Case for office to hotel conversion never been stronger

With many of Australia's CBD office markets beset with high vacancies, particularly at the secondary level, new research has shown that the case for hotel conversion has never been stronger.

A new report from Colliers International said that the tightly held ownership of Australian capital city hotels was "the impetus for investors to examine the prospect of converting office buildings to hotel accommodation."

At present, it said there was "window of opportunity" for office conversion due to hotel values rising relative to B-grade and lower office space, which was suffering from rising vacancy and escalating incentives.  

"Hotel investors clearly have a preference for existing stock but there is presently a lack of hotels for sale so they are being forced to look at alternative options," said Stephen Burt, Colliers managing director of hotels.

He believes that well located, existing B-grade or C-grade office buildings burdened by smaller floor plates, central core and poor lease tenure ironically offered the key attributes for a good hotel conversion.

The research highlights that the feasibility of office conversion is particularly attractive in Brisbane and Sydney.

It also noted that over the year to June 2013, Investment Property Databank figures report that returns generated from the hotel sector halved to 6.3%, down from 12.8% the previous year.

However, over the last three years returns from the hotel sector averaged 11.8% compared with 9.5% for retail, 10.0% for office and 9.7% for the industrial sector.

Strong interest from sovereign wealth funds and global institutional investor has seen transaction activity during 2013 the strongest since 2007. Total hotel sales activity for the year-to-date is in excess of $1.550 billion, a 24% jump over 2012. But the figure was bolstered by just two sales - the Tourism Asset Holdings Limited portfolio for a reported amount of about $800 million and the Four Seasons Hotel Sydney for $340 million.

Colliers also noted that over the year to June, the major city hotel markets it monitored saw average revenue per available room (RevPAR) rise by 2.5%.