RHB Bank arranges rare Islamic bilateral hotel financing for Royal Group

The deal is unusual in Islamic finance as not all income from a hotel business is considered Shariah-compliant

RHB Bank Singapore has recently closed what it described as the world’s largest Islamic bilateral hotel financing transaction with the Royal Group for a five-star luxury hotel valued at S$300 million (US$220.60 million).

The deal involves SO Sofitel Singapore hotel located at 35 Robinson Road as the underlying asset, and it also represented Singapore’s first Islamic bilateral hotel financing transaction.

Announced on July 11, the transaction features a rarity value considering that hospitality assets are not usually use in an Islamic financing transaction since not all income is deemed to be Shariah-compliant.

In the past, hotel businesses were considered Shariah-compliant if sales of alcohol did not exceed more than 20% of the total revenue. In April 2016, the Shariah advisory council of the Securities Commission Malaysia resolved that the 20% rule was no longer applicable as the main purpose of operating hotels and resorts is to provide accommodation.

Nazmi Camalxaman, head of Islamic banking at RHB Bank Singapore, describes hospitality assets as one of the best performing real estate assets in Singapore and RHB Bank will continue to remain aggressive in this sector from a financing perspective.

The deal is the first Islamic financing facility for the Royal Group and it demonstrates that the group is open to alternative financing so long as the economics makes sense, according to group co-chairman Bobby Hiranandani.

The transaction also represented the first Islamic real estate financing facility in Singapore’s core central business district area. Islamic real estate financing is not common in most core financial centres because the tenants mostly comprise of banks, which are non-Sharian compliant in nature due to their interest-bearing activities.

As such, Islamic funds are limited to buying office buildings that are occupied by large corporates or government entities.

SO Sofitel Singapore is a 134-room hotel, which opened its doors in 2013. It is one of the most popular hotels in downtown Singapore, attracting both the business travelers and tourists.

Camalxaman says market consensus indicates that there is a diminishing new supply of hotels in Singapore, particularly after 2020, and for the first time in five years, the government is expected to launch a site for hotel rooms as part of its government land sales programme in September this year amid a positive tourism outlook.