City & Country: Office to hotel conversion on the rise in Malaysia

Tune Hotel on Jalan Tunku Abdul Rahman was previously Sentosa Hospital

CONVERTING office buildings into hotels is an easy way to maximise asset value in certain markets and has resulted in a big change in the way property developers are creating new hotel supply to cater to the country’s growing tourism industry.

A recent Zerin Properties report, “Office to Hotel Conversion”, highlights this growing trend and examines whether vacant office buildings in Kuala Lumpur can be converted into hotels to increase their net profit and yield.

A National Property Information Centre commercial property stock report states that the supply of purpose-built offices in Kuala Lumpur was at 81.6 million sq ft while incoming supply was at 13.6 million sq ft as at 3Q2013. Selangor’s supply of purpose-built offices stood at 32.4 million sq ft while incoming supply was at 4.2 million sq ft. The occupancy rate for Kuala Lumpur offices was 78.8%, compared with Selangor’s 73.9%.

As a comparison, 12% of offices in the UK have stood empty for many years, according to the report by Zerin Properties. In some areas such as Birmingham, 18% of commercial properties are said to be empty. The UK government believes thousands of sites can be converted into homes [rather than hotels], while still meeting the demand for offices when the economy picks up.  

According to Roja Rani, Zerin Properties’ head of research and consultancy, the need to fill commercial space in Malaysia is greater because there is an oversupply.

“However, this could just be that there is an oversupply of old buildings and these are being converted simply because they lack tenants and their yield is far lower than what it should be,” she says.

Malaysia’s current vacancy rate is nearly double that of Britain, which translates into a larger need for office to hotel conversion, she adds. Furthermore, tourist arrivals have been increasing, hitting the 25 million mark in 2012.  

Vacant office buildings in cities with popular holiday destinations nearby are perfect for conversion into hotels. In fact, this trend may have already started.

The report cites Tan Sri Tony Fernandes, group CEO and director of AirAsia Bhd and founder of Tune Group Sdn Bhd, who was quoted as telling Endemic Guides that many property owners wanted to convert their office buildings into hotels to get higher yields.

Fernandes himself has converted office buildings in prime areas of London, including Kings Cross and Paddington, into hotels.

A few Malaysian entrepreneurs have taken a leaf from Fernandes’ book and done the same back home. Mak Hoong Weng, director of Art Form Enterprise Sdn Bhd, owns buildings in Kuala Lumpur, Melaka and Kuantan that he has amassed over a 10-year span. He plans to convert 10 of them into hotels, offering over 1,000 rooms.

One of Mak’s boutique hotels, Star Luxury Hotel in Jalan Raja Chulan, Kuala Lumpur, was converted from two office towers and currently charges between RM280 and RM1,500 per night. He also owns a multi-storey heritage building in Jalan Tun Perak, where the ground floor has been leased out to a food and beverage operator and the rest of the building rented to a budget hotel operator.

The 13-storey Wisma Peladang in Jalan Bukit Bintang also underwent a complete retrofit in 2006, becoming Piccolo Hotel. It immediately drew investment from Berjaya Land, which now owns 51% of the four-star hotel, which charges an average room rate of RM246. As at September 2013, Piccolo had an occupancy rate of 80%.

Roja: This could just be that there is an oversupply of old buildings and these are being converted simply because they lack tenants and their yield is far lower than what it should be

Meanwhile, corporate office tower Plaza Atrium in Lorong P Ramlee is being converted into 109 serviced apartments spread over 34 floors by Pinehigh Development Sdn Bhd, a wholly-owned subsidiary of Far East Organization.

According to Roja, more developers in Kuala Lumpur are starting to jump on the bandwagon. “Recently, it was announced that an old office building, Menara CMY in Jalan Ampang, would be redeveloped into a hotel.”

Foo Gee Jen, managing director of WTW, also cites some conversions in Kuala Lumpur, namely Wisma KLH into Wolo Hotel, Magnum Plaza into Sky Express Hotel (previously Flamingo Hotel) and Sentosa Hospital into Tunes Hotel.

However, he does not believe this is a growing trend. “It all depends on the location being suitable for a hotel, the cost of refurbishment compared with potential profits and whether the property has been vacant for a long time.”

There have been such conversions in Kota Kinabalu and Kuching as well, he says. Two office buildings in Kuching were converted into hotels to cater for the increase in tourist arrivals. KKB Engineering Bhd’s building was redeveloped into the 80-room Abell Hotel while Kuching Tower became the 50-room Lime Tree Hotel.

Sky Express Hotel formerly Magnum Plaza

Overall, says the report, the current trend of investing in office building redevelopment in Kuala Lumpur seems to be focused on old buildings. This is due to the growing number of new Grade-A office buildings in prime locations that boast much better facilities. The more stylish offices draw tenants to relocate despite the higher rents.

