Real Estate

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

A piece of Hong Kong's history won't come cheap.

That's why Mandarin Oriental International Ltd.'s $3.8 billion disposal of the Excelsior Hotel, featured in the Pink Panther movies and linked to the Noon Day Gun immortalized by Noel Coward, is smart.

By selling the only four-star hotel in its five-star portfolio, Mandarin takes advantage of record prices while reducing its reliance on the city's competitive market. 

Unlike its parent Jardine Matheson Holdings Ltd., the British trading house associated with Hong Kong's founding more than 150 years ago, Mandarin Oriental is a mainly local play. While Jardine profits from its ownership of Hongkong Land Holdings Ltd., the biggest landlord in the Central business district, it's also a major player in Southeast Asia. Mandarin Oriental has its name on luxury hotels and residences worldwide, yet it still makes 54 percent of Ebitda from Hong Kong and Macau.

Checking Out
Mandarin Oriental's revenue has been falling
Source: Bloomberg

That has been bad news. Fewer big-spending mainland tourists, the hotel group's bread and butter, are coming to Hong Kong -- they now prefer London, Paris or Tokyo. Until it announced plans for a sale of Excelsior in June, Mandarin Oriental's Singapore-listed shares were underperforming those even of its parent.

Role Reversal
Mandarin Oriental's share price soared, outperforming its parent, since the announcement of the Excelsior sale
Source: Bloomberg

The disposal of the 848-room property, with a gross total floor area of 684,000 square feet, turns a burden into a bonus. The hotel, built in 1973, is run down and would have needed an expensive refit. Easier to sell it for office redevelopment, for which permission has been granted, at the top of the market. Mandarin is tapping into the renewed buzz around Hong Kong office space since May, when Henderson Land Development Co. paid a record $3 billion for a former car park in the city.

The one challenge Mandarin faces is a smaller pool of buyers, as capital controls prevent mainland investors from taking a lead role. Chinese investment in Hong Kong's office sector fell to 8 percent of total investment volumes in the first half, compared with 31 percent last year, according to JLL.

Interest in the site is testament to the Excelsior's location: It's in the retail paradise of Causeway Bay, three subway stops from Central, with sea views and history, as the first plot of land acquired by the British in 1841. The sale has attracted at least five bidders, according to reports, including a Chinese-backed consortium of Sun Hung Kai Properties Ltd. and Hysan Development Co. and a tie-up between Hong Kong's Chinese Estates Holdings Ltd. and longstanding mainland ally China Evergrande Group.

When it abandoned a Hong Kong listing for Singapore in the early 1990s, before the territory's 1997 handover to China, Jardine Matheson was accused of being short-sighted. With this deal, it's anything but.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Paul Sillitoe at psillitoe@bloomberg.net