Tourism surge driving demand for Australian hotels

Australia’s surge in tourism is driving demand for hotels in gateway cities and we see no sign of this momentum easing off in 2014, particularly with demand far outstripping available supply.

Savills research recorded approximately $2 billion of hotel assets transacting in 2013, up on the five year average of $1.3 billion.  

The rising demand, especially from foreign investors, for core hotel assets in gateway cities has never been stronger, with Sydney and Melbourne, followed closely by Brisbane, being the most sought after by Asian investors.  

There is a strong play from China in particular, whether private or institutions, who are chasing hotel assets.  They are attracted to investments where they can participate in, or add to, the “Chinese tourism supply chain” – that is, Chinese travel agents at the point of origin; a critical mass of Chinese inbound tourists to the destination; sufficient inbound airline capacity to service the tourists’ needs; with a rational extension being ownership of hotels at the destination to cater for these Chinese tourists.  These hotels can implement culturally-suitable programs at the hotels, from language to rooms to food and beverage.  

Typically, Chinese investors like to feel “safety in numbers” when investing into a foreign jurisdiction.  It is comforting for these investors when significant State Owned Enterprises and other major investors “take the first step” and prove that the investment destination is stable, secure and attractive. Examples include Greenland’s acquisition of the Water Board site for a mixed use scheme incorporating a hotel, Fullshare’s acquisitions in Tropical North Queensland, and Fu Wah’s recent acquisition of the Park Hyatt Melbourne. As more and more transactions occur with Chinese entities, the message will filter back to China and that is when momentum will grow substantially.  We anticipate that the real weight of Chinese money will be felt in the Australian hotel market in 3 – 5 years time. The result will be further tightening of yields and increased competition for available assets.  

New hotel developments in suitable locations with effective and efficient designs are also starting to stack up.  While CBD locations have traditionally struggled to compete against residential and office uses, the recent rise in values, operator positivity regarding market forecasts and an increase in office vacancies for some areas are making hotel conversion and/or development an attractive alternative.  

Outside Australia’s CBD markets, the emergence of modular construction is opening up a wealth of opportunities, with international operators entering into joint ventures with developers to bulk-build portfolios of select service hotels across Australia in undersupplied areas.

There are currently no signs that the investment market is slowing.  Development of new hotels is also picking up and as a result we could see offshore investors acquire hotels on forward commitments as a way to secure assets in a tightly held market.