APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
RevPAR of RKH and High Tariff A Hotels, 1997 to 2005
High Tariff A Regal Kowloon Hotel Kowloon Shangri-La HK$ 1,600
1,400
1,200
1,000
800
600
400
200
0 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: HKTB, Regal Hotels International Ltd., Shangri-La Asia Limited, Savills Research & Consultancy
The movement of the RevPAR of RKH has generally tracked the High Tariff A hotel average. RevPAR was affected by the Asian Financial Crises (1997-8) and SARS (2003) but reacted to favorable market conditions such as the I.T. boom (2000), the post SARS recovery and the implementation of IVS (2003). Despite the volatility, the average annual growth rate of the RevPAR of RKH between 1997 and 2005 was 1% per annum, lower than the High Tariff A hotel average of 4% per annum, largely reflecting the negative impact of its aging facilities. It is noteworthy that in 2005, since occupancy rates were at high levels, operators have been more aggressive in raising room rates and RKH was no exception. RevPAR in 2005 was therefore driven largely by room rate rises.
The average room rate of RKH over 2006 recorded a strong increase of 16% compared with the same period in 2005. The average occupancy rate also increased to 86%, compared with 84% recorded over the same period last year, RevPAR over this period increased by approximately 18%.
Outlook
RKH is strategically located in a traditional tourist node and a core business district. The vicinity is served by a comprehensive transportation and road network. Infrastructure projects under construction or under planning, such as The Kowloon Southern Link and The West Kowloon Cultural District, are set to enhance the accessibility and increase the attractiveness of the area.
The strong performance of the import/export trade sector and the growing M.I.C.E. market are expected to continue to support RKH’s business.
In Tsim Sha Tsui, 1,314 hotel rooms will be completed over the next 4 years. However, RKH has ample hotel facilities including meeting, F&B and recreational facilities and has been newly renovated to maintain its competitiveness.
— 513 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Although Hotel Panorama will be completed in early 2007 providing 324 rooms, Hyatt Regency Hong Kong (723 rooms) was closed at the end of 2005 (to be redeveloped into a retail center), resulting in a net decrease of around 400 hotel rooms in Tsim Sha Tsui. Given these factors (and bearing in mind that RKH has been recently renovated), we expect the occupancy rate of RKH to remain high in 2007 and track the market from 2008 to 2010.
Average Occupancy Rate Projections, 2007E to 2010E
High Tariff A Hotels RKH Events Related to RKH 2007-2010 86% — 87% per annum 89% per annum Completion of renovation works, net decrease of available hotel rooms in the district
Source: Savills Research & Consultancy
Higher-than-market growth of room rates is expected in 2007, as the total stock of hotel rooms in the district will only be replenished to levels prior to the closure of the Hyatt Regency while the number of tourists is expected to continue rising. The growth rate of RKH room rates is then expected to track the market from 2008 to 2010, with a 6% to 8% increment each year.
Average Room Rate Projections, 2007E to 2010E
High Tariff A Hotels RKH Events related to RKH 2007 +8% — 10% +9% — 16% Completion of renovation works, net decrease of available hotel rooms in the district 2008-2010 +6% — 8% per annum +6% — 8% per annum —
Source: Savills Research & Consultancy
RKH’s RevPAR is expected to rise along with the High Tariff A market in view of the generally positive outlook for the hotel industry and a rising trend in business travel. Meanwhile, stronger- than-average growth in RevPAR can be expected for RKH in 2007 as the completion of renovation works should restore its competitiveness and the tighter hotel room availability in Tsim Sha Tsui effectively reduces direct competition. The average annual growth rate of the RevPAR of RKH over 2006 to 2010 is expected to be in the region of 10% to 15% per annum, higher than the overall High Tariff A market of 11% per annum.
