Service Provider. He was previously the Chief Officer Marketing of an international Hotel Management Company. For feedback and inquiries, please e-mail previn@virtualrealty.com.my

Hotel Sector- Commentary

The current hotel industry is still too focus on providing rooms to meet the future demand. There is an acute lack of convention, seminar, exhibition and meeting room facilities (MICE Facilities) within current hotel establishments and so are those that are currently under construction or being planned. Competition from neighbouring countries like Singapore and Thailand are gaining popularity in respect of accommodating and organising international events within hotel establishments. With the nations numerous promotions programs to promote Malaysia as an alternative international venue for tourism and business activities, it further supports the need for the hotel industry to cater for the specific needs for the international market.

The impeding completion of the Kuala Lumpur City Centre Convention Centre, the promotion of Putrajaya Convention Centre and the push of Multimedia Super Corridor will make Malaysia more attractive and exposed to the global market. This is an opportunity that will create large potential for growth in visitor arrivals and the spin offs that could be created.

End users, that is, hotel guest are also becoming more sophisticated consumers. In Kuala Lumpur City, where the majority of the hotel guests are business travelers, hotel operators must increasingly need to tailor their products to meet more discerning and specialised needs in order to achieve success.

Supply-Hotels

At present, there is a total of approximately 25,000 hotel rooms supply in Kuala Lumpur. In the 4 and 5 star range within Kuala Lumpur city centre, the total number of rooms are approximately 8,300 units or 33.23% of the total amount.

The future supply of 4 and 5 star hotel rooms in Klang Valley by end 1999 amounts to an additional 8,244 units out of which 6,278 or 76.15% will be in Kuala Lumpur city and the balance 1,966 or 23.85% outside Kuala Lumpur. By this time the total 4 and 5 star rooms will account to 59.61% of the total rooms in the Klang Valley.

Future Supply of 4 - 5 Star Hotel Outside KL



Table 1: Future Supply of 4 & 5 Star Hotels in the Klang Valley
Source: Signforce Research


Graph 1: Existing, Future and Cumulative Supply of 4 and 5 star Hotels in the Klang Valley
Source: Signforce Research

Demand

Generally, hotels in the Klang Valley have been consistently achieving occupancy above the 70% mark in 1997, with hotels in the suburbs achieved a better percentage compared to that of in Kuala Lumpur.

However, over the past 5 years, the annual average occupancy rate of hotels in the Klang Valley have been declining. The enormous number of additional rooms has been identified as the main factor that contributed to this downtrend. It is envisaged that this downward trend will continue in the next few years.

Over the recent months, due to the economic downturn and haze problem, hotels in Kuala Lumpur have reported 30 percent to 50 percent occupancy rates while some are as low as 10 percent to 20 percent. Hotels in Petaling Jaya and Shah Alam fared better with average occupancy of 50 percent to 70 percent where much of the support comes from local industries in the area.

In terms of average room rate (ARR) of the hotels, it structure can be divided into five (5) categories:-

  • Luxurious hotel - the ARR starting at RM300 and above. This includes, Carcosa Seri Negara (RM800-RM1500), Palace of Golden Horses (RM320 onwards), and Hotel Imperial (RM310 onwards);
  • The ARR between RM250 and RM300. Most of the 5-star hotels lies under this category that includes Regent, Shangri-La, Renaissance, JW Marriott, Sheraton Subang and Sunway Lagoon Resort;
  • ARR that range between RM200 and RM250 such as KL Hilton, PJ Hilton, Istana Hotel, Pan Pacific Hotel, Radisson Plaza KL and Holiday Villa;
  • ARR less than RM200 where most of the 3 and 4-star properties are under this group such as Concorde Hotel, Melia Hotel, New World, Parkroyal etc.
  • Lastly, ARR of the budget hotels which is usually less than RM100. Among others, Swiss Inn, Brisdale Value Inn, Midah Hotel etc.

Market Prospects

The current hotel industry is still too focus on providing rooms to meet the future demand. There is an acute lack of convention, seminar, exhibition and meeting room facilities within current hotel establishments and so are those that are currently under construction or being planned. Competition from neighbouring countries like Singapore and Thailand are gaining popularity in respect of accommodating and organising international events within hotel establishments. With the nations numerous promotions programs to promote Malaysia as an alternative international venue for tourism and business activities, it further supports the need for the hotel industry to cater for the specific needs for the international market.

