For Frasers, the only way is up

Source : Today - 25 Sep 2008

Low costs and promising markets pave the way for expansion in Asia, Europe

Property crisis or not, Frasers Hospitality is dead-set on rapid expansion, planning within the next 15 months to double the number of service apartments it owns and operates.

The company, an offshoot of food and beverage mainboard-listed blue chip Fraser & Neave, is looking to set up its own procurement unit for central purchase of goods, from toiletries to bed linen, for its numerous properties here and abroad, says chief executive officer Choe Peng Sum. “This should help to bring costs down even lower,” he said.

The group is in an expansion mode, planning to have more than 10,000 apartments by 2010, with China, India and Vietnam targeted for growth. The aim is to double Frasers’ present total of 5,000 apartments in25 buildings in 14 cities in Asia and Europe.

Frasers expects to open half a dozen more properties in China alone within 18 months.

“There is a very strong upside for our market and we are bent on expanding in China,” said Mr Choe at the opening of Fraser Suites CBD in Beijing in mid-August. He thinks that by the end of 2010, the group could have 20 properties under its brand in China, where it works with Citigroup and local partners like Cosco, Cofco, Yanlord Land, China Merchants, China Resources Land and Harvest Land.

Besides cities in Europe, including Madrid and Barcelona in Spain, the group is also looking at the Middle East and Eastern Europe, especially in the main cities of Russia, Budapest in Hungary, and Prague, the capital of the Czech Republic.

Besides its top-end Fraser Suites, Fraser Place and Fraser Residence, the company is developing lower tier serviced apartments for the less well-heeled business traveller - whom Mr Choe termed “road warriors”.

The first Modena apartments, as they are being called, is expected to open early next year in China. Mr Choe sees a huge and growing market for such apartments not only in China, but also in India, Europe and South-east Asia.

And while most sectors of the property market, especially the residential sector, may be heading south following the sub-prime mortgage crisis, and generally tightening credit, the serviced apartment sector continues to provide good returns, Mr Choe said. For Frasers the internal rate of return is between 9 and 15 per cent according to Mr Choe.

“The margins are often better than from hotels as we don’t have to have huge lobbies, numerous F&B (food and beverage) outlets, ballrooms and other amenities that hotels have to provide for. Furthermore, our staff costs are also lower as the staff-to-room ratio at between 0.3 to 0.5 per room is lower than the average five-star hotel’s 0.8 to 1.1 ratio - that is, we have one worker for every two to three rooms compared with the hotel’s one or more staff per room.”

Mr Choe says returns are much better overseas than in Singapore, where the group operates three properties at Valley Point, Robertson Walk and Fusionopolis. “Here, land can make up more than 50 per cent of the cost of the development, while abroad they are much lower, even in places like Shanghai and Beijing,” he said.

In Singapore, Frasers’ clients often have to wait for up to three months to rent an apartment while in China it enjoys occupancy levels of 75 to 80 per cent. In the UK its seven properties have average occupancy levels of 90 per cent. “The break-even occupancy level is typically around 35 to 40 per cent,” Mr Choe said.

On the properties it manages, usually on a contract of between 10 and 15 years, it charges management fees of 3 to 5 per cent of gross revenue and usually gets an incentive fee of 10 to 15 per cent of profits.

While the preference these days is management rather than ownership of properties, Frasers is planning to place at least some of the properties it owns in a real estate investment trust (Reit). However, Mr Choe thinks now is not the right time to do a Reit, in the face of the current turmoil in the equity and financial markets.