Frasers Commercial Trust to build hotel in China Square

Frasers Commercial Trust has struck a conditional deal for a proposed hotel on its China Square Central site. Mr Low Chee Wah (above), chief executive officer of the trust's manager, said the hotel will introduce a resident population and hopefully raise traffic and footfall from hotel guests. -- PHOTO: FRASERS COMMERCIAL TRUST

Frasers Commercial Trust has struck a conditional deal for a proposed hotel (above) on its China Square Central site. Mr

Low Chee Wah, chief executive officer of the trust's manager, said the hotel will introduce a resident population and

hopefully raise traffic and footfall from hotel guests. -- PHOTO: FRASERS COMMERCIAL TRUST

FRASERS Commercial Trust (FCOT) said yesterday that an entity of Frasers Centrepoint will build a hotel on its China Square Central site.

FCOT has struck a conditional deal for the proposed hotel, which will be operated by Frasers Hospitality under the Capri by Fraser brand. The move is expected to reposition and boost the value of the Central Business District (CBD) property, with opportunities to lift rents.

Separately, the trust announced plans to buy an office building in Melbourne from Australand - its first purchase from the Australian property developer since Frasers Centrepoint acquired it last August.

The acquisition of 357 Collins Street, a Grade A office building in the Melbourne CBD, is set to lift distribution per unit (DPU), the trust said.

It will be sending a circular to unit-holders on both proposed transactions in the next month and will be convening an extraordinary general meeting to obtain unitholder approval.

The seeds were sown for the China Square Central transaction in 2013, when the Urban Redevelopment Authority (URA) granted provisional permission for 16,000 sq m additional gross floor area (GFA) for hotel use, and rezoned the site as well.

In this way, the transaction "crystalises the value of the additional GFA", said Mr Low Chee Wah, chief executive officer of the trust's manager.

Development will be done by the Frasers Hospitality China Square Trustee (FHCS Trustee). The hotel will be at the current site of Fountain Square and would affect some retail tenants in the basement, which could see some dip in occupancy rates for FCOT in the short term.

However, this retail space will be relocated to the first floor to give it better visibility, he said. "The net lettable area should improve. Today, some space at the basement is not leasable."

Apart from paying for the hotel development, the FHCS trustee will foot the differential premium, GST and stamp duty, which is expected to be over $100 million.

FCOT will fork out about $7 million for some work to the commercial space, which it will fund with internal resources.

The FHCS trustee will also pay FCOT $44.8 million upon entering the building agreement, set for October this year at the latest.

Construction of the hotel should take another three to four years. FCOT will grant a long lease of the hotel to the trustee when the hotel and commercial works are completed.

"The hotel will benefit the whole area, which can be a bit quiet on the weekends... It will introduce a resident population, hopefully traffic and footfall from hotel guests," said Mr Low.

Rents could be enhanced as well, he added. The average rent for expiring leases at China Square Central was $6.40 per sq ft (psf) per month for office space and $5.80 psf per month for retail as at March 31. Mr Low said office rents are now at $8 to $9 psf per month but retail rents could be higher.

As for the 357 Collins Street acquisition, the 25-storey office building with a total net lettable area of 31,920 sq m will be bought for A$222.5 million (S$232 million) and financed with a combination of equity and debt.

The property has a committed occupancy of 95.5 per cent, with tenants including Commonwealth Bank of Australia, Meridian Lawyers and Wilson HTM Services. About 97.1 per cent of the leases also have fixed annual increments of 3.75 to 4 per cent.

It is expected to increase FCOT's portfolio size by 14.2 per cent from $1.8 billion to $2 billion as at March 31, and will be FCOT's first property in Melbourne and third in Australia, after its properties in Perth and Canberra.

The city has an established office market, Mr Low said. The net property income yield for such a property in the Melbourne CBD could be 6 to 6.5 per cent versus the blended yield of FCOT's portfolio of around 5 per cent.

As for whether there will be more Australand properties bought by the trust, he said it will have to be "mutually agreed between ourselves and Australand, and must fit in with our strategy and theirs, and the shareholders... We're more interested in CBD-located properties, and it would have to be yield accretive."

Australand has over 250,000 sq m of commercial space.