— 514 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Regal Oriental Hotel
The Kai Tak development, although currently under planning review, is anticipated to be one of Hong Kong’s most extensive redevelopment projects, and is expected to stimulate demand for both hotel rooms and F&B at Regal Oriental Hotel (“ROH”) once the scheme is underway. In the vicinity, the districts of Kowloon Bay and Kwun Tong are being transformed into a major decentralized office node. Currently, ROH is the only hotel in Kowloon East and aims to further enhance its competitive position with completion of new guest rooms offering a ‘hip hotel’ concept to business travelers and tourists.
Location
ROH is the only hotel in Kowloon City, opposite the former Kai Tak Airport.
The Property
ROH, a 15-story building (plus two basement levels) opened in 1982, has a total gross floor area of approximately 243,167 sq.ft. 62 The hotel comprises 390 guest rooms, 3 restaurants, 2 bars, 1 cake shop, 1 banquet hall of approximately 3,400 sq.ft. and 13 meeting rooms. It also provides 6 karaoke rooms including one main hall.
ROH is classified as a High Tariff B Hotel by the HKTB.
ROH is the only hotel offering a full range of meeting and F&B services in Kowloon East63. The majority of its guest rooms offer an open harbor view. The guest rooms are spacious and the availability of ‘triple’ (3 beds) and ‘quadruple’ (4 beds) rooms are attractive to family travelers.
ROH lacks recreational facilities such as a swimming pool or health club.
Asset Enhancement Works
The enhancement works involve:
1) converting a portion of 3/F into 49 rooms;
2) converting a portion of 3/F into a lounge area;
3) refurnishing the existing guest rooms (refurnishing work to half of the guest rooms has been completed).
62 Including 14,200 sq.ft. of Po Sing Court. Source: Regal Hotels International Ltd. 63 A general description of a larger area comprising Kowloon City, San Po Kong, Kowloon Bay and Kwun Tong
— 515 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
The new guest rooms will be operated as a ‘hip hotel’ providing stylish, trendy and fashionable decoration and sophisticated services.
The enhancement works are scheduled to be completed in Q3/2007.
The work area is localized on 3/F, which accounts for only 5.9% of the total covered area of the hotel. The addition of guest rooms will involve no major structural alteration works, but only block wall erection, plastering, laying of tiles and carpet, as well as the installation of sanitary fitments. Noise carpentry work will be kept to a minimum by off-site prefabrication.
Recent works have included the renovation of the hotel’s F&B outlets together with its main lobby and driveway.
Transportation and Vicinity
Although ROH is not served by rail links, Prince Edward Road East on the door step of ROH is the major trunk road serving Kowloon East and connects the area with major industrial / business districts including Kwun Tong, Kowloon Bay, Tsim Sha Tsui and Mongkok in Kowloon. Quarry Bay and Causeway Bay on Hong Kong Island are approximately a 20 to 25-minute drive from ROH via the Eastern Harbour Crossing and Cross-Harbour Tunnel respectively.
The provision of shuttle bus services from ROH to the Airport provides extra convenience to its guests.
The anticipated KCR Shatin to Central Link is expected to improve the accessibility of ROH. This link is expected to shorten travel times between the immediate locality of ROH and major business districts on Hong Kong Island as well as Mainland China. Although the KCRC targeted the completion of the Shatin to Central Link by 2011, the scheme and implementation program are subject to a final decision by the Government of HKSAR.
The move of the Airport from Kai Tak to Chek Lap Kok in 1998 has weakened the business of Kowloon City, however, the area remains attractive to both locals and visitors for its wide variety of Chinese and Southeast Asian cuisine.
Approximately a 10-minute drive from ROH, Kowloon Bay and Kwun Tong, 2 traditionally industrial areas of Hong Kong, are being transformed into a major decentralized office node. The total Grade ‘A’ office stock of these 2 areas combined is expected to increase from approximately 1.9 million sq.ft. in 1995 to 9.8 million sq.ft. by 2010, larger than the total Grade ‘A’ office stock of Tsim Sha Tsui today. These developments, during and after construction, will enhance commercial activity in Kowloon East and ROH.
