Facing an outflow of western funds, Hong Kong has been wooing Middle East investors and has enlisted Saudi Arabia as a partner in the hotel business
- Regal Hotels and its sister property company Cosmopolitan International have signed a memorandum of cooperation with Saudi Arabia to develop hotels in the Middle East
- The partnership envisages an investment of up to $5 billion to build 50 hotels in the region, of which 30 would be in Saudi Arabia
By Lau Chi Hang
The Middle East is emerging as a major investor in mainland China and Hong Kong, as the tide of U.S. and European funds recedes.
Hong Kong has been on a charm offensive to sell its benefits as an investment destination and business partner. Early last year its chief executive, Lee Ka-Chiu, led a promotional visit to the Middle East and in December Hong Kong hosted a ministerial delegation from Saudi Arabia that signed a memorandum of understanding about investment cooperation.
Within weeks of the event, Regal Hotels International Holdings Ltd. (0078.HK) and property developer Cosmopolitan International Holdings Ltd. (0120.HK), both owned by the Lo Yuk Sui family, became the first major Hong Kong enterprises to enter cooperation deals with Saudi Arabia.
The companies said on Dec. 21 they had signed a non-binding memorandum with Saudi Arabia’s investment ministry to develop hotels and related projects, in a partnership they estimated could be worth up to $5 billion (35.7 billion yuan). Lo Po Man, vice chairman and managing director of Regal Hotels, said the group planned to add 100 hotels to its “iclub” brand by 2035 including 30 in Saudi Arabia and another 20 elsewhere in the Middle East. In addition to building hotels, Regal would provide iclub management services, applying a so-called “asset light” model.
Regal and Cosmopolitan will also work on setting up an asset management platform to raise funds to develop or acquire hotel-related projects, through joint ventures, investment funds or listed companies in Saudi Arabia or Hong Kong.
Moving beyond oil
Saudi Arabia has identified tourism as a key focus in its efforts to diversify its economy away from fossil fuels. In a statement about the hotel deal, Deputy Investment Minister Saleh Al-Khabti said Saudi Arabia’s inbound tourist arrivals topped 18 million last year, far exceeding those of other Arab countries. He predicted an annual growth rate of about 11% over the next decade.
The Saudi economy is still heavily dependent on the oil industry, but the kingdom has been actively exploring other business opportunities as the world looks to shift towards more sustainable energy sources.
The kingdom launched a “Vision 2030” project and set up the Ministry of Investment of Saudi Arabia (MISA) to accelerate the diversification strategy and facilitate opportunities for investors.
With growing tensions between China and western powers, some international funds have been scaling back their presence in China to avoid any fallout. The Middle East, with its drive to develop new income sources, has stepped into the breach as China looks to fill the investment gap with new alliances.
New income pipeline
Money is flowing from Middle Eastern states into Chinese corporates. Last year, a unit of the Abu Dhabi Investment Authority spent $3.3 billion to gain a 20.1% stake in the Chinese car company NIO Inc. (9866.HK; NIO.US). Meanwhile, Saudi Arabia’s sovereign wealth fund invested $250 million in electric vehicle maker Human Horizons. In addition, the Qatar Investment Authority paid $200 million for a 4.26% stake in Kingdee International Software (0268.HK), a provider of enterprise management software and cloud services.
The growing connections include joint ventures as well as stake sales. For example, Haichang Ocean Park(2255.HK) signed a memorandum of understanding with Saudi Arabia’s Tourism Development Fund for joint work on the kingdom’s Haichang Ocean Park project as part of the bid to boost tourism.
It is clear why Hong Kong-based hotel operator Regal was keen to get an early ride on the Saudi capital express, as Chinese companies jostle to get on board.
Regal Chairman Lo Yuk Sui is the son of property tycoon Lo Ying Shek, founder of Hong Kong’s Great Eagle (0041.HK) group. Lo Yuk Sui left the family business at an early age, making a name for himself as an investor in the 1980s and 1990s. He has acquired several companies along the way, five of them listed: Regal,Cosmopolitan, Paliburg (0617.HK), Century City (0355.HK) and Regal REIT (1881.HK).
The business empire came close to the brink after the Asia financial crisis in 1997 and a downturn in Hong Kong’s property market left deep debts. But in 2003 Regal was able to sell off properties to keep the company afloat and benefited from a scheme to boost mainland tourism to Hong Kong after the SARS outbreak. The company has kept a low profile for several years but is stepping back into the limelight with its Saudi partnership.
Big Saudi spenders
Hong Kong is home to 10 hotels operating under the Regal or iclub brands. Aside from the Regala Skycity Hotel in the Hong Kong airport, which is owned by Regal Hotels, the other nine are managed and operated byRegal REIT. The group also manages mainland hotels in Shanghai, Dezhou in Shandong Province, Xi’an in Shanxi Province and a site in Chengdu that is under construction. According to the latest interim results from Regal Hotels, revenue fell 25% to HK$780 million in the first half of the year from the same period of 2022, resulting in a loss of HK$760 million.
Under the agreement, Regal will develop and operate the planned hotels using its industry experience, whilethe Saudi partner will tap local investors and companies for funds to support the projects. For sure, Regal would not be able to establish a chain of 50 hotels in the region without ample Saudi capital.
Cosmopolitan International, a property developer and investor, has been dubbed a “demon stock” by Hong Kong market watchers because of its extreme price volatility. After the partnership was announced, the stock price rallied as much as 23%. Cosmopolitan has been tipped to become the financing platform for the venture that would help Regal Hotels expand into the Middle East.
The MOU is just a preliminary document for the time being, providing few clues about the future of the relationship. Notably, Lo Po Man said she would visit Saudi Arabia again this month or next to check out local airports and look for a hotel site. If Middle East tourism takes off in a big way, this could be the start of a rewarding partnership for Regal and Cosmopolitan.
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