Building Hotel On Commercial Properties

Is it really giving you more return on investment instead of renting it out?

The current market sentiment and speculation have caused many investors to pull the brakes on their investment activities. They choose to ‘wait and see’, while some adopt extra precautionary measures as they are spooked by the uncertainty.

The news that is going around town is that the rental of high-rise units is abysmal to say the least, while there is nothing much that anyone can do to boost the rental returns of landed properties. If that is the case, what about commercial properties? Is it also suffering the same fate?

As reported in NAPIC 2015, there is an overall softening of the property market. It stated that, “The commercial sub-sector is expected to be equally or more challenging in comparison to the residential sub-sector. The performance of the office market is expected to plateau.” With such news, what can investors do to leverage the rental of their commercial properties?

The same report also mentioned that the leisure sub-sector is expected to remain positive. The budget allocation of RM1.2 billion to the Ministry of Tourism and Culture to achieve the targeted foreign tourists arrival of 30.5 million in 2016 may help support a key component of the sub-sector, namely the hotel industry.

As such, enterprising investors have begun tapping into the trend of building hotels on commercial properties, especially shop-lot units. This trend has seen tremendous growth especially in the past few years. To find out whether those who have adopted such a strategy have seen a higher return on their investment or otherwise, Property Insight talks to a few big names in the industry.

SANDEEP GREWAL, Founder Of Subhome Management

Subhome Management has been in the industry for only a few years and started off with a students’ hostel in Cyberjaya. According to its founder Sandeep Grewal, the project was for them a way to ‘test the water’ before they ventured into the real deal.

Sandeep’s team then converted the commercial units of Summer Suite in Kuala Lumpur into a hotel. “The problem we had with this property was that the building was a commercial building. Every unit in the SPA (Sale & Purchase Agreement) is state as for ‘office’ use. Each office lot in this building comes with a toilet and kitchen, so what’s left is for you to put in a bed and wardrobe. But it’s still an office and who wants such an office in the KLCC area? So we identified the problem and decided to convert it into a small hotel.”

“We examined the location – it was supported by LRT and monorail stations, and it’s off Jalan Ismail. With all the amenities and accessibility, I knew since day one that it has to be a hotel.”

“We actually started listing the units on Airbnb to test the market and to gauge the response. When we started to get enquiries, we became more convinced that this was something that we must do. Then we hired a few hoteliers as advisors to set up the whole structure for us.”

Why did Sandeep do that? “These experienced hoteliers taught us how to get the necessary licensing and approval. There were many things that we did that other operators were not doing, so it was a little costlier to do it our way. We got our hotel license from DBKL last year.”

“The whole market is now experiencing rental depression, and many people are not able to rent out their units. It is even worse for office units actually. Since it’s a tough market, it’s time to do something about it – so we decided to do this. The plus point of doing this business is that you get higher returns. Within three to six months, we were already getting higher rental compared to the rest of the market.”

“We are doing this to provide solutions to developers as well as investors who want to do this. I am also an investor, so I understand the pain of not being able to get a good rental return. Besides the rental, doing this also spares us from having to look for tenants for each unit,” Sandeep advises.

PK LEONG, President of Malaysia Budget Hotel Association

Leong’s experience in budget hotels goes back many years, to the time he built Corona Inn at Bukit Bintang. Although he has since sold the hotel, he is still involved in the hotel business with Comfort Inn being one of the hotels in his portfolio.

According to Leong, “The property price has gone up many times. My own property has increased in value 10 times in 20 years, so on average, that is an appreciation of 5% every year. If you run a hotel business on your property, you can surely get additional profit on top of the property appreciation. If you are not running any business on your property, then it’s not generating any money.”

“In addition to that, if the money you’re generating from your business increases over the years, the property value will also increase accordingly. The average ROI of buildings nowadays is 3% to 4%, but if you do business on your property – for example, a hotel in the Tengkat Tong Shin area, you can get higher returns than that. The property appreciation alone will net you 5%, not to mention the profit from the operations. That’s double the value already.”