— 516 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
The Kai Tak development plan, which involves approximately 328 hectares of land, is a long term project and is expected to have a mixed effect on ROH. The Government has recently launched a Stage 2 Public Participation Programme for the Kai Tak Planning Review. There are 3 different draft Outline Concept Plans:
Proposed Land Use Area (hectares) Concept 1 Concept 2 Concept 3 Office — 3 (0.9%) — Mixed Use (Office, Hotel & Retail) 10 (3.1%) 20 (6.1%) 19 (5.8%) Mixed Use (Housing & Commercial) 9 (2.7%) 5 (1.5%) — High Density Housing 41 (12.5%) 33 (10.1%) 14 (4.2%) Medium Density Housing 17 (5.2%) 10 (3.1%) 18 (5.5%) Low Density Housing ——13 (4.0%) G/IC Other Specified Use 45 (13.7%) 42 (12.8%) 43 (13.1%) Metro Park, Runway Park & Waterfront Promenade 42 (12.8%) 48 (14.6%) 50 (15.2%) District & Local Open Space 56 (17.1%) 64 (19.5%) 54 (16.5%) Proposed Multi-purpose Stadium 24 (7.3%) 24 (7.3%) 24 (7.3%) (Including open space) Sports/Recreation ——16 (4.9%) Cruise Terminal 5 (1.5%) 5 (1.5%) 5 (1.5%) Road Network, Amenity Area & Green Belt 79 (24.1%) 74 (22.6%) 72 (22.0%) Total 328 328 328
Source: Planning Department, Savills Research & Consultancy
The Kai Tak development is expected to attract overseas consultants, engineers and related parties when the projects commence, with a number of them opting to stay in ROH or utilize ROH’s F&B facilities or both.
In addition, Kai Tak is one of the potential locations for a Cruise Terminal. The Study on Cruise Terminal Facilities Development of Hong Kong64 expects the cruise market to remain a large and growing presence in international tourism, and Hong Kong could welcome between 776,700 and 1.3 million throughput passengers by 2020. A projected throughput of 776,700 passengers could generate HK$2,884.7 million in tourism expenditure and support as many as 6,907 jobs by 2020.
Views from ROH may change as a result, from an open harbor view to views of a dynamic and interesting urban area. However, possible hotel developments on the Kai Tak site may constitute competition in the longer term.
There are a number of residential developments comprising a total gross floor area of approximately 1.6 million sq.ft. or approximately 2,200 units under construction in the close proximity of ROH. These projects are expected to enlarge the resident catchment of ROH’s F&B business.
Competition
The Harbour Plaza — Tokwawan project, which has a total gross floor area of 226,000 sq.ft. (714 rooms), is the only upcoming hotel project near ROH. Nevertheless, the project is not expected to be completed until at least 2008.
64 2004 Study on Cruise Terminal Facilities Development for Hong Kong by Bermells-Ajamil to Parners, Inc (B&A)
— 517 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
In San Po Kong, 5 hotel projects with a total of 3,186 hotel rooms have been approved by the Town Planning Board to change from industrial use. Only two landlords (representing 990 rooms) have agreed to pay the land premiums, however, no construction work has started on these sites.
Performance
Average Occupancy Rates of ROH and High Tariff B Hotels, 1997-2005
High Tariff B Regal Oriental Hotel % 100
90
80
70
60
50
40
30
20
10
0 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: HKTB, Regal Hotels Int’l, Savills Research & Consultancy
ROH room occupancy rates have moved in line with High Tariff B Hotel occupancy rates. However, ROH’s occupancy rate was higher than the High Tariff B Hotel average in 2004 and 2005, standing at above 90%. The recent surge in visitor arrivals, induced by a marked increase of individual travelers from Mainland China, has benefited ROH more than the overall market.
