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.
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