Commercial, residential buildings to find new life as hotels

Developers continue to jump on the hotel-conversion bandwagon, with Fragrance Group for its flagship office building in Alexandra Road and Lian Beng for Wilkie Edge among the latest to have received nods from the Urban Redevelopment Authority (URA).

The trend is being fuelled by the rise in hotel land values and a perceived shortage of hotel room supply on the island; this follows URA generally having disallowed, over a four-year period, development applications for new hotels, including change-of-use proposals, on sites that are not zoned for hotel use.

The restrictions, which took effect in July 2014, were relaxed in August last year.

Savills Singapore deputy managing director of investment sales and capital markets Galven Tan, said: “Hotel land values, based on recent transactions, have exceeded those of commercial and even residential in some instances. Therefore, building owners are exploring conversion to extract the highest and best value.”

One of the biggest players riding on the trend is James Koh’s listed Fragrance Group. It has received approvals from the URA to redevelop Fragrance Empire Building in Alexandra Road and Tower 15 in Hoe Chiang Road into hotel projects. The group is also planning a hotel project on the combined sites of Waterloo Apartments and Min Yuan Apartments, which it acquired through collective sales last year and this year respectively.

In August, Fragrance received provisional permission to redevelop the 26-storey freehold Fragrance Empire Building (the former NOL Building) into a 1,000-room hotel with a gross floor area (GFA) of 289,441 sq ft, and retail space of 13,132 sq ft.

Over in Selegie, Lian Beng Group and Apricot Capital, which acquired Wilkie Edge in 2017, received URA’s provisional permission in July for additions and alterations to create a 540-room hotel and 28,200 sq ft of retail space.

The new owners of Chinatown Plaza in Craig Road, who acquired the property through a collective sale in 2018, bagged URA’s provisional permission in September for a 306-room hotel development with some retail space.

Over in the city area, Fragrance Group clinched written permission last month to redevelop Tower 15 along Hoe Chiang Road into a 25-storey hotel project with 807 rooms, with carparks on levels two to four and ancillary facilities.

The maximum GFA set by the URA for the proposed development is 248,483 sq ft. However, as disclosed in its Q2 and Q3 FY2019 results statements, Fragrance plans to apply for the URA’s CBD Incentive Scheme (announced this year) to redevelop the Hoe Chiang Road asset. This could add another 25 per cent GFA to the project; however, a development charge (DC) would be payable to the state for the extra GFA and change of use.

The DC rate for hotel use in the location is significantly higher than that for commercial use.

Market watchers reckon that Fragrance may consider a mixed development for its Hoe Chiang Road asset, which could also include some serviced apartments and retail space.

These projects are on a growing list of properties which are being slated for conversion to hotels. These include the Golden Wall Centre in Short Street, bought by Worldwide Hotels Group (the parent group of the Hotel 81 chain) in an en bloc sale in 2018.

One factor spurring the change-of-use applications to hotels these days is the expected shortage of new hotel rooms.

According to figures from JLL’s Hotels & Hospitality Group, the total upcoming known hotel supply from 2019 to 2023 and beyond is about 8,300 rooms – less than half the net increase in supply of about 17,000 rooms from 2013 to 2018.

The group’s senior vice-president of strategic advisory and asset management for Asia, Calvin Li, noted that a sizable proportion of the upcoming hotels are positioned in the mid-scale segment.

“This is in contrast to the past six years, when several hotels positioned in the upscale and luxury segments opened, including brands such as Andaz, J W Marriott, Kempinski, InterContinental, Six Senses, Sofitel and Westin.”

The trend towards mid-scale hotel developments is connected to rising hotel land values.

Profit margins are higher for mid-scale hotels than luxe ones, partly because they tend to be less labour-intensive – an important consideration given the tightening in foreign labour quotas, said Mr Li.

“Midscale hotels can outsource operations like housekeeping, whereas luxury hotels would want to have their own in-house staff to maintain high standards of service.

“Because mid-scale hotels have higher profit margins, their developers can afford to bid higher for the land.”

A seasoned industry observer said that luxury hotel room rates in Singapore are significantly lower than those in other Asian gateway cities like Hong Kong and Tokyo; in Singapore, there is higher demand for rooms in the mid-scale space, he added.

Agreeing, a seasoned hotelier said: “If you have paid a high land price, and you want to build a luxury hotel with large rooms, your cost per room will be higher; but can you achieve the equivalent room rate for it? Your occupancy rate may be lower and this will have a bearing on your profitability.”

For instance, it is much easier to sell two smaller rooms at S$150 per night than a larger room at S$250 a night.

Savills’ Mr Tan said clear evidence of the rise in hotel land values outstripping commercial and residential land values can be gleaned from the government’s DC rates, since these are the Chief Valuer’s assessment of land values.

Developers pay DC for the right to enhance the use of some sites or to build bigger projects on them.

Mr Tan said: “DC rates for hotel use for most of the city area, including Orchard Road and the financial district, are the highest among all use groups, surpassing those for commercial and residential uses.”

In fact, the current high DC rates for hotel use may cream off a significant portion of the enhancement in land value from conversion to hotel – and this may limit the number of property owners jumping on the bandwagon, he added.

Agreeing, Knight Frank Singapore head of investment and capital markets Ian Loh said that the CBD Incentive Scheme, which offers 25 or 30 per cent additional GFA to entice owners of older office buildings to redevelop their properties to mixed-use projects, may have excited some parties.

“However, because DC rates for hotel use are higher than those for commercial use, owners may find the numbers do not make sense for conversion to hotels.”

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