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UOL Group's acquisition over the weekend of United Overseas Bank group's 54.5 per cent stake in listed Hotel Negara for $73.3 million and ensuing takeover offer sets the stage for UOL to unlock the value of the Hotel Negara site at Claymore Road by redeveloping it.

Building challenge: A better chance of getting a higher plot ratio is to go the way of neighbour Orchard Towers

Just how much value it can unlock from the 39,328 sq ft freehold site will depend on what the property group redevelops it into.

In June 2003, when Hotel Negara attempted to sell the site, it was stated that it could be redeveloped into a residential project with a 2.8 plot ratio (ratio of potential gross floor area to land area) and 36-storey height limit.

Assuming UOL manages to take full ownership of listed Hotel Negara - whose main asset is the hotel at Claymore Road - at $6.45 per Hotel Negara share, its total cost for buying 100 per cent of the company's equity would work out to $134.5 million.

After adding to that Hotel Negara's borrowings of $14.8 million as at Dec 31, 2005 and deducting the company's only other key asset - available-for-sale financial assets of $7.5 million as at the same date - the value of the Claymore site comes up to $141.8 million.

Based on a 2.8 plot ratio residential development scheme, the land value based on UOL's acquisition price works out to a hefty $1,287 per square foot of potential gross floor area. This would be a new record for residential land in Singapore.

And the estimated break even cost for a new condo of around $1,800 psf would leave a thin profit margin for UOL, assuming a new condo on the site may fetch $1,800 to $1,900 psf on a project-average basis today.

However, UOL could try to extract more value from the site.

It could apply for a higher plot ratio for a residential development, pointing to recent precedents.

For example, a 4.2 plot ratio was granted recently for a residential project on the Hotel Asia site on Scotts Road.

Such an argument may or may not work in the case of Hotel Negara, given that nearby residential sites have 2.8 plot ratios under Master Plan 2003.

UOL may stand a higher chance of success in clinching a higher plot ratio by looking at Orchard Towers next door.

The property is associated with karaoke pubs, night clubs and the like. But it is also zoned for commercial and residential use with a 4.9 plot ratio under Master Plan 2003.

The Hotel Negara site is zoned for hotel use, also with a 4.9 plot ratio, and since it is longer safeguarded for hotel use, UOL may seek the planning authorities' permission to redevelop it for other uses.

Instead of doing a pure residential development as indicated in the past for the plot, UOL could apply for a commercial and residential project with 4.9 plot ratio, since this is already allowed for the adjacent Orchard Towers.

This could allow UOL to do a small office, home office (Soho) or some other commercial/residential development on the site. The developer seems to have taken to such mixed development schemes of late - for example, its redevelopment of Eng Cheong Tower near Lavender MRT Station into a Soho and apartment project named Southbank, and of the former UOL Building near Somerset MRT Station into a commercial/residential development.

Projects like these not only add vibrancy to the city with their dual live and work elements but could help ease the impending tightening of office supply in the city.

Of course, UOL will have to pay a development charge if it embarks on a commercial/residential scheme for the Hotel Negara site. But even after factoring this in, its unit land price would be much lower if it bags a higher plot ratio of 4.9 - compared with the $1,287 psf per plot ratio based on 2.8 plot ratio.

UOL's acquisition of Hotel Negara may yet prove to be a highly profitable one.