Average Room Rates of ROH and High Tariff B Hotels, 1997-2005
High Tariff B Regal Oriental Hotel
HK$ 1,600
1,400
1,200
1,000
800
600
400
200
0 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: HKTB, Regal Hotel Int’l, Savills Research & Consultancy
— 518 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Following the airport relocation to Chek Lap Kok and the Asian Financial Crisis, ROH room rates declined sharply by more than 75% from 1997 to 1999. The room rate movement tracked the market thereafter. Between 2002 and 2005 hotel room rates of High Tariff B hotels and ROH increased 39% and 33% respectively.
Despite outperforming the market over the past 2 years in occupancy terms, room rates of ROH have recorded slightly less than market average growth. In addition, at the end of 2005, the average room rate of High Tariff B Hotels was 38% below the 1997 peak, whereas ROH’s room rate was 68% behind its 1997 peak, largely reflecting the implication of the relocation of the airport.
RevPAR of ROH and High Tariff B Hotels, 1997 to 2005
Regal Oriental Hotel High Tariff B HK$ 1,400
1,200
1,000
800
600
400
200
0 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: HKTB, Regal Hotels International Ltd., Savills Research & Consultancy
The movement of the RevPAR of ROH has generally tracked the High Tariff B hotel average. RevPAR was affected the Asian Financial Crisis (1997-8) and SARS (2003). The relocation of the airport from Kai Tak to Chek Lap Kok in 1998 has also affected ROH, leading to another sharp decline in RevPAR in 1999. Strong RevPAR growths were noted in favorable market conditions such as the I.T. boom (2000), the post SARS recovery and the implementation of IVS (2003).
Average Annual Growth Rates of RevPAR of ROH and High Tariff B Hotels
ROH High Tariff B Hotels Average Annual Growth Rate (1998 to 2005) -4% -1% Average Annual Growth Rate (2000 to 2005) 11% 7%
Source: HKTB, Regal Hotels International Ltd., Savills Research & Consultancy
— 519 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
The average annual growth rate of RevPAR of ROH between 1997 and 2005 was -4% per annum, lower than High Tariff B hotels average of -1% per annum, largely reflecting the negative impact of the airport relocation. To eliminate this one-off effect, comparison of the RevPAR movements of ROH and High Tariff B hotel between 2000 and 2005 was made and the result shows that ROH has outperformed the market over the recent years. It is noteworthy that in 2005, since occupancy rates were at high levels, operators have been more aggressive in raising room rates and ROH was no exception. RevPAR in 2005 was therefore driven largely by room rate rises.
The average room rate of ROH over 2006 recorded an increase of 12% compared with the same period in 2005. Although the average occupancy rate edged down to 90%, compared with 92% recorded over the same period last year, RevPAR over this period increased by approximately 10%.
Outlook
ROH’s performance was clearly affected by the airport relocation from Kai Tak to Chek Lap Kok in 1998. However, performance was improved by the Individual Visit Scheme and Hong Kong’s recovering economy.
The Shatin to Central Link and Kai Tak development projects will improve the access to ROH when completed. The vicinity will be strengthened significantly as a residential, commercial and tourism hub. If the Individual Visit Scheme continues to expand to other Mainland cities, this will also be beneficial to ROH.
The completion of the extension works in Q2/2007 and the imminent start of the Kai Tak development projects are expected to keep occupancy rates of ROH reasonably high, but only marginally higher than the forecast for the market as a whole from 2007 to 2010 due to the intended optimization of guest mix towards higher yielding guests of the management of ROH.
Average Occupancy Rate Projections, 2007E to 2010E
High Tariff B Hotels ROH Events Related to ROH 2007-2010 90% — 91% 92% — 93% Completion of extension works in Q3/2007, imminent start of Kai Tak development projects, optimization of guest mix towards higher yielding guests
Source: Savills Research & Consultancy
As ROH is relatively old, its room rate growth is expected to lag behind the market before the enhancement works are completed by Q3/2007. Higher than market growth is expected in 2007 after the enhancement works are finished. We expected room rate movements to run slightly ahead of the High Tariff B Hotel market thereafter, partially because of the intended optimization of guest mix towards higher yielding guests of the management of ROH in spite of slightly lower occupancy rates.
