Kuala Lumpur hotels get new lease on life

Kuala Lumpur hotels get new lease on life
By Jon Gorvett Published: April 17, 2007

KUALA LUMPUR: Kuala Lumpur's downtown hotels have long been well-known for their business centers, bars and banqueting halls, but recently the city's hospitality sector has been making waves in a new area - real estate.

The five-star, 384-room Westin Hotel was sold to a Thai investment firm earlier this year for 455 million ringgit, or almost $132 million. The price exceeded all previous local records for a hotel sale, breaking through the million-ringgit-per-room barrier and turning the spotlight on a string of potential deals for other high-end hotels.

These include a closely fought competition for the 921-room Renaissance Kuala Lumpur, which has the interest of some Hong Kong and Malaysian property groups, and the Crown Princess KL, which comes with an adjacent shopping center.

"The Westin sale set a new benchmark," said Sarkunan Subramaniam, executive director, Malaysia, for the Knight Frank real estate consultancy. "Before this, we were seeing values of 570,000 ringgit a room, 750,000 tops."

Although hotel prices are rising, talk to almost any hotel manager here and you will likely see a highly furrowed brow. "Hotels in KL for the past three years have not been getting good returns," said I.Z. Melvin, general manager of the luxury downtown Hotel Maya. "Although occupancy rates have been high, the yield has not been very encouraging, due to high competition on room rates."

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The competition reflects management's attempts to keep occupancy up despite a string of bad regional headlines: SARS, bird flu and, last fall, the smoke from forest fires in neighboring Indonesia. Add to these problems the relatively low value of the Malaysian currency and the large number of available hotels and the result has been good for customers, but not business.

"If you compare room rates in KL with other cities in Southeast Asia, you see that here they are at quite a steep discount," said Chong Tjen San, an analyst with Am Research, part of the AmInvestment Bank Group. "You can get a five-star hotel room here for $60 to $80. The same chain would charge $200 down the road in Singapore."

The real estate interest seems at odds with the hotels' poor returns, but two factors - expectations that room rates will rise and that the ringgit will strengthen - have changed investors' long-term views and transformed these city center towers into hot properties. "The people who bought the Westin were very smart," Subramaniam said. "They knew that in the next year or so we'll likely see a tremendous hike in room rates. We've reached rock bottom and the only way is up."

The forecast is echoed widely by the hotel managers themselves. "Room rates are low, yes, but they went up last year and this year we'll see that happen again," said Martin Jones, the Westin's general manager. Also, "investors look at the price based on the current weak ringgit and anticipate that it must get stronger in the coming years."

Such an increase would enhance margins and take advantage of recent initiatives to increase tourism. The most recent is "Visit Malaysia Year 2007," a government-backed campaign to increase tourist arrivals to 20 million this year from around 17.5 million in 2006.

The Regent Kuala Lumpur is being renovated as a Four Seasons, while Ridges, W and Grand Hyatt are all looking at new downtown developments. "There will be at least four big international hotel chains coming in over the next two to three years," Melvin said.

But the success of any of the ventures is expected to hinge on the time-honored real estate fundamental of location. The capital's prime spot is undoubtedly the city center, the heart of Kuala Lumpur's "Golden Triangle" business and entertainment district, which locals call KLCC. It includes the iconic Petronas Towers.

"For prime hotels in the KLCC, there will still be demand," Ching Tjen San said. "Those in a good strategic location will do very well."

That factor also helps explain just why the Westin's sale broke records.

"We're right in the KLCC," said Jones, the manager. "Really, our location just couldn't get any better."