Wednesday, May 29, 2013

Trying to Invest in a Guesthouse/Small Hotel in Cambodia

Let’s make it clear: we are talking about a smaller investment, say around $250,000, not something in the multi-million dollar range. There are many big projects in the pipeline but we still have to see any of them become reality; whether this is Koh Rong where the Royal Group has been trying to drum up investment capital, or whether it is the many Chinese investors that have a lease on land and haven’t done anything with it, or whether it is the Sokha Group that has owned a huge part of the eastern end of Ochheuteal Beach for years but hasn’t shown any sign of using this prime piece of land for another 5-star hotel. Perhaps the one on Sokha Beach is not as successful as hoped for. There is also a French group holding a lease for Koh Russei, or the Monarch  company (Russian?) that leased Koh Tang. Neither has shown any sign of actually doing something with their lease. Of course, Monarch is a burnt child with their failed Hawaii Bach project.

Now why do I want to invest in a hotel, of all things? I have a long history with this country, if you can call more than 20 years history.  Somewhere else I had written about how it all started. But this is not what I want to go into again here. After many years of going back and forth between the U. S. and Cambodia, I finally relocated for good here.  The reasons were manifold. Originally, I wanted to relocate to a country in Europe, Italy or Spain. The U.S., my home for 20 years, had become too conservative and was moving ever more to the right, not to mention the hypocrisy in public life – not good for a died-in-the-wool liberal. It needed to be to a warm climate, too. Although I am married to a Khmer wife, Cambodia was a second choice. I liked the country well enough but there were too many things I wasn’t ready to adjust to. I also wanted to remain in a Western cultural environment. But what finally decided our move was that all my funds were in U. S. dollars, and I would have had to write off nearly 30% due to the rate of exchange. So, my wife being Cambodian, the economy here being dollar-based, there really was no practical alternative. Plus you are pretty much left alone in Cambodia if you don’t pay too much attention to the things some organizations are wont to criticize.

I had invested some money in a small working rubber plantation, which didn’t do too well in the beginning. But I didn’t need the income as I still earned money from my other business in the U. S. The bottom fell out from the plantation business during and in the aftermath of the financial crisis but recovered more than nicely a couple of years later. Although now it is not as profitable due to the drop in rubber prices, it still pays well enough to live comfortably.

Part of my professional life was spent in the tourism/hospitality industry, both as an employee and later as a self-employed businessman (before I turned to import/export as the travel industry underwent a drastic change with the introduction of the Internet). Being the owner of a rubber plantation is not one of the most challenging jobs you can imagine. So I have been looking for something else to do. The closest thing for me was to go back into the tourism/hospitality business. Trading was out of the question as I really did not want to compete with the native businesses and their tiny margins. Tourism is still a growth sector and if done right there is money to be made. I can point to many examples. But equally numerous are the businesses that simply don’t know what it takes to attract foreigners to their property. As mentioned elsewhere, customer service is an unknown term for most Cambodian businesses.

So I set out on buying or leasing a guesthouse/boutique hotel. At one point I even wanted to start from scratch but the numbers wouldn’t work out. Anyway here is my experience with both local people and expats. My search has been confined to Phnom Penh and Sihanoukville, although I did venture into Siem Reap at one time.

As a hotel contracting manager for a very large tour operator I checked out many resorts all over Asia and know my way around. I am a professional and know what factors determine a 3-star, 4-star, or 5-star hotel, and I know marketing. My aim was to go into the 3-star category, which constitutes the broadest base of the industry.

First project:
Build a 3-star 50 room resort at Otres Beach (near O); investment volume $7 million. The one hectare of land needed would have been $1.1 million alone. Since I didn’t have that kind of money myself, I looked for investors – unsuccessfully; end of story. The land we looked at was later leased by the Queenco Casino Group, although they haven’t put in a resort yet. They are probably waiting for the airport to accommodate direct flights from abroad. That’s been a long time coming, with the usual promises, promises, promises.

Second project:
The same thing on beach land north of Stung Hao (about 20 km north of Sihanoukville); the seven owners of the land couldn’t agree among each other  on the price. So this deal fell through. I later heard that Ke Kim Yang had bought the land. It is still sitting there undisturbed. I sometimes go by boat to that beach to swim.