— 520 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Average Room Rate Projections, 2007E to 2010E
High Tariff B Hotels ROH Events related to ROH 2007 +8% — 12% +16% — 21% Completion of extension works in Q2/2007 2008-2010 +6% — 11% per annum +11% — 15% per annum Imminent start of Kai Tak development projects, optimization of guest mix towards higher yielding guests
Source: Savills Research & Consultancy
ROH’s RevPAR is expected to rise along with the High Tariff B market in the order of approximately 13% per annum from 2006 to 2010 in view of the generally positive outlook of the hotel industry. The completion of extension works and the eventual start of Kai Tak development projects will support this growth.
Regal Riverside Hotel
Located in Shatin, Hong Kong’s largest New Town, Regal Riverside Hotel (“RRH”) offers easy access to both the Mainland Chinese border and Kowloon. Although not a traditional tourist destination, nearby attractions include the Shatin Racecourse and the International Dragon Boat Races in June. The launch of ‘Shatin Soho’ in 2005 is aimed at promoting RRH as an up-market dining and entertainment destination for residents of the New Territories. Completion of a further 302 guest rooms in 2008 is expected to raise further the profile of RRH. The main arena for the Equestrian events of the 2008 Olympics will be completed nearby in mid-2007.
Location
RRH is located in Shatin by Shing Mun River and enjoys a pleasant river view while being located in close proximity to a major transportation hub and retail facilities.
The Property
RRH, a 15-story building (plus two basement floors) opened in 1986, has a total gross floor area of approximately 519,046 sq.ft. The hotel comprises 830 guest rooms, 5 restaurants, 2 bars, 1 cake shop, 1 ballroom of approximately 4,750 sq.ft. and 12 meeting rooms. It also provides a range of recreational facilities including a swimming pool, a health club and a shopping arcade of approximately 21,000 sq.ft.
RRH is classified as a High Tariff B Hotel by the HKTB.
RRH is the largest hotel in Shatin. It is renowned for its spacious guest rooms which are 30% larger than hotels of the same class with a distinctive supply of ‘triple’ (3 beds) and ‘quadruple’ (4 beds) rooms. 20 guest rooms are equipped with pantries so as to meet the needs of long-staying guests. In addition, a majority of rooms enjoy a pleasant river view.
— 521 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Asset Enhancement Works
The Asset Enhancement Program involves converting certain suites into an additional 28 guest rooms in 2007 and adding 274 new guest rooms on top of the existing hotel in 2008. After completion by the end of 2008, 302 new guest rooms will be available. Three stories will be added to RRH and the total gross floor area of the hotel will increase to approximately 639,292 sq.ft.
The additional rooms (32% increment) are expected to raise the overall average room rate of RRH while the anticipated rise in the number of guests is expected to enhance the F&B business. RRH revenue is therefore expected to rise significantly after 2008.
To avoid excessive noise during construction, some of the structural elements will be made of steel. Noisy works such as in-situ concreting, formwork fabrication and steel bending will be kept to a minimum. The construction methodology will be strategically planned and construction works will be carried out in rotational sequences to reduce the extent and duration of the noise impact to lower guest room floors. The portion of the topmost guest room floor directly below the construction area will be withheld from sale (about 40 rooms each time) and act as a noise buffer to the guest rooms below. The noisy interior carpentry works will be kept to a minimum by off-site prefabrication. Construction materials delivery will be by tower crane erected on the roof, while the vertical movement of workers will be restricted to fire exit staircases so as to avoid disturbance to the hotel’s normal operations. The construction works will be carried out from 9:00 a.m. to 6:00 p.m. During such time, all the tour group guests, who form a substantial part of the hotel guests, will have already left the hotel for day tours. Disturbance to them will be minimal.