The near completion of the Kuala Lumpur International Airport in Sepang, the promotion of the Multimedia Super Corridor and the coming Commonwealth Games in 1998 will make Malaysia more accessible and exposed to the global market. This is an opportunity that will create large potential for growth in visitor arrivals and the spin offs that could be created.

End users, that is, hotel guest are also becoming more sophisticated consumers. In Kuala Lumpur City, where the majority of the hotel guests are business travelers, hotel operators must increasingly need to tailor their products to meet more discerning and specialised needs in order to achieve success.

Considering the enormous supply of rooms coming into the market and the slowing down of the regional economy, the future for the Kuala Lumpur market in 1998 and beyond looks pale. This outlook is shared by the existing and future hotel operators and owners.

Serviced Apartment Sector

The serviced apartment market sector is a considerably new concept of residential cum commercial hotel development. The establishment of the UBN Park along Jalan Sultan Ismail, Kuala Lumpur in 1988 is the first serviced apartment in Malaysia.

Supply

To date, there are approximately 1,542 units of serviced apartments in the market with over 3000 units currently under construction that will enter the market by the year 2000. MiCasa Hotel Apartments, Pacific Regency Suites and Duta Vista Executives are among the leading serviced apartments in the Klang Valley.

At present, the 4 and 5 star serviced apartments in the Klang Valley total up to about 552 units or 35.79% of the total amount. This is shown in Table 2 below.

Supply of Serviced Apartment in Kuala Lumpur No. of Rooms
Pacific Regency Suites 153
Crown Regency Apartments 90
Total Existing Unit of Serviced Apartments in KL 243

Supply of Serviced Apartment outside Kuala Lumpur No. of Rooms
MiCasa Hotel Apartments 241
Duta Vista Ececutives 68
Total Existing Unit of Serviced Apartments outside KL 309

Table 2: Existing Supply of 4 and 5 star Serviced Apartments in the Klang Valley
Source: Signforce Research

The future supply of serviced apartment in the Klang Valley is astounding with an additional 3,201 units coming into the market by end 1999. The 4 and 5 star units total up to 46.89% or 1,501 units. Out of this, only 241 units or 16.05% will be outside Kuala Lumpur city; all these units being within Lanson Place along Jalan Ampang/Persiaran Ampang Hilir. Table 10 below shows the list of the oncoming supply whilst Graph 5 shows the existing, future and cumulative supply of serviced apartments.

Supply of Serviced Apartment in Kuala Lumpur No. of Rooms
Ascott Serviced Residences (1998) 223
The Maple Suite (1998) 92
Lot 181 Service Apartment (May 1999) 330
Guoman Serviced Apartment (1999) 288
Vision City Project (1999) 288
Capital Square (1999) 400

Future Supply of Serviced Apartment outside KL No. of Rooms
Lanson Place, Ambasador Row (1998) 241
Total 241

Table 3: Future Supply of 4 and 5 star Serviced Apartments in the Klang Valley
Source: Signforce Research


Graph 2: Existing, Future and Cumulative Supply of 4 and 5 Star Serviced Apartments in the Klang Valley
Source: Signforce Research

Demand

The demand for serviced apartments in Kuala Lumpur is unlike the tourist-dependent hotel industry. The serviced apartment sub-sector caters for the economic-driven market niches. Ninety percent are foreigners who require accommodation for extended periods from three weeks to six months.

Most of these foreigners are from UK, Australia, USA and Japan and are primarily involved in the oil and gas industry, information technology and infrastructure projects such as the LRT, KLIA and KLCC developments.

This indicates that the survival of serviced apartments is highly dependent on the expatriate communities who are on contractual employment terms in Malaysia.

The overall occupancy rate of service apartments for the year 1997 in the Klang Valley is 67.97% and this is depicted in Graph 6 below. Table 11 overleaf also depicts the monthly occupancy and average rate statistics for the year 1997.


Graph 3: Occupancy of Serviced Apartments in Kuala Lumpur (1997)
Source: Signforce Research

     
Mont' Kiara Living Sentul Life Style Living @ KLCC Office space Expat Home Kuala Lumpur Bangsar Living