Third project:
Again the same thing, but this time in Chrouy Svay; pristine beaches, clear and clean water; the catch: no hard title, no access roads, no electricity, no water, no nothing; this would also have been so isolated that it would have had to be a Club-Med type resort; too much hassle; no thank you.

Fourth project:
Ream National Park – at that time the government had just set aside a small area for tourism development. We checked it out and got all the nods from the officials when practically overnight we learned that a Chinese group had leased the entire southern part. Well so much, so good; just another concept down the drain. Never mind that the Chinese have done squat there in the 4, 5 years since. At least there is a small tent resort, which appears to be doing well enough, although this is far from being a money-making enterprise.

Since my more high-flying concepts obviously couldn’t be realized I left these plans alone for a while. The time wasn’t ripe for them either – we are talking 2008 – 2011. In the meantime, I built a house, bought some additional land for speculation (still dormant), bought a new car (sort of expensive, given the Cambodian import tariffs), bought a powerboat for fishing and other fun (also expensive as it was custom-made), so my investment funds had somewhat dwindled. I had also been busy for more than a year as a consultant for a large investor who was seeking an economic land concession (which failed).

When that ended I again became intrigued by the hotel business. My friend who is a very successful co-owner of now two boutique hotels in Phnom Penh reinforced my thoughts by offering to be a partner.

Foray into Siem Reap:

A nice guesthouse with 26 rooms in a good location; it made decent money; the Khmer owner wanted to go into the luxury sector so he wanted to sell the guesthouse. He was one of the few people I met who actually kept good books and knew exactly where he stood. We settled on a price ($70,000 based on an annual net profit of $40,000 – with a manager’s salary accounted for). He now needed to get the landlord to transfer the lease. But this turned out to be the deal-breaker: the landlord wanted to increase the rent so much it would have made the business unattractive – an all too familiar story in Cambodia.

Boutique Hotel in Colonial Vila Phnom Penh:

10 rooms, remodeled a year ago, total investment over $100,000 (for new electrical wiring and plumbing, among others), location a little off the main tourist spots, catered mostly to NGOs. Asking  price: $40,000. Now this made us scratch our heads. His explanation: his partner is in Thailand, she can’t come back as she has children there, so needs to sell quickly. He wants to get out too. So far so good. But when we asked for some accounting background he said maybe we could do this unofficially without any supporting documents  in order to speed it up. Too fishy for me.

Boutique Hotel Phnom Penh:

10 rooms, good location, good room rates, occupancy rate over 85%; profitable, how much exactly we didn’t get to find out as the asking price was $300,000; the owner said he had invested $200,000 to remodel it. But he had no long track record, as he had only owned it for a year. For me: too much for such a small hotel.

There was a sister hotel close-by; same story, same price. Thanks, but no thanks.

Riverside property:

8 suites with balcony and view of the river; nice but at $250,000 also too expensive. How are you ever going to earn the money back.

To his credit: he only wanted to sell if the right offer came along; makes sense.

Upscale Boutique Hotel in Neo-Colonial Style Villa, Phnom Penh:

8 Rooms incl. 1 junior suite; with restaurant, room to add two or three rooms; Boeung Koeng Kang area; no profit so far; the operator had it for 8 months only, had invested about $50,000, but had a high-level government job waiting for him. We were very much interested in this property as it had a lot of potential. We made an offer, but now he decided that he needed to be on the lease and we would sublease it. That didn’t sit well with us; too many potential complications later on. Sorry, no can do.

Low-end guesthouse near Sokha Beach:

Located practically at the back of the Sokha Beach Hotel Bungalows, across the little lake; 10 rooms, vacant at that time, up for rent at $1000 a month; the previous owner had room rates of $10 to $20. The condition of the rooms was more or less desolate, in other words, a lot needed to be done to upgrade this property. In the end we didn’t like the location. One could also buy it for $1.2 million.

Far end of Otres Beach project:

We wanted to build 10 upscale bungalows with swimming pool and beachside restaurant on a lot 30 x 55 m. We crunched figures upwards and downwards, turned them left and right, but in the end we didn’t see how we could come out with a decent profit for an investment of approx. $250,000. The 10 units were simply not enough, and we did not want build 2-story bungalows for marketing and financial considerations.