In 2005, RRH launched a project named “Shatin Soho”, with the aim of turning RRH into an up-market dining and entertainment hub comparable to Soho in Central and Knutsford Terrace in Tsim Sha Tsui. Under the project, G/F shop units have been converted into an Italian restaurant, an entertainment bar and other F&B outlets for lease. Also, all the F&B outlets from 1/F to 3/F have been renovated to give a fresh look. Currently, there are seven distinctive restaurants and bars in Shatin Soho, and this number will increase to 15 later. ‘Shatin Soho’ is targeting hotel guests, Shatin residents of approximately 620,00065 as well as the huge population in the New Territories.
It is expected that the F&B business of RRH will be much improved due to the ‘Shatin Soho’ project.
Transportation and Vicinity
RRH is in close proximity to major transportation and retail facilities in Shatin. It is a 20-minute walk from the KCR Shatin Station of East Rail, and a 15-minute walk from both the Shatin Wai Station and City One Station of KCR Ma On Shan Rail.
Although RRH is not situated in a traditional tourist or business district, KCR East Rail provides RRH with easy access to both the mainland border at Lo Wu and to Kowloon. The extension of the KCR East Rail to East Tsim Sha Tsui in 2004 served to further strengthen the connection between Shatin and Kowloon. Ma On Shan Rail which started services in December 2004 links Shatin with Ma On Shan. RRH provides shuttle bus services to the Airport, the Hong Kong Science Park and Tai Po Industrial Zone to cater for the needs of business travelers.
65 Estimated figure for 2005. Source:
— 522 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Located beside KCR Shatin Station and a 20-minute walk from RRH, New Town Plaza comprises more than 360 shops and 50 restaurants in a development of over 2 million sq.ft. and is the largest shopping mall in Shatin.
There are several tourist attractions in the district. The weekly horse races held at Shatin Racecourse have been a popular social event among locals and tourists since the track’s completion in 1978.
The Hong Kong International Dragon Boat Races held on Shing Mun River is the highlight of the Dragon Boat Festival and attract many tourists. Other places of interest include the Che Kung Temple located in Tai Wai which is one of the most famous temples in Hong Kong, and the Hong Kong Heritage Museum with 12 exhibition galleries, is the largest museum in Hong Kong. Shatin Town Hall next to the KCR Shatin Station stages many cultural and community events throughout the year, ranging from concerts to sculpture displays.
Hong Kong Science Park (“HKSP”) is a 22-hectare project on the Tolo Harbour waterfront in Pak Shek Kok around 15 minutes drive from RRH and provides a knowledge-based and campus-like environment for high-technology enterprises. Upon completion (in three phases), HKSP will provide a total gross floor area of 3.6 million sq.ft. of office, research & development, conference and exhibition and serviced apartment space.
Phase 1 of HKSP was completed in 2004 and current tenants include Philips Electronics, Vtech, On Semiconductor and GP Electronics. Phase 2 is scheduled for completion in 2008. Short-term contract staff working at HKSP will take accommodation in RRH while permanent staff may make use of RRH’s F&B and entertainment facilities.
Shatin Trunk Road T4, Route 8, the Shatin to Central Link (“SCL”) and the main arena for the 2008 Olympic Equestrian events are four key projects planned for Shatin. The first three infrastructure projects are expected to improve the accessibility of Shatin as a whole while the Olympic event is expected to draw a significant number of visitors to Shatin in 2008.
Competition
The hotel stock in Shatin District mainly comprises two hotels, namely Regal Riverside Hotel (830 rooms) and Royal Park Hotel (448 rooms). As the Horizon Suite Hotel at Tolo Harbour (831 rooms) only offers 2-bedroom or 3-bedroom suites, it is considered a serviced apartment and does not constitute direct competition to RRH.
A hotel project is under planning at The Chinese University of Hong Kong. The new hotel, scheduled for completion in 2009, will provide 600 rooms. Nevertheless, its remote location means that this new hotel only represents very indirect competition to RRH.
