Frasers Hospitality in talks with funds as it eyes Europe assets

Frankfurt

IN a bid to expedite growth, Frasers Hospitality is in talks with funds to scoop up targeted assets in Europe and has carved out plans to expand its newly acquired UK-based hotel chain group to Europe as well as Asia.

The hospitality arm of Frasers Centrepoint Limited (FCL) is also exploring options with distribution houses in Europe that could take the form of a strategic alliance or an equity investment. In fact, it is wooing a Japan-based player for over a month now, whose highly scalable distribution platform is envisaged to go global.

Frasers Hospitality chief executive Choe Peng Sum told The Business Times in an interview: "We really need to fight the distribution strategy, in fact if we can, to have our own (platform) because that whole distribution network is going to be very critical and crucial."

While ensuing concerns over the euro crisis have held some investors back in Europe, there are opportunities that have presented themselves as valuations eased.

"With the drop in pricing, we can easily clear those hurdle rates," he said. "In Europe, we are largely looking at Ebitda (earnings before interest, tax, depreciation and amortisation) yield of 7 per cent, which is very good compared to Asia or even China. Yields in China, especially first-tier cities, have dropped tremendously."

A case in point is a property that Frasers Hospitality acquired in Barcelona, Spain and converted into a hotel residence under "Capri by Fraser" brand. The pricing had dropped 20 per cent over two years by the time Frasers Hospitality was approached a second time for the property. "That's the kind of nature we are seeing in Europe in the price of land and building that has moderated," Mr Choe said.

Frasers Hospitality is in talks with several funds including sovereign wealth funds and pension funds that are looking at serviced apartments for long-term recurring income stream. "What we are looking for are like-minded partners who can be passive enough for us to run the business and seek growth," he added.

On why it is taking longer than expected to set up funds to acquire European assets, Mr Choe explained that private equity (PE) players have become less open to blind pools since the global financial crisis, with their preference shifted towards deploying capital for targeted assets that are already on the table.

"It's a chicken and egg thing. While we are looking for the target, we are also trying to set up the PE fund. It's a matter of timing," he said. But competition is sizzling up, with many US and European funds closing in on major deals, as well as cash-flush Chinese state-owned funds.

"While we are assessing some of the target assets that we are looking at, it is not unusual to have three to four bidders for that same thing as well," Mr Choe said. "I guess it boils down to timing, to the right project with the right yields."

Frasers Hospitality has been looking closely at opportunities in Munich in Germany, Madrid in Spain, Milan in Italy as well as the UK and the Netherlands. While it is interested in Paris, prices there have not come down enough for yields to be attractive.

The group has three branded Gold-Standard serviced residences offerings - Fraser Suites, Fraser Place and Fraser Residence; a second-tier brand Modena by Fraser; and design-led hotel residence brand Capri by Fraser. In addition, the group operates two brands of upscale boutique hotels - Malmaison and Hotel du Vin - through its acquisition of hotel chain group Malmaison Hotel du Vin (MHDV) in June.

While its portfolio is currently about 70 per cent Fraser-branded, the group is eyeing a balanced product mix of 30-40 per cent Fraser, 30 per cent Capri and 30 per cent boutique hotels as it expands the Capri and boutique hotels segments.

On Thursday, Frasers Hospitality celebrated the opening of its first property in Germany with the official launch of the 153-unit Capri by Fraser in Frankfurt, following its recent entry into Spain with the 97-unit Capri in Barcelona. It is also slated to open a Capri in Berlin in 2017.

In Asia-Pacific, it is adding another 10 Capri properties over the next four years, bringing the total number of hotel residences to 17 properties with more than 3,500 units.

As the new owner of hotel chain group MHDV, Frasers Hospitality is also wasting no time to grow the brands in this "blue ocean" of boutique hotels. Mr Choe cited rising demand from the "millennial travellers" who are not looking for cookie-cutter, run-of-the-mill hotel offerings but are seeking out lifestyle experiences without a bulged budget.

Asia is seen as a viable market for the Malmaison brand of hotels, with Taiwan already identified as a potential new market, while the expansion of Hotel du Vin brand will be focused on Europe first.

Mr Choe reckoned that the fact that luxury hotel brands such as Intercontinental, Marriott, Hyatt and Westin have ventured into the boutique hotel space shows there is demand for boutique hotels. At the same time, this market is not saturated yet.

Also, Frasers Hospitality hopes to expand the Modena brand in Asia outside of China, having acquired the remaining 49 per cent of Modena Hospitality Management (Shanghai) Co Ltd from Shanghai Chongfu Investment Holding Ltd in April. It will open a Modena in Bangkok in a year's time, followed by Kuala Lumpur.

But Mr Choe is cognisant that growth cannot be pursued at the expense of branding. This has kept Frasers Hospitality from franchise agreements for now even though that is one proven model for rapid expansion.

"Giving your name up for a price" in a franchise model comes with a loss of control and it takes only some bad reviews in one of the properties to affect the brand, he said. "For us, the brand is important where for every property, we must have full control over the quality of operations, the quality of assets, the service standards and all."

Meanwhile, Frasers Hospitality has identified certain assets within its portfolio for redevelopment or asset enhancement, so that the performance upside could be priced in by the time they are monetised through the Reit. Frasers Place Robertson Walk in Singapore could potentially be redeveloped to achieve a higher plot ratio, while Frasers Suites Kensington and some assets of MDHV are due for asset enhancements.

FCL had injected six serviced residences into Frasers Hospitality Trust (FHT) during its listing in July last year, with FCL's major shareholder TCC Group injecting six hotels into the Reit. FHT has the right of first refusal to another 12 assets from FCL, of which it acquired the iconic heritage hotel Sofitel Sydney Wentworth, Australia in May.

READ MORE: Frasers Hospitality's Capri goes global