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The Hotel Owners' Great Debate: Is it Better to Buy or to Build?

Category: , Posted:09 Mar 2012 | 06:00 am

PHUKET: Decisions, decisions. Our lives often revolve around them like a lotus in a whirlpool. In through the 'out' door and out through the 'in'. Or just 'smash and grab' like some random jewelry heist.
But wait, we have a topic, and rolling into 2012 it has never been more relevant. Hotels coming into the market place in Phuket have historically been a rare and endangered breed.
Perhaps like some hooded rainforest owl who has found its way onto the menu in a host of Chinese restaurants. Frankly speaking, I don't like the odds on the owl.
Shakespeare was said to utter the catchphrase "To be or not to be?" Prospective hotel buyers stuck in the waiting game are faced with the question to "buy or build?"
It's a long line, boredom often sets in. Angst. Anyone who has tried to line up at Phuket airport immigration lately in tandem with a string of charter flights to Snow land can attest to the edgy panic.
Sweaty palms, racing heartbeat, is it a heart attack? And who is Ivan?
The current lineup of hospitality assets range from Mvenpick Resort in Karon, the former Courtyard by Marriott located city center Patong, and the Evason Rawai.
All allowing purchasers to get in the market fast. Cash in on the tourism boom and become a striker versus a beach warmer in the hotel Olympics.
Agents such as Jones Lang LaSalle Hotels, CBRE Thailand and others are issuing press releases on glowing prospects faster than the trees can be cut down in Myanmar to make the paper.
Hotel buying can be compared to high stakes poker. Different strategies for the mixed bag of players. Owner/operators, private equity and conglomerates are just a few of the split personalities.
In the trade we categorize by what is called an investment horizon, though in local lingo in the entertainment district you could classify these into short time or long time holds.
For financial institutions or funds existing assets represent sound cash flow, low development risk and in today's topsy turvey world, stabilized returns. More venturesome groups look at upside exercises renovation, branding, and repositioning. Ultimately a mid-term holding period is taken with the ultimate end game of selling at a premium.
Of course, you have other groups looking to build portfolios, grow management groups or else the lucrative set of individuals who just want to own a hotel as part of a larger collection of trophies.
The truth is, buying over existing hotels can be a minefield. There are two basic deal structures, either purchasing a company along with its liabilities or else just the raw asset.
In the case of the former, this includes taking over existing staff, possible debt or legal impediments and all manner of items that are often overlooked.
Straight asset deals are easier, but fall into the minority of transactions given tax implications on a gain versus a simple share purchase.
Overseas buyers face an even greater hurdle if the project is not BOI (Thailand's Board of Investment) approved for 100 per cent foreign ownership. Options include joint ventures, leasehold or a property fund.
Rope in the unknown costs of capital improvements once you start looking in ceilings and evaluating physical plant machinery and all of a sudden that upgrade is well over budget.
Given the current market conditions with the availability of debt to developers, one has to say any hotel asset needs to critically studied to see if it may just be better to start all over again. Build new and don't inherit the sins of the father.
Again, stress, distress and vulture capital continues to circle over the playing field, and look for opportunity. But it never stops amazing me, with the availability of land, why some prospective hotel owners don't simply do the math and start fresh.
Yes, there are exceptions and big picture thinking for larger investors but as a whole the debate on buy vs build needs careful consideration and planning. There is no fast track to success in either regime so do your homework.
Either or neither very may well be the best course of action.
As for that owl, it's probably best it stay hidden in the tree tops.

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