— 523 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Performance
Average Occupancy Rates of RRH and High Tariff B Hotels, 1997-2005
% Regal Riverside Hotel High Tariff B 100
90
80
70
60
50
40
30
20
10
0 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Regal Hotels International Ltd., HKTB, Savills Research & Consultancy
The average occupancy rates of RRH were lower than the High Tariff B hotel average before 2004. Benefiting from the strong rebound in tourist numbers after 2003, occupancy of RRH and High Tariff B hotels reached 90% and 89% respectively in 2004. RRH further outperformed the market average by recording an occupancy rate above 91% in 2005, compared with a High Tariff B hotel average of 86%.
Average Room Rates of RRH and High Tariff B Hotels, 1997-2005
Regal Riverside Hotel High Tariff B HK$ 1,400
1,200
1,000
800
600
400
200
0 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: Regal Hotels International Ltd., HKTB, Savills Research & Consultancy
— 524 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
While following a similar trend to the High Tariff B average, the average room rate of RRH has been lower than the market average over the past few years. The lower than average room rate is a result of the hotel’s location in a non-core commercial/tourist district, and the management’s desire to maintain a high occupancy rate. RRH’s room rates describe a downward trend from 1997 to 2003, falling by about 60% over the period. Given a strong recovery in the tourism industry after SARS, RRH’s room rates returned to positive growth in 2004. Rates registered growth of 27% between 2003 and 2005, compared with a 42% growth rate for High Tariff B hotels during the same period.
At the end of 2005, the average room rate of High Tariff B Hotels was 38% below the 1997 peak, whereas RRH’s room rate was still 48% behind its 1997 peak. This finding suggests that room rates of RRH have room to increase.
In 2004, room revenue and F&B accounted for about 68% and 29% respectively of RRH’s total operational revenue, while the High Tariff B hotel figures are 61% and 33.5% respectively. It is noteworthy that the contribution from F&B is likely to show strong growth after the opening of ‘Shatin Soho’ at the end of 2005.
RevPAR of RRH and High Tariff B Hotels, 1997 to 2005
HK$ Regal Riverside Hotel High Tariff B 1,000
800
600
400
200
0 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: HKTB, Regal Hotels International Ltd., Savills Research & Consultancy
The movement of RRH’s RevPAR has generally tracked the High Tariff B hotel average. RevPAR was severely dampened by the Asian Financial Crises (1997-8) and SARS (2003) but reacted to favorable market conditions such as the I.T. boom (2000), the post SARS recovery and the implementation of IVS (2003). The average annual growth rate of RevPAR of RRH between 1997 and 2005 was 1% per annum, slightly higher than High Tariff B hotels average of -1% per annum. It is noteworthy that in 2005, since occupancy rates were at high levels, operators have been more aggressive in raising room rates and RRH was no exception. RevPAR in 2005 was therefore driven largely by room rate rises.
— 525 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
The average room rate of RRH over 2006 increased by 7% compared with the same period in 2005. The average occupancy rate also edged up to 92%, compared with the 91% recorded over the same period last year, RevPAR over this period increased by approximately 8%.
Outlook
The occupancy rate of RRH is expected to remain high and room rates are expected to continue rising as visitor arrivals to Hong Kong continue on a rising trend.
While the completion of Shatin Soho may start to help improve RRH’s F&B business from 2006, more obvious improvements are expected to be realized from 2007 after Shatin Soho is fully leased. In addition, although the Olympic Games are taking place in 2008, part of the construction of the main arena for the equestrian event is expected to finish by mid 2007 and be occupied by all divisions of the Olympic Organizing Committee to trial their organizational capabilities for the Olympic Games. Parties related to these events are expected to utilize RRH’s F&B facilities or stay in RRH or both. Notably, the intended optimization of guest mix towards higher yielding guests of the management of RRH from 2009 onwards is expected to reduce the occupancy rate to 89 per cent.