Old office buildings are also ripe for transformation because their rents are lower than new buildings, which translates into shrinking yearly income. The redevelopment of old office buildings in strategic locations, close to tourist attractions, into hotels would maximise yields and boost income. A vacant building costs its owner huge sums in lost rent.

With Malaysia’s office vacancy rate at 23%, with a substantial future supply in the pipeline, the competition for tenants is tight and it could take months or even years before a client can be found.

According to Roja, apart from office towers, several office buildings have been converted into serviced apartments, condominiums and retail space.

Foo, meanwhile, adds that shopoffices in many cities have also been converted into budget hotels.

“More are converted into hotels rather than purpose-built offices. In fact, several heritage shophouses are now boutique hotels, especially in Penang and Melaka.”

Foo says office space can also be converted for use as universities, colleges, hospitals or specialist centres. “The conversion is usually done by the operators after they acquire the building. However, there are more hotel operators than education or hospital operators as it is easier to obtain a licence for the hotel business than for universities or hospitals.”

Foo: It all depends on the location being suitable for a hotel

The conversion of offices into hotels represents a great opportunity for investors and developers.

Foo says from a purely investing viewpoint, an office building generates more profit than a hotel. “Most hotel profits are generated as a business and not as an investment and therefore are not comparable with office building rental returns.”

Top: Piccolo Hotel was formerly Wisma Peladang Below: Wolo Hotel was formerly Wisma KLH

According to the Zerin Propertie problem, a major problem in this new scenario could be the investors’ lack of experience in the hotel industry as they would have mainly invested in office space before. One way to overcome this is to carry out detailed research on the demand for particular types of hotels in specific areas and whether they fit the layout of existing office buildings, it advises. For example, a 3-storey building in Seri Kembangan may not be suitable for a luxury hotel.

Another problem could be that the original floor plan of an existing office building may not cater for the type of hotel the developer wants to invest in, says Roja. He adds that most floor plans of old offices would tend to cater for boutique and budget hotels.

Nevertheless, the conversion of office buildings into hotels seems right at the moment, given the high vacancy rates and the booming local tourism industry. It makes sense to transform older office buildings that are currently vacant into something that offers better returns.

A growing trend around the world

The conversion of offices into hotels is evident in many other parts of the world, according to the Zerin Properties report, “Office to Hotel Conversion”.

In Germany, for example, a huge amount of office space has been turned into budget hotels. In Berlin, some of these hotels, located near busy transport lines, enjoy high occupancy and revenue per room.

Hotel Indigo Berlin Hardenbergstrasse is an 81-room office conversion that opened in 2012. Tourists are drawn by its cheap prices and prime location close to Ku’damm Avenue, which is known for its designer shops, restaurants and bars.

Tan Sri Tony Fernandes, founder and key shareholder of Tune Hotels, has converted office buildings into hotels in prime areas of London, including Kings Cross and Paddington.

In September 2011, Fernandes acquired a vacant office building, which was formerly the headquarters of the Unite union, at 324 Grays Inn Road, Kings Cross. He turned it into Tune Hotels Kings Cross and opened it in 2012, a few weeks before the Olympics. The hotel saw an occupancy rate of 95%.

More recently, a 1960s 8-storey building in Red Lion Street in Bloomsbury, central London, was granted permission for conversion into a 150-bedroom hotel because it could no longer be used as an office. The conversion was considered ideal because of the need for increased hotel supply in London.

Over in the US, Trump Organization is planning a US$200 million redevelopment of the Old Post Office Building in Washington, DC, into a luxury hotel. The company has finalised a deal with the US General Services Administration to redevelop the landmark building in Pennsylvania Avenue now that a congressional review has been completed.

In Manhattan, planned conversions have been key to some of the largest office transactions in recent years. These include 650 Madison Avenue, which sold for US$1.3 billion (US$2,200 psf), as well as 550 Madison Avenue, which Sony Corp sold for US$1.1 billion to an investment group headed by developer Joseph Chetrit. Chetrit is exploring plans to convert the asset into luxury condominiums, a hotel and an upscale retail space.

In Auckland, a number of office buildings in the central business district are said to be appropriate for conversion into hotels. International hotel operator Accor Hotels has announced that it will be opening a boutique operation in the Reserve Bank office building on Customs Street in downtown Auckland. This is expected to be the start of a trend of such conversions as there is strong demand for hotels in the city due to an acute shortage of existing hotel stock for sale.

This article first appeared in The Edge Malaysia Weekly, on January 27, 2014.

Looking for properties to buy or rent? With >150,000 exclusive listings, including undervalued properties, from vetted Pro Agents, you can now easily find the right property on Malaysia's leading property portal EdgeProp! You can also get free past transacted data and use our proprietary Edge Reference Price tool, to make an informed purchase.