Guesthouse Serendipity Road

This was a 16-room property offered at $165,000, including a well-running restaurant, or so he says. Room rates are in the $20 range; occupancy not known; the price includes the security deposit; rent is decent; but a lot needs to be done with this property. Some of the rooms were really a mess; the kitchen looked unsanitary;  in the West the restaurant would be closed. How he can make money is beyond us, and how he can ask this kind of money likewise. Last I heard he sold it for $90,000 (still too expensive); so he was desperate.

Guesthouse  on Tola Street

Now this is one of the best mid-range places at Ochheuteal; everything is nicely laid out with 38 rooms,  a swimming pool, and a restaurant;  the rent is so low that I don’t want to mention it here. The owners rented the land and built the entire resort. They said they aren’t selling but if the offer is in the high 6 figures they might contemplate it. We had a nice chat, that was it; very good place, no doubt about it.

Guesthouse on Beach Road

This is also one of the most successful places at Ochheuteal. Like the one above the operator rented the land eight years ago and built everything from scratch. The rent is equally ridiculously low so I am sure he got his initial investment back even at moderate occupancy rates. The place is very popular and got good reviews. The operator isn’t sure whether he wants to sell it either; sometimes he is fed up with working 24/7, other times everything works so well that he doesn’t really want to let go of it. The lease has enough time on it; but at $400,000 it’s not exactly a steal; not within our range.

Guesthouse Mid-town

This one intrigued me a lot. The owner offered a guesthouse with 8 rooms, a restaurant, and a fishing charter boat for $60,000. According to his estimate the boat alone is worth $40,000, though I would put it in the $25,000 to $30,000 range. The guesthouse is shabby, one cannot say otherwise, unfortunately. The restaurant/bar does not do a lot business as there is no barkeeper who can attract guests. It mainly serves as the booking office for the boat tours. The fishing charter business, however, would have made it worthwhile. The boat seats 18. I could have put in a ‘fishing guide’ to accompany the guests. The Khmer skipper has been running the boat for 8 years. He knows the spots and how to handle a boat. The problem was that I didn’t want to and can’t run the guesthouse/restaurant myself. So I was looking for someone to manage it for me; I would sublease it for just the rent of $700. But the numbers no matter how long we crunched them just wouldn’t show a decent income for the manager, let alone a return, even a small one, for me.

Guesthouse  II on Tola Street

This is a new building; the catch is that the landlord wants to rent only half of it because he lives in the other half. He counts eight rooms, whereas we could use only seven, the eighth one was too small. In general, the building is designed as a residence and not as a guesthouse. There is enough room for a swimming pool and a small restaurant. Three of the rooms have their own kitchenette. The rent at $2,000 is a little too much. A little difficult the way it is designed, so a no go for us; we would have liked the location and the space. Our offer to rent the whole building was declined.

Guesthouse Chong Ochheuteal

This is one of the ugliest guesthouses I have seen in Cambodia. The big plus is its location right on the beach, that is, there is the road in front and then the beach. It has thirteen rooms all facing the ocean with beautiful views of sunsets; enough room for a swimming pool and expansion of the beach bar into a restaurant.

The rent at $1500 is very decent; transforming this guesthouse, especially the façade, into a more upscale small hotel would be worth it. This would be well within our budget.

But here comes the catch: there is an environmental problem of worrisome proportions. The nearby small river flows directly into the ocean, which wouldn’t be so bad if it didn’t carry waste water from the not too distant water treatment plant of Sihanoukville. At times there is a stench wafting over from some place (the local people don’t really know from where) that will drive away any guests staying there.  Obviously the chemicals used in the treatment plant also flow into the ocean. Guests have complained of itching. Too bad.  Another disappointment.

Guesthouse II on Serendipity

This is another dreamer. He is asking a cool $100,000 for his 27-room low-end guesthouse. He rents part of the premises to a diving outfit, offsetting the $1300 rent. He makes about $1000 to $1200 per month as his income; in other words, no real profit. When asked how he arrived at his asking price he just said he thinks it’s a fair price considering. Considering what?