Leong bought a 6-storey property at RM600,000 in 1991. “It is a residential property that is located within a commercial zone. Now the property is worth RM6 million at least. But this is if you started 20 years ago. In doing business, you need to be ahead of the trend. If you are coming in a bit later, it will be tougher for you.”

“I started with Corona Inn. I was an engineer and was helping my friend to build the hotel. Then he asked me to join him in running the hotel business. We were one of the first players in the industry.”

Leong thinks it is very important to ride the wave and adapt to the current trend. “People came and asked if we had a room that cost less than RM100. That’s when I realised that there was a market for rooms that cost below RM100 and decided to open another hotel to cater to that market. After that, people came and asked if we had a room that cost less than RM50 per night. So I built another one to meet the demand for that market. That’s how I started.”

DENIS ONG, Vice President Of Malaysia Budget Hotel Association

Ong started in this industry because he has worked at many hotels before. “The time came when I told myself, ‘Okay it’s time that I set up my own’. Instead of buying properties for this purpose, I decided to rent. I started the business in 2005 with a 3-storey shoplot and offered backpacker accommodation.”

“At that time, I rented the property at around RM6,000 per month, but gave up the business around 4 years back because the rent had gone up to RM15,000. Since then, I shifted my focus to set up hotels in second tier cities like Klang and Shah Alam,” he elaborates.

“If we are talking about property appreciation at this moment, the entry level is very high. You can imagine when Leong bought his property for RM600,000, the bank was quite flexible. But in this current market, if you were to buy a RM6 million property, the bank might need a 30% down payment, which is RM2 million. On top of that, you need money for renovation if you want to build a hotel. To do that, you need RM4 million, so you cannot match the game already.”

As the Vice President of MyBha and the founder of Smart Hotel, Ong points out that, “The challenge in the current market is that hotels in Malaysia are not setting its rates right. For example, if a five-star hotel maintains a minimum rate of US$100 per night as a standard, then we would have an easier time of setting the minimum rate for the other hotel categories. When five-star hotels don’t adhere to the minimum rate, this will severely impact the pricing for the four-star and three-star hotels. The other problem is that many hotels claim that they are five-star hotels, but they actually don’t meet the standard.”

KENNETH OH, Founder Of Anggun Boutique Hotel

Oh is among those who ventured into the hotel business in recent years. “Previously, I worked in a travel agency and started off with a guest house. From one guest house, I expanded to two and three, until I realised I could not generate the profits that I wanted from it.”

“I bought the property for Anggun Boutique Hotel a few years back and has since enjoyed an appreciation of more than 10%. I try to add more value to the hotel by including a restaurant and wellness spa. The moment the LRT operates in this area, the appreciation will easily be double. People come to this area for what it has to offer such as the nightlife, shopping, food and accessibility.”

As MYBHA’s Chairman for the Kuala Lumpur Chapter, Oh says the challenge he faces is that the law keeps changing. “We are not able to keep up with the guidelines on how to do certain things. Before this, the law was quite straightforward, but along the way, it kept changing. When the council changes it and there is no communication, people like us are caught in the confusion. Also, there is also an oversupply issue in the industry. You can find budget hotels everywhere.”

JERRY HO, Founder Of  Apple Hotel

Ho started out providing student accommodation before he ventured into budget hotel. “In 2003, my partners and I bought our 6-storey property at RM3 million and people told me that I was crazy because the market price was only around RM2 million. The price was not an issue to us because we believed that it was a good investment. We converted the shop-lot into a hotel. Today, the property is worth around RM20 million.”

Is running a hotel really better than renting the shop lot out in the traditional sense? “If I rent my shop-lot out to tenants, I might only get a profit of 10% in terms of cash flow. But if you’re running a hotel, you’re easily looking at a profit of 30% and that excludes the capital appreciation on the property. The cash flow from a hotel business is definitely better in comparison to collecting rent. However, you do need to put in more effort in the beginning,” Ho says.

