SINGAPORE (Dec 13): W Singapore — Sentosa Cove (W Hotel), located just 7km from Singapore’s busy CBD, has a spacious, relaxed feel about it. The lobby is vast and the hotel rooms, which have names, are big. For instance, the Extreme WOW suite, with more than 2,000 sq ft, is larger than most condominium units in the city state. The hotel has one Extreme WOW suite and two WOW suites. A WOW room is designed to impress guests. In addition to the Extreme WOW and WOW suites, there are 93 Wonderful rooms, 15 Spectacular rooms, 97 Fabulous rooms, six AWAY rooms, two Spectacular AWAY rooms, one AWAY suite, 21 Marvelous suites and two Fantastic suites. Altogether, W Hotel has 240 rooms and suites, ranging from 40 to 195 sq m, along with a ballroom, function rooms, 24-hour F&B outlets and a lounge bar — the WOOBAR — which is being renovated.
Sentosa is likely to play an important role in the next decade or so, following the launch of the Greater Southern Waterfront master plan. CDL Hospitality Trusts has entered into a transaction that will ensure its unitholders benefit from this initiative. On Nov 21, it announced the proposed acquisition of W Hotel from its sponsor, a unit of City Developments (CDL), for $324 million. It will also divest Novotel Clarke Quay to CDL for $375.9 million and make a forward puchase of a new hotel to be built by CDL at the site.
Novotel Clarke Quay has 403 rooms and the divestment cost per key is $933,000. W Hotel’s acquisition cost per key is $1.35 million. Although the cost per key is higher, W Hotel is a luxury hotel managed by Marriott International and has a longer land lease of 86 years compared with Novotel Clarke Quay, a midscale hotel with just 57 years of land lease left.
Few luxury hotels in Singapore have changed hands. Earlier this year, Andaz Singapore was sold to Hoi Hup Realty for $475 million, or $1.39 million per key. Andaz is a concept hotel by Hyatt. In December 2013, The Westin Singapore was sold by a fund to Daisho Group for $1.53 million per key.
As part of the transaction, CDL will be redeveloping Novotel Clarke Quay into an upper-midscale hotel, managed by Marriott under the Moxy brand, with up to 475 rooms, at a maximum cost of $475 million, or $1 million per key. The new Moxy hotel will have a fresh 99-year lease. Moxy is one of the newest lifestyle boutique hotel concepts by Marriott that is designed to attract the next-generation traveller, which includes the millennial. CDLHT does not need any outlay for the new Moxy hotel, as it will pay for it only when it is ready in 2025. The transactions are subject to unitholders’ approval.
“Our starting point was [figuring out how to] retain a hotel in this very prime location, which is suitable for a lifestyle hotel. Hospitality assets are so hard to secure in Singapore and we didn’t want to surrender the hotel without a chance to re-secure the site,” explains Vincent Yeo, CEO of CDLHT’s manager.
Keeping Singapore weightage high
Singapore accounts for about 60% of CDLHT’s asset base, and contributes around 60% to its net property income. In the first three quarters of the year to Sept 30, Singapore contributed 61.4% to NPI of $103.2 million. After divesting Novotel Clarke Quay, Singapore would contribute 53% to NPI and account for 57% of assets. With the purchase of W Hotel, Singapore will make up 62% of CDLHT’s assets and contribute 57% to NPI. When the new hotel is acquired in 2025, the Singapore concentration rises to 68% of assets, with contribution to NPI increasing to 64%.
“It’s important to preserve a certain weightage in Singapore because it offers stability [in distributions] and demand [for rooms] remains strong,” Yeo says. “The timing is good for W Hotel to bring the weightage of Singapore back up and, five years later — as an estimate for the opening timeline — we will get Novotel Clarke Quay back [as a new hotel] and bring the overall Singapore portfolio weightage up to what we would like to have.”
As he tells it, the transaction with CDL is beneficial to unitholders. CDLHT investors get an uplift in valuation, as Novotel Clarke Quay was acquired at $201 million, and by selling it to CDL, capital is unlocked and recycled into W Hotel. “We have an actual gain. There is uplift to the underlying landbank and we sold [Novotel Clarke Quay] at $175 million [above] the purchase price,” Yeo says.
The new Moxy hotel will have more rooms than Novotel Clarke Quay and will carry a higher valuation, as hotels are valued per key. Although the total gross floor area of the new hotel is 15,540.7 sq m compared with a GFA of 34,908.7 sq m for the old Novotel Clarke Quay, the valuation of the new hotel is much higher.
Having more rooms will also be better for revenue. “Being able to maximise the yield (that is, RevPAR, or revenue per available room, and margins) is very important,” Yeo says. Having more rooms also means higher margins for investors, as room margins are generally better than those for F&B outlets. On F&B, the focus is likely to be on beverage, as Moxy will be a lifestyle hotel for the younger generation, with a rooftop bar overlooking the Singapore River and Marina Bay.
Supply subsides
Following large increases in hotel rooms in 2015 and 2016, supply subsided last year. According to Cushman & Wakefield, citing Singapore Tourism Board numbers, 1,450 rooms were removed from the market in 2018, reducing hotel stock by 2.1% to 66,994 rooms. “In 2019, total hotel supply is expected to increase by 1,712 rooms, driven by the three new hotels in Sentosa, Capri by Fraser China Square and the completion of AEI [asset enhancement initiative] works at Swissôtel The Stamford,” Cushman says, adding that new room supply is expected to fall below 1,000 annually from 2020 to 2022.
Of the 1,712 rooms being added this year, more than 800 were in Sentosa. Raffles Hotel reopened with 115 rooms, and the 329 rooms that were being refurbished at Swissôtel The Stamford were included in the tally.
