Symbolic links of plist file getting turned into plain text files
Yes, it's the expected behavior because Sequel Pro expects the Favorites.plist file to be where it's programmed to be, in ~/Application Support/Sequel Pro/Data.

In other words, when Sequel Pro opens, it reads the Favorites.plist file following the symlink because it's just making a read of the file.  When a change is make or the app closes the file is updated and is written in its programmed location and does not follow the symlink because first a temporary Favorites.plist.&lt;$random&gt; file is written and then the symlink is deleted and the temporary Favorites.plist.&lt;$random&gt; file is renamed to Favorites.plist.  In this process Sequel Pro sees the symlink of the Favorites.plist as a regular file not a symlink and why it's replaced.