A string of suburban hotels in our cities are backed by strong demand and budget-conscious travellers. We talked to two experts – Quest’s James Shields and Axsia’s David Simpson – to explore the possibilities.
Suburban hotels are far from a new phenomenon in Australia, but the shift to the suburbs, a trend gathering steam before COVID-19, is now picking up its pace.
“COVID is forcing businesses to reassess the way we approach the real estate market, and suburban hotels in the right location provide a compelling investment,” says Quest’s general manager James Shields.
Both corporate and leisure customers are budget-conscious in the current environment, but they are looking for ‘lifestyle accommodation’ in suburbs that were once dominated by warehouses and factories.
Quest’s Australian development pipeline has historically featured suburban locations, Shields says, particularly in Sydney, Melbourne and Brisbane, but its two newest developments are illustrative of the trend.
Located 24 kilometres from the Sydney CBD, Quest’s 71-room hotel in Sydney’s Woolooware Bay, is being developed by Hong Kong-based Aoyuan International. The hotel will feature conference facilities, a gymnasium and an external garden terrace overlooking PointsBet Stadium, the home of the Cronulla Sharks NRL team.
Quest’s 83-room apartment hotel in Collingwood is also under construction by Centreland Group. With a mix of studio, one, two and three-bedroom apartments, the hotel will also feature conferencing for up to 80 people, a business lounge and gym, as well as two floors of offices and ground floor café.
Suburban apartment hotels offer big upsides: availability of cheaper land and fewer competitors in under-serviced markets. New infrastructure investment in rail networks also make the suburbs even more accessible and appealing destinations to savvy travellers.
Shields says a suburban apartment hotel can provide an “anchor” that supports an entire commercial precinct. “An apartment hotel can help bring to life and activate surrounding establishments such as gyms, cinemas and night-time food venues, which becomes a win-win for all parties and maximises developer returns for any particular site”.
But there are “lucrative opportunities” for developers who choose the right partners – those who can “provide evidence of sustained drivers of demand, from local public transport networks to tourism and event hubs”. Shields recommends prospective hotel developers do their homework.
“Look for other nearby infrastructure and construction projects – from office buildings, to council offices, to cultural landmarks or even business parks– that will drive employment, attract investment and increase visitation.”
David Simpson, Axsia’s managing director, agrees. A multi-disciplinary advisory firm, Axsia offers specialist expertise across key sectors including hotel, tourism and leisure.
“Infrastructure investment and proximity to commercial offices, universities and schools, hospitals, retail, and sporting facilities matter,” Simpson says. “Important, too, is good access to major arterials and public transport.”
But success depends on understanding the “underlying fundamentals of demand and supply: who will stay and why?” Demand determines the size and class of hotel, and the mix of amenity. Function facilities can attract corporates, day spas lure in those looking for a luxury lifestyle experience, while food and beverage outlets cater to loyal locals.
“Future demand may come from new markets and customers prepared to pay for experiential product of higher quality. This understanding can result in higher room rates and profits.”
Simpson says smaller hotels – those with less than 100 rooms – can be “hard to stack up on a stand-alone basis” as the fixed operating costs of hotels are high. Land cost is another key factor. “Often, the hotel must be part of a larger mixed-use development, where the hotel increases the value proposition of the office, retail or residential components.”
Simpson notes the work required to deliver a successful hotel development can be “overwhelming in proportion to the cost and potential value”. However, the intellectual property gained “can be amortised over several similar projects to achieve superior returns in the longer term”.
Even a small hotel of 100 rooms equates to 36,500 room nights of potential occupancy in just one year, which is why “branding is critical”, Simpson adds. “Developers need to understand brand fit and how to drive the right commercial deal with the brand operator.”
The biggest challenge for suburban hotels in the COVID era? Funding – both debt and equity sources of capital, says Shields.
“With international borders forecast to remain closed until the end of 2022, inspiring and supporting domestic travel is key to rebuilding investment confidence in our world class hospitality assets.”