A former hotel industry developer in Asia, Choe Peng Sum joined Frasers Hospitality Group on the eve of the new millennium to accelerate the pace of expansion of company that is capitalising on a strong demand for high-end serviced apartments. He explains why Frasers Hospitality will double in size in less than 18 months.
{{HTR Magazine: When did you realise the bright potential of the residence segment?C.P.S.:}} A lot of interest. We have many contacts with investors who want to know more about the segment and are willing to be associated, like the Carlyle Group, or banks like Goldman Sachs and Citigroup, just to name a few. They are beginning to see that there is a viable investment alternative, between retail, offices and hotels. Especially when you look at the cycle of our business. Just as an example, when the SARS crisis affected Asian hotels, which experienced 15% occupancy, we were operating at 70% in the same cities. The kind of customer that we cater to is obviously a stabilising factor. And we can also cater to shorter stays if the market requires it.Choe Peng Sum: }} In the late 90s, I worked for the Shangri-La hotel group to develop the first serviced apartments building in Singapore. The success was such that I was invited to do the same thing in Shanghai. Once the second unit was open, we had to face a waiting list of several months to satisfy the clients. The success was immediate and I realised what it was like to turn the most profitable activity of the hotel business, accommodation, into a separate business.{{HTR: How do you explain this immediate success?C.P.S.: }} In a large business city there is a huge demand for this type of product. Especially in Asia where there is a very large community of expatriates who do not like to stay more than a week in a hotel room, but at the same time they don't have access to the individual residential market. What is true in Asia also applies to the Middle East. The serviced apartments sector is typically a business that has developed in response to the market’s needs. In cities where we opened recently, such as Sydney, our second unit is surrounded by major hotel brands but we are the final choice of clients who stay in town for more than three to four days. We even have a fair share of our customers who have been guests in residence for one to three years.{{HTR: Do you see that just as a phase or is it a growing market?C.P.S.: }} Nowadays, companies that want to start new businesses in emerging countries will parachute a task force to establish the base. This group of 5 to 10 executives, sometimes more, will stay several months before going back to corporate headquarters for another mission. We are the response for that niche market which is increasingly active. It is a clientele that needs space and facilities, and even more, hotel services to facilitate their daily life. There is tremendous growth in demand for this and it is not limited to certain areas in Asia or the Middle East, it is now a global expansion that we are going to accompany.{{HTR: At what pace?C.P.S.:}} We have a strong development programme to reach 42 properties in 25 key locations within the next eighteen months. We will add 23 new properties to our 19 already in operation. All together we should provide over 9,000 apartments almost throughout the world.{{HTR: What king of location are you looking for?C.P.S.: }} 70% of the Top Fortune 500 companies are using our properties. 95% of our clientele are corporate guests, so therefore most of our locations are in the central business district of major gateway cities. Our target is to stay in key prime locations with very prime buildings. For example, Sir Norman Foster is in charge of our next Sydney project. We just might have a small proportion of resort projects in the future.{{HTR : Are you facing a problem with the increased price of real estate in city centres?C.P.S.: }} Obviously prices are going up, that is why it is very important to move in first. We were lucky to move very fast Beijing and Shanghai. We have reached a stage where 50 to 60% of project costs are due to the cost of land. Indeed it is becoming more difficult to find the right location at the right price with the involvement of a local partner.{{HTR : Do you have the financial power to invest when necessary?C.P.S.: }} Yes we do, in London, for example, our parent company Frasers Centrepoint Limited owns the properties. As of today, 7 of our 19 properties are owned; we have equity in another third and the rest are managed. The Fraser & Neave Holding company has a median market capitalisation of about 5.2 billion euros. It is a strong company, with more than a 130-year history, which can support us when needed. We look at investment on a separate yield basis, with very stringent rates. So if a project does meet our yield requirements such as our investment in Beijing or Sydney, then we invest directly. But as in many hotel groups, our core competence is management; we see our growth much more in terms of management contracts than investment. It is definitely not like running a hotel and you need a specific expertise.{{HTR : How is it so different?C.P.S.:}} If you look at the needs of those who stay with us, these are more like home needs. They require everything from laundry to leisure programmes for their family or spouses. Corporate guests live a very stressful life so it is our task to ease their stay with joint programmes, weekends in resorts.{{ HTR : Where do you see your global expansion?C.P.S.:}} We have identified five prime targets: South-East Asia (Bangkok, Manila, Singapore, Kuala Lumpur, Djarkarta,… . The second one is North Asia, the fastest growing area, where our major targets in China are in most large cities, but we are also looking at India, Tokyo, Osaka Yokohama, Seoul, Hong Kong, Taiwan... The third area we are looking at is Australia: two properties are under development in Sydney and a second one in Perth, plus Melbourne and Brisbane. The fourth area is the Middle East: Bahrain, Dubai, Abu Dhabi, Qatar, Kuwait, Saudi Arabia and even Oman. And the fifth, but not the least area of development is Europe. We already have six properties in the UK and two in Paris and we are looking at growing more in the big cities.{{HTR : What about the American continent?C.P.S.:}} It is not a priority as the extended stay market in the USA is already very saturated. I think it will happen some day in Latin America. But the first five areas are keeping us busy. At the moment there are still a lot of places where we can grow without any fear of over capacity on the segment. Today, the serviced apartments sector represents less than 10% of the hotel industry overhaul capacity. In Singapore, there are only 3,500 serviced apartments compared to 30,000 hotel rooms. We can easily double our market share because the growth of the offer is increasing the public awareness. It is a market that is still creating itself. When we arrived in Seoul, there were so few serviced apartments that the long-stay segment represented over 20% of clientele at hotels. There was simply no choice, so there was a great deal of room for growth.{{HTR : Is the lack of awareness a weakness for the segment?C.P.S.:}} The fact that big groups like Marriott, Four Seasons, Shangri-La, even Accor, have an interest in the market brings more credibility to it. Yes, it's true that the serviced apartments business is still opaque with very few branded operators. There are several levels of services and so far what has been filled up is really much more the 3-star kind of demand. What we see, as a world trend, is a demand from increasingly sophisticated travellers for very high levels of service. This is where there is a huge gap nowadays although luxury hotel brands are becoming more active in that field. Our strategy is to fill that gap with our “gold standards” philosophy, which is very different from the 5* hotel approach. We do not emphasise the luxury aspect because in your home you want to feel relaxed. But even wearing something casual, you expect a high standard of service. There is a shortage of really high-end branded residences for corporate guests who demand both the feeling of a home and high-end service.{{ HTR : Do you fear competition from large hotel groups?C.P.S.: }} For a time, hoteliers in many countries thought that the rules that apply to them were much stricter than for residences. But it is no longer true when it comes to the high end of the segment. We invest a great deal in the security of our properties. Whereas we do not invest in ballrooms or restaurant facilities, we throw all the space available into the rooms. The larger hotel groups, such as Four Seasons or Marriott, have foreseen the value of that market and are becoming more active. We tend to believe that we still have our first-move advantage.{{HTR : Have you experienced greater interest in your company from investment funds?C.P.S.:}} A lot of interest. We have many contacts with investors who want to know more about the segment and are willing to be associated, like the Carlyle Group, or banks like Goldman Sachs and Citigroup, just to name a few. They are beginning to see that there is a viable investment alternative, between retail, offices and hotels. Especially when you look at the cycle of our business. Just as an example, when the SARS crisis affected Asian hotels, which experienced 15% occupancy, we were operating at 70% in the same cities. The kind of customer that we cater to is obviously a stabilising factor. And we can also cater to shorter stays if the market requires it.