Guesthouse  near  Ochheuteal

We are looking at 27-rooms, all air-conditioned,  all completely renovated; the owner invested about $60,000 into 8 new rooms (included in the 27), redoing the restaurant and the reception. Asking price: $165,000 including the security deposit. Room rates around $20, occupancy around 55%. Although the price is negotiable and the place is well-regarded by guests, we didn’t believe that even a much lower price could be recovered in a decent amount of time. A disturbing factor was that the owner has owned the place just one year. He wants to open a place on one of the islands. Why, if this one runs well and considering all the logistical problems for the islands?

So altogether, there has not been one place that fit our bill. Each one of the properties we looked at had one or more negatives. We are looking for a place to rent in a good location, preferably with a hard or at least uncontested title near the beach, which we can remodel, transforming it into a near 3-star property. Ideally, it would have 12 rooms with enough space to add 10 more or 25-30 rooms ready to use. This size hotel is much easier to fill than a 50 or 80 room hotel. If there is no swimming pool, we would put one in, same for a small restaurant. Together with offering sports activities, boat tours in our power boat, free transfers, etc., such a property will attract the appropriate clientele. The room rates will be according to the standard offered. There is enough low-end accommodation in the $10 to $25 range; we don’t believe there is a need for more. Plus you can’t really make any money at those rates.

People, whether Khmer or expat, who mostly invest in a guesthouse/small hotel/restaurant/bar usually say the profit is what they take out. Strictly speaking, that is wrong, of course. They pay themselves a salary, which is part of the expenses; they also need to amortize their investment they in most cases need to make (with or without interest) over the duration of the lease, and what is left over after that is their profit, or the return on investment. Many hope they can get their money back by selling the lease, but then the buyer faces the same situation.

In this context I usually use the term owner’s benefits, which includes salary, car expenses, entertainment expenses, health insurance; but these are all part of the expenses and do not constitute profit. The above naturally applies to leased properties only as foreigners are not allowed to own land. The accounting would be somewhat different in that case.  If you are married to a Khmer spouse, you can buy the land in her/his name, but the capital required makes this unfeasible for most. Frankly, I would not invest $2.0 million in land and a hotel in Cambodia. There are better ways to earn very good money with this kind of capital without the headaches that accompany the management of a larger hotel.


Sihanoukville is on the verge of transitioning from backpacker central to a flashpacker and middle-class tourist destination. It still lacks mid and upper range properties. Although there is a handful around, it is not nearly enough to arouse serious interest from larger tour operators in Europe, Australia, the U.S., Korea, Taiwan, etc. This transition will also help shed Sihanoukville that noxious reputation of being a haven for sex tourists, pedophiles, and other low-life that frequent such places as Victory Hill - the sooner the better. Cambodia could do without the riff-raff. Meanwhile, we keep on looking.

7 comments:

Girls Hostel In Lucknow said...

Good post ,very useful information.Thanks for sharing this valuable post.

Anonymous said...

KJE,
Nice write up. We have something in common. How much is an initial investment in a small hotel in SHV? By the way, do you know anything about Greek's property market? I've experience with customer services and moor.

K

KJE said...

5:05
You can figure about $100,000 for buying a 10 room backpackers guesthouse in a decent location, plus deposit for the landlord. But prices vary widely. Although I know Greece but that was some time ago.

SharonBG 12WBT from Fat to Fabulous said...

This has been a great help to me as I am currently researching and looking into a business in Cambodia

Anonymous said...

Very insightful post, and great blog! What would you say is a good price/annual net profit ratio for a 3 star boutique hotel purchase? Say the annual profit is $20,000, how much would be a fair sales price?

KJE said...

9:49
Sorry for late response. I consider a 15% return on investment appropriate; some people think 10% is good enough, some think they need 20 or 25%.
Using the 15% you can figure on about $150,000 for a turn-key boutique hotel.Returns are based net profits, that is, after owner's salary, taxes, etc.

Avery said...

Glad I saw this link. I was calculating the taxes and I do not know how they can make it profitable. Look at the hotel prices on agoda, they are so low. Really, I do not know how they make a profit.

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