Hilton Should Open a Hotel Business Proposal

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However, the foreign investment climate has improved significantly in recent years, especially with respect to hotel development, including in Phnom Penh. A new system for lease registration has been developed that effectively allows for registering land titles, allowing foreign entities to take out 99-year leases on property, which otherwise would be subject to foreign ownership restrictions. Those restrictions on foreign ownership of land have stifled foreign direct investment in the past. As these rules change, Hilton's ability to build out a strong Cambodian asset base will improve. It is recommended that in order to obtain early mover advantages that Hilton get in front of this curve by taking out 99-year leases on properties, something other hoteliers have done already.

The hotel business in Phnom Penh is currently underdeveloped. There are few international players; most hotels are small operations owned by domestic firms either wholly or in partnership with firms from other Asian countries. Standards are relatively low. Business and tourism travel is growing despite the challenges of the past year. As the global economy improves, tourism is expected to revive and there is also a high level of demand for business hotels, in particular from corporate guests from around Southeast Asia. Phnom Penh's first skyscraper opened in 2009, and there are more such projects under way. The result will be an increase of businesses setting up in the city, and this will bring a rise in business travelers to Phnom Penh as well.

Hilton would occupy the high end of the Phnom Penh market.

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We would not be able to compete on the basis of price with the local hotels, but Hilton's strong brand, decades of experience and high standards of service would allow us to take market share away from the local hotels. It is believed that many of those hotels win business simply because there is so little competition at the high end that it can be difficult for business travelers and Western tourists to find accommodation that meets their standards. As result, a Hilton property in Phnom Penh can be expected to enjoy healthy occupancy rates.

Existing hotels in Phnom Penh are relatively small, so a property in the range of 200 rooms would make the hotel one of the city's largest. If such a property had an occupancy rate of 60% at an average room rate of $160, the hotel would earn $7.0 million per year from rooms alone. With low land and construction costs, the hotel would likely have a payback period of under ten years. With financing acquired in U.S. dollars and funneled through our Bangkok operations, our cost of capital would be very low for this project.

It is recommended that Hilton invest in the Phnom Penh marketplace. The downside risks are relatively minor whereas the growth potential is strong due to increases in business travel and in Western tourism.

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