PRIME PROSPECTS

PERCHED on a prime site in the Central business district, the Hilton hotel was ripe for the picking. One look at its nondescript exterior, noticeably dowdy among mirror-clad corporate neighbours twice its height and the writing was on the wall.

It didn't matter that only a year ago the interior was lavishly refurbished. Not even the $15 million marble lobby could save the gracious 30-year-old.

The Hilton sale was the latest and largest in a series of rumbles that began last year when hotels were snapped up for large sums of money only to be torn down to make way for commercial space.

If the Hilton is demolished - financial analysts say it almost certainly will be - then it will follow the Ambassador, China Harbour View and Lee Gardens hotels. All gone and forgotten, replaced by impersonal corporate towers, as will be the China Merchants and Fortuna hotels this year.

The big difference is that the Hilton is a five-star hotel and successful at that. The white marble staircases, Viennese chandeliers and Russian paintings will have counted for naught. Not even the high occupancy rate, elegant restaurants or faithful clientele will have mattered enough to save it.

Hutchison refuses to divulge its plans, but isn't denying the possibility of demolition. Head of corporate affairs, Laura Cheung, said vaguely: 'There are a number of options being considered by the company. We could continue to manage the hotel ourselves, but we are also looking at its potential.' Financial analysts say a demolition will set a precedent that is likely to seriously threaten other top hotels occupying prime turf. This move may even signal the death knell for hotels in the Central business district. It will further reduce the dwindling number of hotel rooms and push up rates at the remaining hotels.

There are strong rumours that the Ritz-Carlton and Furama in Central and the Miramar and Sheraton hotels in the Tsim Tsa Tsui business district are high up on the demolition list. It has even been suggested that the Mandarin is at risk, if present property trends continue.

With Grade A office space becoming scarcer and more expensive (property experts predict office rentals could reach $100 per square foot within two years) the natural trend is for hotels to give way. 'International companies are tripping over themselves toestablish a base before China opens up to the rest of the world and all international businesses want to be located in prime office space,' says Asia Equity director, Clive Weedon. 'Prices are bound to keep soaring.' Senior analyst at Morgan Grenfell, Alan Hutcheson has no doubts as to the Hilton's future. 'Look at it this way: the Hilton has 739 rooms and even if we are generous with its occupation rate the room revenue works out to be $310 million a year. The shopping arcade, food and beverage outlets will bring in a further $290 million. Take a 30 per cent profit margin and this works out to about $180 million a year.

'On the other hand, multiply the space (the Hilton has 27 storeys with a total gross floor area of 573,820 square feet and an additional 20,970 in the shopping arcade, restaurants and so on) by $70 per square foot (this rate is going up all the time) and the annual revenue comes to $482 million. Although this is less than the revenues from the hotel, overhead costs are only 20 per cent which means a clear profit of $386 million.' An office block also generates a much steadier income and requires only a handful of staff to run it, Mr Hutcheson said.

The research manager at First Pacific Davies, Mr K.S. Koh, expects hotel prices to soar if the present trend of diminishing supply continues. 'Hotel prices will go up to the point where knocking the hotel down to make office space won't be justified. Hotel prices here can afford to go up because they're certainly not the highest in the world and businessmen can afford them.' The director of the Hong Kong Hotels Association, Mr Manuel Woo, expressed fears that Hong Kong's position as a major tourist destination would be threatened if more hotels closed, adding that there was already a shortage of rooms during peak season. 'We had more than seven million visitors last year, but what will happen if there is not enough accommodation?' he said.