Asking the hard questions for hotel investors

While the hotel industry is in good shape, threats – real or imagined – will always exist. John Smith, CEO of HTL Capital Advisors and Hotels World Australia poses 10 questions for potential hotel investors.

Given the generally positive local and regional economic outlooks and the manageable volumes of new supply in the pipeline, the future for most hotel investment markets looks positive, which in part explains the unprecedented volumes of capital looking for prime opportunities in key Australian hotel markets.

However, as in all cycles, hotel investors must look beyond current and short-term market conditions to focus on longer term trends and directions, including threats, as much as opportunities.

Threats, real or imagined, will always exist and must be given due attention and scrutiny. No investor wants to face unexpected and unplanned for events that threaten future values and investment returns.

With this in mind, the following 10 questions are issues for consideration as investors assess the outlook for hotel investment and operating performance beyond the short to medium term in Australia.

1. Will China, now Australia’s largest source of inbound tourism delivering more than one million visitors a year, continue to underwrite further demand growth given tightening economic conditions? Is Australia becoming too reliant on China as a key demand source for tourism visitation and hotel demand?
2. How durable and resilient is the appetite of investors from China and other markets, many of whom are first-time hotel investors and have never seen a market downturn in this industry and in this country? Are market values in Australia now overly dependent on the preparedness of Chinese regulators and lenders to continue to permit further investment in overseas assets?
3. Given historically high room rates in Sydney, Melbourne and Brisbane, how much more ‘sticker shock’ will domestic leisure guests and corporate users accept before pushing back on further growth in rates?
4. If, as is being suggested by some analysts, a slump occurs in residential apartment sales in Melbourne, Brisbane and Sydney, due to the deluge of new apartments coming on stream, how much of a risk does that pose to the hotel industry given the potential for apartment owners to compete with hotels by renting rooms through facilities such as airbnb? And is there an added risk of hotel room rates being threatened by discounting if apartment owners pursue occupancy regardless of rate in order to service debt on apartment loans?
5. What, if any, risks to hotel owners arise from the current wave of ‘consolidation’ (in other words, mergers) of mainstream hotel companies?
6. Given historically low hotel investment yields and a narrowing of the ‘premium for risk’ between hotels and other forms of real estate, is there a risk that hotel yields are presently at unsustainable levels?
7. In an era of supply-driven brand proliferation have we reached the point where new brands are becoming pointless and not understood or valued by the public and therefore risk having a limited lifespan? Does this pose a threat to those investors and developers who have recently or are considering committing to new brands under long-term management agreements?
8. Are investors building an adequate allowance into their pricing and valuation models for the rising number of uncontrollable risks to which hotels (and tourism) are inherently more susceptible, such as terrorism, health pandemics and geo-political threats?
9. Does the rise of management rights in some parts of Australia pose a threat to the mainstream hotel industry, particularly given the contemporaneous rise of both accessible demand facilitators (such as online travel agents) and sharing economy facilitators (such as airbnb)?
10. Where is the world of disruption and the rising power and cost of online travel agents taking the hotel industry? Is it going to a place in which the hotel industry can still continue to control its room stock and pricing, or to a place in which the industry loses control of pricing and also has to absorb unacceptably high distribution costs in a market increasingly controlled by online travel agents and other intermediaries?

For more information contact John Smith at [email protected].  

These issues and more will be analysed and discussed by leading hotel investors, developers, lenders, operators and professional advisers during Hotels Investment World in Sydney on 28 July 2016. To review the program and to register online , visit  www.hotelsworld.com.au