“I have a hotel in the Bukit Bintang area which we bought for about RM6 million three years back. Now it is already worth RM15 million. Converting your shop-lot into a hotel can be very profitable depending on the location of your property.”

He adds, “There are people who converted their shop-lots into hotels yet lost money because they did not go through the proper channels. These are the people who run illegal hotel businesses, and when you do it illegally, you don’t get to enjoy the true value of your hotel, hence the valuation remains as commercial properties.”

“To unlock the full value of your hotel, you must own the property. If you are renting the units, you are indirectly helping the owners to increase the value of the building,” Ho emphasises. “The capital appreciation of the hotel can also help increase your cash flow. During bad times, your cash flow would definitely decrease, but the value of your hotel would remain stable.”

CK MOO, General Manager Of

Sovotel Boutique Hotel

Sovotel is a hotel known for its character, soul, inspiration, personality and stylish design. Its general manager, Moo says, “We adopted this concept because we want to revolutionise the budget hotel industry. The uniqueness of our hotel is that we provide massage equipment in all our rooms – i.e. foot massage, massage chair and massage bed.”

“When people stay in a budget hotel, they are not expecting too much because they are paying for what they get. We are charging you an affordable price but we have more things to offer. We do not charge extra for the massage equipment; they are all complimentary.”

Moo explains that they spent a lot of money on renovation and interior design for branding purposes so that the look and feel at every branch is the same.

“Our hotels are located in business or commercial areas. We target the working class who stay at our hotels for work purposes, hence the reason for providing massage facilities. Those are the things that would be useful for our guests.”

Moo agrees that converting one’s property into a hotel can really benefit the owner. “If you are a landlord and you rent your units to a hotel, you are already at an advantage because the hotel business is a long term one. You can easily sign the contract for 10 years. And after 10 years, the value of your property would definitely have gone so much higher. It is better to run a hotel instead of doing other businesses on your commercial properties. It is actually the best choice if you are the owner of the property,” he says.

RAYMOND NG, Director Of Best View Hotel

Having rebranded in 2010, Best View Hotel has gained valuable insights and local knowledge to cater for guests that include individual travellers, as well as international business and leisure travellers.

Ng started Best View Hotel because he and his partner, Dato D’Raja Kelvin Chow realised that the number of hotels within commercial properties has grown rapidly. “For us, to offer a standardised service in different locations for a standalone hotel would not be an easy task. Instead of putting the risk in one particular property, we split the risk of the business into different locations.”

“It depends on the season and the location of the hotel. Looking into the outlets we are currently running, they have brought us at least double profit compared to earnings from renting. The figure could multiply during peak seasons for properties that are in good locations. By converting the properties, we realised that we are able to enjoy a profit margin of 200%.”

Ng points out, “We encountered several challenges when we entered this business. We needed to do major renovation. We often faced technical issues and tight deadlines as we needed to deal with many parties to ensure the various issues are taken care of. The process begins with the license submission where we need to seek approval from the ministry and local authorities. The process will definitely be a long one as it’s hard to get hold of the decision makers.”

“Converting your commercial property into a hotel will help you generate more revenue than renting it out to a third party as we need to take note that, with the latter, it’s not a permanent income as the tenant would find alternatives.”

IN A NUTSHELL

Building hotels on commercial properties is indeed generating more revenue and appreciation for investors instead of merely renting it out. However, there are many aspects that need to be considered before investors take the plunge.

The hotel industry is about providing services, be it a five-star or budget hotel. It is crucial for owners who want to build a hotel to familiarise themselves with the hospitality industry. It is advisable for them to go to the right people to seek the right knowledge, for example, getting in touch with the Malaysia Budget Hotel Association if they want to set up their own brand, or take up an existing hotel franchise.

Since the entry level to this business is currently high, you might want to consider a joint venture with the owner of commercial properties if you want to do this right.