Chinese Investors Up The Ante In Australian Hotel Sector

The latest research into Australia's hotel sector reveals that China is becoming a driving force behind transactions, with an increase in their business that accounts for 42% of the $1.7 billion in hotel sales year-to-date.

“Recent volatility in global equity markets, particularly in China, and the onset of low-yielding bond markets has served to increase the appeal of property as an investment class, with Australia perceived to be a relatively low risk, strong, stable and transparent market in which to invest,” CBRE Hotels Executive Director Robert McIntosh said.

Significant purchases this year include that of the proposed The Ribbon project in Darling Harbour by Chinese-backed development and investment group Greaton and the sale of the Park Regis in Sydney to a Chinese private capital group.

Other transactions include South Molle Island in the Whitsundays, which was purchased for $25 million by Shanghai-based China Capital Investment Group (CCIG), 18 months after the group acquired the adjacent Daydream Island Resort and Spa for $30 million.

It seems that many Chinese investors are seeking generational buying opportunities, acquiring assets that they can hand down to their children and several generations to come. Their interest in the Australian hotel sector also stems from their motivation to capitalise on the current strength in the tourism sector.

The increase in Chinese investment - which totals $715 million year to date - comes amid what has been a quieter period in the Australia hotel sector after a record year in 2016. The first three quarters of the year saw 28 sales totalling $1.7 billion, compared to 41 sales totalling $2.3 billion in same period in 2015.

However, the average size of transactions has been growing – from $36 million in 2014 to $55 million in 2015, with the average transaction size this year being even higher at $60 million.

The average price per room has not increased, but the size of the properties has; from an average size of 102 rooms in 2014 to 142 rooms in 2015 and 165 rooms in 2016.
An interesting discovery
Data compiled by CBRE on the hotel sector revealed that there was a change in trend when it came to the location of where capital was being invested. Rather than investment on a state-by-state basis, the shift involves the growing volume of capital invested in regional locations, with significant sales occurring in 2016 in markets such as Cairns and the Central Coast of NSW.

While NSW attracted between 49%and 56% of investment each year, followed by Victoria at 19% to 27% and Queensland at 16% to 17%, in 2014 and 2015 transactions in regional areas comprised around 20% of total sales by value.

To date, the figure grew to 24%. When looking at the data by number of sales, the change is even more dramatic from 40% to 60%.

Why have the changes been occurring and what does this mean for the hotel market?
McIntosh said the global economic outlook appeared to indicate that the current low interest rate environment would continue for some time, and therefore investors are seeking higher returns than can be achieved from passive investments and the risk margins are falling.

“Against this backdrop, yields are being compressed and asset appreciation is being achieved irrespective of the lack of income growth. The result is that higher yielding properties are becoming more attractive and the hotel sector has certainly benefited from this trend, particularly in Australia," he said.

CBRE Hotels National Director Wayne Bunz noted that the availability of properties for sale had reduced and capital was therefore chasing opportunities in markets that were seen to have higher yields and income growth potential.

“The Cairns market is a classic example of this. Having suffered from declining visitor numbers and financial performance for some years, this market is in a turnaround phase, with a real potential shortfall of rooms in the near future. Hence this has become an attractive location for investors,” he said.

It is expected that top quality CBD hotels will continue to attract very strong interest and investors seeking higher yields will be looking increasingly at the choice between secondary CBD locations or regional assets.