Hotel investors expand their horizons
With hotel transaction totalling more than $4.2 billion in the 12 months to June 2015, Australia is in the middle of a hotel investment boom, says Savills.
The Australian hotel market, which is up 107 per cent on the previous 12 months, continues to be dominated by overseas investors who, according to Savills, purchased 54 per cent or $2.7 billion of hotel assets in the 12 months to June 2015.
Savills director of valuations and consultancy for hotels, Adrian Archer, says that this could be even higher, with another 25 per cent comprising private investors whose geographic origin is undisclosed.
Michael Simpson, Savills managing director for hotels said that the numbers are not surprising.
“Australia remains a safe investment destination due to its strong banking system, consistent and transparent investment market, relative legislative certainty, low cost of debt and favourable real estate investment yields compared to other developed global real estate markets,” Simpson says.
The most recent significant hotel transaction in Australia is the Westin Sydney, which is due to complete on a passing yield of 4.0 per cent and a cap rate of 4.5 per cent.
This is a compression in the cap rate of 2 basis points at the luxury end of the sector in just over 18 months, Archer notes.
Historically, hotel cap rate movements have lagged behind other assets classes – being the last to fall and the last to increase. However, hotel cap rates for five star luxury properties in capital cities are now falling at a similar rate in comparison to prime office investments, which are falling by basis points to under six per cent.
The question is whether the fall in cap rates will continue.
“This depends upon the usual influencing factors: low interest rates and whether further interest rate easing is anticipated; continued good performance of hotel room rates and occupancy; overseas investment; a stable Australian economy; weakening of the Australian dollar and China’s economy,” Archer says.
Given the dynamic nature of hotel operations and performance, in which hotels are required to react to market forces on a daily basis, property investors should play close attention to hotels’ key performance indicators. These can be one of the earliest indicators of a change in market conditions.
Given the current strength of the key gateway markets of Sydney and Melbourne in average daily rate, occupancy and meetings, conferences and corporate clientele, Savills says it is reasonable to assume that the hotel investment boom will continue in Australia for the foreseeable future.
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