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SCMP Reporter

Booming tourism industry may lure investors back to property trusts

Regal Hotels International Holdings, controlled by  Lo Yuk-sui, hopes to raise at least HK$4 billion from the sale of units in a real estate investment trust based on its five hotels in the city, sources familiar with the deal said.

If successful, the initial public offering will be Hong Kong's fifth reit, and  first since May, when Great Eagle Holdings sold units in its Champion Reit for HK$6.29 billion.

After an initial burst of enthusiasm, investors lost  interest in reits as their shares flagged.

Champion Reit posted the worst after-sale performance, with its shares down 23.92 per cent from the offering price as of last Friday's close. Prosperity Reit, controlled by Cheung Kong (Holdings), has fallen 8.8 per cent from its IPO price.

Only the government's Link Reit and Guangzhou Investment's GZI Reit have bucked the trend.  The Link, which made its debut in November last year, is up 57.48 per cent from the initial sale price while GZI Reit has risen  just 3.41 per cent since its IPO.

Not surprisingly, other developers have  dropped reit plans. Henderson Land Development shelved its HK$3.9 billion Sunlight Reit in June while Sun Hung Kai Properties put its HK$3.1 billion Sun Millennium Reit on hold.

The Regal Hotels sale is being timed to come to market shortly after Industrial  and Commercial Bank of China's US$19 billion  Hong Kong and Shanghai listing set for later this month. ICBC, the mainland's largest state-owned commercial lender by assets, loans and deposits, is set to launch the international roadshow next week for what will be the world's largest share sale.

'Regal Hotels is expected to sell about  40 per cent [of the reit] and will keep the remaining stake as a long-term investment,' one source said. The properties involved have a net asset value of more than HK$10 billion.

Merrill Lynch and Deutsche Bank are arranging the share sale.

Sources close to the deal said Regal Hotels has set up a company to run the hotels on the reit's behalf in return for management fees. That should give Regal Hotels a stable income supply, the source said.

By selling Hong Kong's first hotel-based reit at a time of rising room and occupancy rates, analysts said Regal Hotels could prove attractive to investors, although the inherent volatility of the hotel business means it will have to offer fairly juicy returns - at least 5.5 to 6 per cent annually.

'You are buying Hong Kong's strong tourism growth story when you're buying into a hotel reit now,' said Janice Tan, an analyst with CLSA. 'Room rates have been climbing steadily and there is a lot of upside for the industry players.

'[However],  investment yield for a new reit has to be competitive.'

Hong Kong's hotel operators are enjoying a banner year,   thanks to a surge in tourist arrivals.

According to the Hong Kong Tourism Board, the average hotel room rate last month was HK$920 a night, up 18 per cent from September last year.

The average occupancy rate climbed three percentage points to a  healthy 89 per cent, even as the number of hotel rooms on offer rose 3.4 per cent, official  data showed.

Dao Heng Securities research head Eric Yuen Chi-fung  warned, however, that investors should not focus too much on the industry's current buoyant prospects.

'A hotel's room rate is marked to market and is subject to seasonal factors, whereas office and residential properties would have a relatively more stable rental stream due to their lease cycle,' Mr Yuen said.

Regal operates five hotels with more than 3,300 rooms, including the Regal Airport Hotel on Lantau, Regal Hongkong Hotel in Causeway Bay, Regal Kowloon Hotel in Tsim Sha Tsui, Regal Oriental Hotel in Kowloon City and Regal Riverside Hotel in Sha Tin. Its core earnings grew 25 per cent year on year to HK$289.1 million for the six months  to June  due to  the rising room rates.

After the spin-off, Regal Hotels' main assets will be the Regalia Bay luxury house project in Stanley and other overseas hotels including two hotels in Shanghai, sources said.



Regal Hotels eyes HK$4b from reit IPO