Murray Building sale highlights hotel yield appeal

Harbour Centre Development's higher-than-expected offer for the Murray Building in Central underscores developers' increasing optimism about hotel investment.

The company bought the property for HK$4.4 billion on Wednesday, aiming to convert it into a hotel.

"If we include the cost of converting the building into a hotel development, the investment cost of each room would be about HK$19 million," said Alfred Lau, a property analyst at Bocom International, adding that set a record for hotel rooms in Hong Kong.

Harbour Centre might want to build a landmark project in order to strengthen its hotel brand, Lau said.

The strong bidding for the building indicates that Harbour Centre is optimistic about the upside potential of hotels in the city.

Consultancy Knight Frank, in its annual "Greater China Hotel" report, said Hong Kong was expected this year to draw more international overnight visitors than Beijing, Shanghai, Guangzhou and Macau. However, the city's five-star hotel stock is the second-lowest among these cities, making the room rates the most expensive in this group.

In the first half of this year, no new five-star hotels opened in Hong Kong. Knight Frank expects the occupancy rate to remain stable due to the limited supply of five-star hotels.

In the property investment market, investors are willing to offer aggressive prices for hotel acquisitions.

Research by consultancy Colliers International shows Butterfly on Morrison in Wan Chai was sold at a healthy price last month. Despite the hotel providing only 93 rooms and it lacking a rating, property investment firm Gale Well paid HK$7.31 million for each room.

Rooms at Le Rivage and Domus Queen, serviced apartments in Western, sold for HK$8.88 million and HK$10 million, respectively.

Simon Lo Wing-fai, an executive director at Colliers International, believes developers and property investors are willing to pay aggressive prices for hotels as they provide a higher yield.

"A hotel is probably the best investment [under the current weakening market condition]. The yield of a hotel is more than 3.5 per cent. It is higher than that of other kinds of properties. The yield for prime offices is 2 per cent only," Lo said. "Developers and investors may treat hotels as a defensive investment as the market outlook remains positive."

However, Lau said: "We saw the demand for high-end hotels is weakening due to the poor global economy. The demand from the business sector is not strong as the businesses of some industries, such as the financial sector, are not doing well."

Lau said Harbour Centre could generate a gross operating profit of about 5 per cent from the Murray Building project. "But the margin is low. You can get a higher return if you invest in other projects," he said.

Shares of Harbour Centre Development rose 2.58 per cent to close at HK$14.34 yesterday.