IF you have ever dreamt of owning a hotel and money is not on your side, quite likely your dreams may have been dashed by the amount of money you would need to invest to build and operate a hotel.
But mid-sized hotels here are starting to adopt a sale and leaseback business model that may very well allow investors to take a bite of the hotel sector.
The concept is relatively new in Malaysia whereby individual owners buy a hotel suite and lease it back to the hotel management to be let out to hotel guests.
One such hotel is the Best Western Premier Hotel, housed in Dua Sentral, a milestone development by government-linked developer, Amanah Raya Hartanah Sdn Bhd.
Azuan Ariffin, chief operating officer of Amanah Raya Hartanah, said the model is picking up steam here as he noted that some 80% of the 386 units of hotel suites have been taken up.
“The model is not familiar in this market and many think that this model is a gimmick. We have to prove that this is not a gimmick. We have to change that perception,” he said.
The hotel suites come in built-up sizes ranging from 577sq ft to 1,009sq ft with options of one-bedroom units and two-bedroom units.
Of the 386 units, 248 units are fully furnished hotel suites that are sold with leaseback arrangement with Best Western Premier while the other 138 units are sold without leaseback arrangements.
The units that come with a leaseback option enable investors to lease the units back to Best Western Premier, which manages the hotel suites, at a fixed 7% net return per annum for a five-year period with the option to extend the lease for another five years at the same rate.
“The whole Dua Sentral development has been completed and we are confident that the units will sell out soon,” Azuan said, adding that the hotel has seen a consistent occupancy rate of 70% to 80%.
Dua Sentral is a freehold development in Jalan Tun Sambanthan, located a stone’s throw away from the RM1.2bil transportation hub and integrated commercial development, KL Sentral. The Dua Sentral comprises an office tower and the hotel.
Azuan is particularly proud that the development of Dua Sentral has been completed given its troubled past.
Dua Sentral started out as a 50:50 joint venture between Amanah Raya and Magic Coast Sdn Bhd, a subsidiary of OilCorp Berhad, in 2008. However, the project hit a speed bump when OilCorp ran into financial difficulties two years later.
But the circumstances have certainly turned in Amanah Raya’s favour.
The developer has since bought over OilCorp’s stake in the project, partnered with Best Western Premier to run the hotel and successfully sold its tower block with net floor space of 430,000sq ft to Tenaga Nasional Berhad at RM232mil.
For Azuan, the focus now is to ensure that the hotel is fully taken up.
“We have fulfilled our obligations as a developer of the property but we want to continue to be present in this development to make sure that it continues to run successfully in the long run,” he said.
Azuan noted that the bulk of the hotel suites at Dua Sentral were taken up by investors from Japan, Singapore and the Middle East.
It is not puzzling to see these units being snapped up.
The area surrounding Dua Sentral is bustling with development activity including the completion of KL Sentral, the up and coming commercial space Nu Sentral as well as Little India.
Azuan added that suite owners will be able to enjoy capital appreciation once the vicinity area is fully developed.
The average price for the fully furnished hotel suites with leaseback option is RM1,200psf while the other units are going at about RM950psf.
Note that the average price at Dua Sentral has appreciated more than 30% since the end of 2010 when the fully furnished units averaged at RM900psf and the non-furnished units were sold at RM700psf.
According to Azuan, the average price in nearby KL Sentral is around RM1,200psf.
Given the popularity of the area, room rates are bound to increase steadily at the hotel.
Although investors of Dua Sentral’s hotel suites may not be able to immediately enjoy the increase in room rates due to the fixed 7% return in the leaseback agreement, Azuan said the rate was already a very generous return for investors.
“There is risk in any kind of investment. Here, we are trying to mitigate the risk with a fixed rate so investors will not be affected in the event of a drop in room rates. 7% is considered a generous rate in the market,” he added.
“The sale and leaseback model will work well here if the hotel is associated with good branding. We have the backing of a world-class hotel like Best Western Premier and we are sure available units will be cleared up within the next six months,” Azuan said.