Regal Hotels International Holdings Ltd plans to launch a real estate investment trust (REIT) soon, bundling five of its Hong Kong hotels to bankroll an expansion in China's booming tourism sector.

The envisioned REIT, in which Regal aims to keep a 40 to 60 per cent stake, would then take in hotel properties to be built in the world's fourth-largest economy, a senior executive said yesterday.

The five hotels are worth HK$16 billion (US$2.06 billion) collectively, based on a replacement cost valuation, said Poman Lo, the firm's executive director. That would equate to a book value per share of about HK$1.70, versus the HK$0.21 that Regal is now trading at.

"By launching this REIT, Regal will end up with a fairly good amount of cash for expansion in greater China," Lo said.

"We want Regal Hotels and the REIT to grow together."

Lo told Reuters that her firm intended to keep a 40 to 60 per cent stake in the REIT.

Regal's shares began climbing yesterday afternoon, hitting a peak of HK$0.81 for a gain of more than 6 per cent after the market reopened following the noon break.

Asia's hoteliers are wrapping properties into real estate funds to fund expansion in a regional industry growing 10 per cent annually and worth US$115 billion in revenue a year.

And the Beijing Olympics in 2008 has spurred construction in China, where an increasingly wealthy middle class is eager to travel and which the World Tourism Organization reckons would become the largest tourist destination on the planet by 2020.

"I can say the major obstacles have been overcome," Lo told a business conference earlier.

"And we aim to launch this REIT as soon as we can."

Sources have said Regal's REIT would launch in November and be worth more than US$500 million. Deutsche Bank, Goldman Sachs and Merrill Lynch are sponsoring Regal's offering, sources have said.

Riding a trend

REITs of offices, shopping malls and warehouses are catching on across Asia, and some bankers believe investors would relish also dabbling in a thriving tourism industry.

Hong Kong-based Cheung Kong (Holdings) and Far East Consortium International Ltd are among those considering hotel spin-offs.

Regal planned to inject hotels to be built on the mainland into its REIT. The firm is now scouring locations in Beijing - where it is building the capital's tallest building - Shanghai, Guangzhou, and northeastern Shenyang.

On its home turf, Regal runs five hotels housing 3,350 rooms - 8 per cent of the city's count as of end-2005 - and was adding another 475. The firm claimed an average occupancy of 80 per cent in the first half of 2006.

Hong Kong has enjoyed a boom in tourism since the mainland began easing individual travel restrictions three years ago.

According to Savills Research and Consultancy, visitor arrivals to the city are expected to grow to 27.8 million in 2007 and 29.4 million in 2008, from a forecast 25.8 million in 2006.

But room supply would lag that growth, with a projected 53,340 rooms in 2007 and 55,772 in 2008, versus 50,749 this year.

"The REIT would be structured to give both a fixed rent and a variable element," Lo said without elaborating.

Because occupancy fluctuates and is susceptible to anything from air traffic control strikes to disease outbreaks, hospitality REITs normally set up a sale-leaseback agreement under which the hotel operator pays fixed rent to the trust.

To allow potential income growth for investors, CDL Hospitality set up by City Developments introduced a variable element.

It gets 20 per cent of revenues and 20 per cent of gross operating profit from its five hotels, with a base guarantee.