Asia’s biggest hotel deal in a decade was sealed last month, when the Middle Eastern sovereign wealth fund, The Abu Dhabi Investment Authority (ADIA) entered into a HK$18.5 billion (€2.1 billion; $2.3 billion) agreement with the Hong Kong conglomerate, New World Development.
In the gulf investor’s first ever property purchase in Hong Kong, ADIA has acquired a 50 percent stake in the city’s three prime luxury hotels via HIP Company, its wholly-owned subsidiary. With the joint venture partnership, New World’s stake in Grand Hyatt, Renaissance Harbour View and Hyatt Regency TST has reportedly been halved to 32 percent and that of Chow Tai Fook Enterprises, New World’s controlling shareholder, to 18 percent.
PERE understands that the deal has worked out to be more than $10 million per room key.
Terming the deal as an “opportunistic” buy, Simon Lo, executive director at Colliers International, said that the market price of $10 million per key for the hotels located in traditional business locations was low. For comparison purposes, he gave the example of a service apartment in the Causeway Bay district, which ended up selling for more than $10 million two years ago.
“Using that as the benchmark – we cannot find any other closer comparison – we believe that the average rate could have been 10 to 20 percent higher were the hotels in a better condition,” he said. “Some of these hotels may be aged, and the new buyer may have to pump in more money for upgrading or restoration.”
The deal is understood to reflect a yield of close to 3.6 percent, a better return on investment in comparison to the 2.8 percent yield on prime office assets, according to estimates by CBRE.
Such deals are also hard to materialize in a place like Hong Kong, where most of the quality assets in the sector are retained by local landlords and developers for long term investment, according to several real estate brokers.
A further analysis of the local hotel industry indicates that the market remains subdued. According to Lo, traditional business locations on the Hong Kong Island currently had 15,000 high tariff hotel rooms, a number that has remained stagnant for many years, given that there is no more land supply or acquisition opportunities in the CBD area.
Falling visitor arrivals blamed on the mainland, China’s economic slowdown, and the communist party’s corruption crackdown are all exacerbating a decline in the sector. Hotel occupancy and the average room rate in the region have both witnessed a single digit decline so far this year.