In data compiled by Cushman, for the first nine months of the year, overall RevPAR (average day rate multiplied by occupancy rate) increased 1.4%, with the improvement seen across most hotel segments. “Driven by increases in both ADR and occupancy rates, luxury, mid-tier and economy hotels saw a year-to-date improvement in RevPAR of around 2.4%, 3% and 1.4% respectively. Despite a rise in occupancy rates, overall upscale hotel RevPAR saw a slight decline of 0.1% YTD, owing to lower room rates,” Cushman says.
Consultancy Howarth HTL forecasts that the number of rooms will increase by 789 next year. Of this, 206 rooms will come from the Dusit Thani Laguna Singapore resort at Laguna Golf Course, and 190 will come from THE EDITION by Marriott, which occupies the site of the former Boulevard Hotel.
“Novotel Clarke Quay is being divested at a time when supply is low. It’s a pity to lose that Singapore concentration, so at the same time, we negotiated with the sponsor to acquire W Hotel, as it is a very good asset. It is out of the PPS [profit participation security] structure, good for the REIT [real estate investment trust] and good for capital appreciation,” Yeo says.
Master plan boost for Sentosa
Sentosa figures strongly in the Greater Southern Waterfront master plan, introduced during this year’s National Day Rally speech. The Greater Southern Waterfront comprises 30km of the southern coastline of Singapore. The PSA city terminals at Tanjong Pagar, Keppel and Pulau Brani will be moving out of this area by 2027, freeing up land for redevelopment. This will allow for more housing, commercial and entertainment opportunities in the area.
Eventually, Brani will be linked to Sentosa and house a futuristic Discovery Park. In April, Resorts World Sentosa announced its expansion plan, RWS2.0, with a proposed investment of $4.5 billion. The plan comprises an expansion of about 50% of new GFA, adding more than 164,000 sq m of new attractions and lifestyle offerings. This major expansion will be delivered in phases, with new attractions opening every year from 2020 to 2025, when the project is expected to be completed.
As a result, CDLHT should continue to benefit from the limited new supply and growing MICE (meetings, incentives, conferences and exhibitions) market in the next few years, which will support a gradual recovery in the local hotel sector, even after the divestment of Novotel Clarke Quay.
W Hotel’s conference facilities are one of the largest outside of RWS, and it is outside the area of construction around RWS. Sentosa’s tourism infrastructure should have a positive impact on W Hotel. “Historically, hotels within or near theme parks have tended to do well — it’s the convenience of being close to attractions,” Yeo says.
In a recent report, Vijay Natarajan, an analyst at RHB Securities, says there are multiple catalysts for local hotels, including those that involve the Greater Southern Waterfront. “Plans for large-scale tourism redevelopment over the next few years (which include the Resorts World Sentosa/Marina Bay Sands expansion, Sentosa Brani Master Master Plan, Mandai makeover and the Greater Southern Waterfront) should help make Singapore’s hospitality scene more vibrant. Overall, for 2020, we expect visitor arrivals and RevPAR to increase 2% to 5% on the back of positive demand-supply despite market uncertainties. CDLHT is our preferred pick for the hospitality sector.”
Clarke Quay rejuvenation
The larger upside in the longer term for CDLHT is likely to be the rejuvenation of Clarke Quay. The CDLHT-CDL transaction is part of a bigger plan to redevelop Liang Court (see “Liang Court redevelopment: A win-win situation”).
Clarke Quay, along the Singapore River, is popular with locals and tourists as an eating, drinking and entertainment hub. The Clarke Quay precinct is situated only minutes from the CBD. Liang Court is a couple of minutes’ walk from Fort Canning Station on the Downtown Line. Clarke Quay is also served by the North-East Line.
Novotel Clarke Quay was acquired in 2007. Owing to the limited available acquisition opportunities at Clarke Quay, there are considerably high barriers to entry, and the new Moxy hotel presents a rare opportunity for CDLHT to retain a presence in this precinct, CDLHT’s manager said in the November announcement.
“For the longest time, investors were asking about the redevelopment potential of Novotel Clarke Quay. There is potential, but it’s very hard to realise it unless your stars are all aligned. Here is that one chance to execute it,” Yeo says. He is excited about the entire redevelopment. “Looking at the whole environment at Clarke Quay, it’s going to be quite a dramatic transformation and we are getting back a hotel in a similar spot but in a more gentrified environment, with open spaces and connectivity with the river and Fort Canning.”
Unitholders’ interest in focus
The redevelopment consortium — which comprises CDL, its joint-venture partner CapitaLand and the latter’s REIT, Ascott Residence Trust — will not know the exact redevelopment costs until April. Thus, CDLHT’s manager structured the deal such that $475 million is the ceiling price for the new Moxy hotel. If the redevelopment of the hotel costs less than $475 million, CDLHT pays less but it will not have to pay more if costs rise.
“Usually, for turnkey projects, there are progress payments, but we structured it such that no progress payment takes place and we are free to recycle capital,” Yeo says. “On the whole, we negotiated a sweet deal for unitholders: We are not taking on development risk, there is a cap on the price. [We get] savings, we get back a Singapore asset and unitholders stand to benefit from [the transaction] five years later — and we still have Singapore representation.
“In terms of holding the asset, capital return must be considered by investors,” Yeo says. “When you divest, you get capital return, and if investors are concerned about [distribution per unit] dropping in the interim, that’s where we can top up DPU. That’s our way of returning some of the capital back to unitholders. Ideally, the board is likely to [support] maintaining DPU to investors and giving some capital distributions.”
