As it turns sweet 16 this year, Frasers Hospitality is now dipping its toes into hotels. CEO Choe Peng Sum tells Gracia Chiang how the serviced residence operator is moving forward following a high-profile acquisition by Thailand’s TCC Group
How have things changed since TCC Group became the major shareholder?
The main structure that was changed was the splitting of F&B into Fraser and Neave (F&N). That’s quite a good move because shareholders would view F&N as a pure play for F&B. And then on the property side under Frasers Centrepoint there are three main arms – office, retail, and serviced apartments and hotels.
TCC has got about 15 overseas properties including InterContinental Singapore and Hôtel Plaza Athénée New York. Will you be taking over any of these hotels?
Frasers Hospitality Group will have an asset management arm that handles what we call third-party management if we don’t own or manage (the properties). It will also oversee the performance of all our existing Frasers properties. Frasers Hospitality Pte Ltd is the management company for all the serviced apartments.
We’ve always been either owner-managed or we manage our own. So this is an addition to the arm which is a good move because it’s the same business; it’s just growing our asset management arm.
If the property is not performing very well, there are options for us to manage it on our own and rebrand it. As of now there are no plans to rebrand (any property).
How different is running hotels from serviced residences?
It’s different but also the same. If you look at our serviced apartments, basically it’s the rooms division of the hotel…We don’t have that many F&B outlets and that’s one of the main differences, but at the same time, a lot of hotels are now scaling back on F&B outlets. Other than major convention hotels, the main profit margin would come from rooms. It’s quite synergistic.
Are you going to create your own hotel brand?
We could. We are now crossing the first bridge from Frasers into Capri (the group’s hotel-residence brand). It’s not unforeseen that we would potentially move into pure hotel play as well.
But we would concentrate first on Frasers, Capri, (second-tier brand) Modena, then we might go into hotel branding. I think there is still a lot of growth (in serviced residences).
We started with two properties in Singapore with 400 apartments. Now including sign-ups, it’s grown to 15,000. In the next five years, we want to grow from 15,000 to 30,000.
Where are you looking for growth?
We’re beginning to find a lot of value in Europe. Up to three, four and even five years ago, the prices of land and building were all very high. Right now we find a lot of the prices are more realistic. We’ve invested in Barcelona, Hamburg, Berlin, Munich, Frankfurt, London. We’ll continue to look at Spain, Madrid, Milan, the Netherlands, London again, Paris and even Eastern Europe. A lot of people might still be staying away but we think it’s going to come up very well.
We’re beginning to see a lot of funds moving into Europe again so that window of opportunity is slowly closing, but in the property cycle it’s still about seven, eight o’clock.
Why are you so confident about Europe when others are cautious?
Land and building prices have dropped quite substantially because of the problems in the economy, yet hotel rates have not. Therefore the yields that we are looking at for investment are still very doable. If you look at leveraged internal rate of return, it has surpassed into the teens. It’s exactly where we want to be.
The yield play in Asia has jumped up too high. For example, in Singapore, cost has reached S$1.5 million (US$1.2 million) per room. At that kind of rate, yields can be as low as sub four per cent. Even in China, land prices have gone up too high in the top-tier cities, so we’ve gone into second-tier cities. Recently we purchased a project in Dalian, but the prices are catching up really fast.
Where else are you eyeing?
The extended stay market is pretty strong in Europe, the US and Australia. That’s where we can really grow this business even more. But we’ve not even gone into South America, Russia or Africa, which we probably will. So far our only reach in Africa is Nigeria. The Frasers brand is going to be ready by end-2015 in Lagos and Abuja.
We still want to be engaged a lot in China, while South-east Asia, too, will continue to grow for us. The situation in Bangkok is a bit difficult, so we’ll have to wait until it blows over. Manila is coming up quite well; we’re going to grow quite a bit in Kuala Lumpur and Jakarta. In Jakarta alone, we’ll have six projects.
Would you still be concentrating on serviced residences?
We’re not averse to investing in hotels if we see a good location and capital appreciation is there, but the priority would be serviced apartments.
There is a reason for that. In terms of a niche market, it’s still not as overcrowded and there’s a lot of business coming through especially from corporate travel. A lot of our properties are averaging 80 to 90 per cent occupancy and at very very good rates.
Another reason is because in a lot of jurisdictions, serviced apartments can also be zoned residential, and of course the valuation for residential is a lot higher. So there is still an option, an exit route, should the time be right for residential play. It’s a lot easier in terms of investment outlook. Whereas for hotels, most of the time you have to use, buy or sell it as a hotel.
Capri gives us a very strong in-between. We need to have hotel licences for Capri but at the same time, it has the stability of mid- to longer stays. (Opened last year) our Capri in Singapore is performing at over 90 per cent occupancy…and our rates are in fact very close to the Crowne Plaza at the airport. Since then we have moved very quickly; I can count at least 10 new properties coming up for Capri. We started in Singapore, we launched in Ho Chi Minh City, and we’re going to open in Kuala Lumpur, Brisbane, Frankfurt, Shanghai, Jakarta and (across) Europe.
Tell us about the travellers you’re seeing.
We’re seeing a lot of project groups. Instead of one, two nights or years, they stay for one, two, three weeks or months. From consulting, finance and banking to oil and gas, shipping and engineering, they are flying into a city, getting the project done then flying back. Companies can’t afford to have them fly in and out because of airline and hotel costs. At the same time we don’t see as many with families. A lot of the project and taskforce groups comprise mainly singles and younger executives…We see more families in emerging markets like China, but more singles in mature markets.
There’s a big market for young and travelling executives, and that’s where Capri, Fraser Place and Modena (can grow).
Previously the trend words were pampering, fussing, butler service, luxurious. But we’re seeing a lot of move away into lifestyle and high-tech needs. This younger set of travellers wants something different. That’s why we don’t want cookie-cutter (properties). It’s a lot cheaper for us to fix to a design and multiply that throughout, but the young are looking for an experience. It has to be inspiring and new.
Who or what inspires you?
I’m a Christian, so God and the Bible inspire me. That’s where I find my sense of calmness in the course of growing the business. There are many ways of getting things done in various countries, but we don’t need to get into under-the-table money or things like that.
For example, when we first went into Beijing, we were advised to list the property as having a permanent establishment in Tianjin and become a shadow play because of the clampdown in foreign investments and red tape in the capital. Another advice was to split our US$100 million investment into two parts so that we would be outside the radar (of the central government). We decided against them.
Finally we got through with the investment based in Beijing. I also found out later that the properties that went into other jurisdictions were fined heavily and there were back taxes that caused a lot of companies to do very badly.
There are many ways to grow a company; you might have to take a longer, tougher way, but you sleep better at night.
This article was first published in TTG Asia, March 28, 2014 on page 9. To read more, please view our digital edition or click here to subscribe.
