BTO: Is Raffles Hotel on sale or not?

Business Times - 04 May 2009

COMMENTARY
Is Raffles Hotel on sale or not?

URA's approval for its expansion leaves many wondering

By EMILYN YAP

 

REGARDLESS of what his plans really are for Raffles Hotel, Saudi billionaire Prince Alwaleed bin Talal seems to have made a smart move by getting the authorities' approval to expand it.

 

The prince's investment company said recently that its unit, Fairmont Raffles Hotels International (FRHI), had secured the go-ahead to add as many as 78 guest rooms at the hotel's shopping arcade. Coming just days after a London-based newspaper speculated on the hotel's sale, the news once again sparked interest and left many observers wondering about the national monument's fate.

 

Surely FRHI has no plans to sell the hotel if it is still planning to expand it, some say. Well, it depends. The option to redevelop the shopping arcade might come in handy in more ways than one.

 

Supposing that Raffles Hotel is up for sale, the expansion option would make FRHI's offer more attractive to prospective buyers. And if the speculated terms of the offer are true, there would be quite a lot of sweetening to do.

 

Asking price $670m

 

For one, FRHI may be asking for close to $670 million for the hotel, based on the London report. This is pretty hefty considering floundering market conditions today. A BT report last year noted that the hotel and shopping arcade was valued at about $200 million in 2005.

 

The London report did not mention if FRHI has asked to retain management of Raffles Hotel. A long-term management contract (reportedly lasting 40 years) was part of the deal when it tried to sell the property in May last year. Some interested buyers may also find this condition a hard one to swallow if it is still there.

 

If the deal involves a high asking price and a long-term management contract, FRHI would have to justify its terms by showing that high returns are achievable, possibly by having more hotel rooms. And it could add value to its offer by getting the paperwork ready for the next owner.

 

FRHI can expand the hotel on its own but so far, there are few signs of work happening soon. On a visit to the shopping arcade a few days after its possible redevelopment was announced, shops remained open and many sales assistants did not know of plans to move.

 

'It is business as usual for the foreseeable future,' a Raffles Hotels & Resorts' spokeswoman told BT. 'Any proposals for strategic investment in the hotel and arcade are considered preliminary in nature and it would be premature to discuss them at this time.'

 

Downturn repositioning maybe

 

The Urban Redevelopment Authority's (URA) data last month did not show when the project might get its temporary occupation permit.

 

But supposing that the prince is not seeking a buyer for Raffles Hotel - as his investment company said after the London report surfaced - FRHI may truly be looking for more returns.

 

URA granted approval for the creation of 78 hotel rooms across a gross floor area of over 79,300 sq ft. Assuming that 70 per cent of the new rooms are filled at $590 per night, the hotel can already expect to bring in an additional $11-plus million a year.

 

However, this does not factor in rental losses if some of the shops in the arcade have to make way for rooms. BT understands that retail rents there range from the mid- to high-$20s psf, and they make up a relatively stable source of income in the unpredictable tourism industry.

 

Without details from the hotel, it would be hard to pinpoint changes to come. But some industry observers believe that the hotel will retain some popular outlets and restaurants for a more optimal mix of returns.

 

But why think about having more rooms now, when the global economy is sinking, tourism numbers are down and the swine flu is on the attack? As a property consultant pointed out, renovation works may not be ideal when business is booming. 'In a downturn like this, it will be good to reposition.'