Average Occupancy Rate Projections, 2007E to 2010E
High Tariff B Hotels RRH Events Related to RRH 2007 90% 92% — 94% Completion of Shatin Soho project 2008-2010 91% per annum 89% — 93% Completion of the Asset Enhancement Works, Main Arena for Olympic and Science Park Phase II, optimization of guest mix towards higher yielding guests
Source: Savills Research & Consultancy
Higher growth of room rates is expected in 2007, due to the impact from Shatin Soho and the test event described above. Above-market average rises of room rates are expected in 2008, due to the opening of 302 new guest rooms in that year, together with the main arena for the 2008 Olympic and Paralympic equestrian events and the completion of Science Park Phase II. It is anticipated that more tourists and business travelers will choose to stay in Shatin. This will help improve both the occupancy levels and room rates of RRH. The intended optimization of guest mix towards higher yielding guests from 2009 onwards should help maintain an above-market growth in room rates despite lowering occupancy rates.
— 526 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
Although a 600-room hotel is expected to be completed in 2009, its remote location means that this new hotel only represents very indirect competition to RRH.
Average Room Rates Projections, 2007E to 2010E
High Tariff B Hotels RRH Events Related to RRH 2007 +8% — 12% +11% — 16% Completion of the Asset Enhancement Works, Main 2008 +7% — 11% +15% — 20% Arena for Olympic and Science Park Phase II 2009-2010 +6% — 11% per annum +9% — 13% per annum Optimization of guest mix towards higher yielding guests
Source: Savills Research & Consultancy
RRH’s RevPAR is expected to rise in line with the High Tariff B market in the order of approximately 13% per annum from 2006 to 2010 in view of the generally positive outlook of the hotel industry. The completion of extension works and the Olympic Games will help support this growth.
Limitations on Report
This report contains forward looking statements which state Savills Valuation and Professional Services Limited’s (the Consultant) beliefs, expectations, forecasts or predictions for the future. The Consultant stresses that all such forecasts and statements other than statements of historical facts outlined in this summary report should be regarded as an indicative assessment of possibilities rather than absolute certainties. The process of making forecasts involves assumptions about a considerable number of variables which are very sensitive to changing conditions. Variations of any one may significantly affect outcomes and the Consultant draws your attention to this.
The Consultant therefore can give no assurance that the forecasts outlined in this summary report will be achieved or that such forecasts and forward looking statements will prove to have been correct and you are cautioned not to place undue reliance on such statements. The Consultant undertakes no obligation to publicly update or revise any forward looking statements contained in this summary report, whether as a result of new information, future events or otherwise, except as required by law and all forward looking statements contained in this summary report, is qualified by reference to this cautionary statement. However, if the Consultant becomes aware of material changes affecting the items documented in this report, either a) between the date of the report and the issue of the offering circular, or b) after the issue of the offering circular and before the issue of the securities, then we agree to notify Regal Portfolio Management Limited and Regal Real Estate Investment Trust immediately.
— 527 — APPENDIX V LETTER FROM THE MARKET CONSULTANT IN RELATION TO ITS HONG KONG HOTEL INDUSTRY REPORT
This report was prepared for inclusion in an offering circular for Regal Real Estate Investment Trust dated March 19, 2007 and certain of the information contained herein has been referred to in the preparation of a valuation report prepared by CB Richard Ellis limited in connection with the issue of the offering circular. Whilst reasonable care has been exercised in preparing the report, it is subject to change and these particulars do not constitute, nor constitute part of, an offer or contract, interested parties should not rely on the statements or representations of fact but must satisfy themselves by inspection or otherwise as to the accuracy. Whilst the Consultant believes that the information in this report is correct, we cannot guarantee its validity. In producing this report, the Consultant has relied upon external third party information and on statistical models to generate the forward looking statements. It should be noted and it is expressly stated that there is no independent verification of any of the external third party documents or information referred to herein. This report is limited to the matters stated in it and no opinion is implied or may be inferred beyond the matters expressly stated herein.
Yours sincerely, Savills Valuation and Professional Services Limited Simon Smith Deputy Managing Director Head of Research & Consultancy
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