The 100 year old Palace Theatre, an iconic heritage-listed building in Melbourne, is set to be demolished and replaced with a 5-star hotel and apartment complex.

The $180 million proposal by W Hotels and Resorts, a luxury boutique hotel chain marketed towards a younger crowd, will transform the prestigious 40,000sqm site to a luxury destination featuring 205 hotel rooms and 145 apartments.

The 30-storey project on Bourke Street was announced by Melbourne’s Jinshan Investments, which has commissioned local architecture firm Bates Smart to design the building.

The developer bought the three-storey building at a public auction last year after former owners Kefi Nominees went into administration. A short term lease has been granted to Kefi Nominees to continue holding concerts.

Artist impression of the proposed development. Image: The Age

Development manager Tim Price of Sinclair Brook believes the luxury hotel will not only help to revitalise the ground level of the site, but also become a leading tourist destination, with guests expected to spend over $1,000 in the city for each night they stay.

Price also says that the development would generate 620 jobs once built, plus another 300 during the construction phase.

Image: The Age

The tower design is said to complement Melbourne’s culture while respecting the surrounding landscape in the area, such as the Parliament House. A new Melbourne laneway between Bourke and Little Bourke streets will be created.

However, The National Trust has raised concerns about the project exceeding the current 23-metre height limit in the area. This limit was imposed following the controversial Hotel Windsor redevelopment, which saw a 25-storey building attached to the rear of the heritage hotel in 2009.

Windor Hotel redevelopment. Image:

"The Windsor has opened the door, [and] now all the developers are rushing through it," conversation manager Paul Roser told The Age.

"I think in 20 years this precinct could be transformed unless the minister draws a line in the sand."

To date, Planning Minister Matthew Guy has signalled that he would reject the development in its original form.

"The developer is dreaming if he thinks the government is going to approve this in the form in which it has been submitted," Guy told ABC News. "It is too tall, it is in the wrong location."

The Melbourne Heritage Group also plans to oppose the project with spokesman Rohan Storey stating that the interior architecture is more historically significant than the facade of The Palace Theatre, and should be preserved.

Melbourne City councillor Ken Ong takes a different view, and believes the frontage is worth protecting.

“I’ll let the heritage experts fight it out over the heritage frontage,” says Ong, who hopes that the developers respect the planning controls and heritage overlays in the area.

Under the current plan submitted to the Victorian government, nothing of the century-old theatre will remain. Subject to approvals, construction on the project could start as early as next year and be completed in late 2016.