Up to 15 Australian hotels were passed in this year due to sellers’ unrealistic price expectations as buyers wait patiently for reasonable offers to be accepted.
Two years of a global pandemic—with little sign of it truly abating—has meant that picky buyers can spend months negotiating prices as they await further clarity on how Australia, and the world, will handle any new movement restrictions.
Prominent hotels that failed to sell in 2021 included the Rydges Sydney Airport Hotel, Novotel Melbourne South Wharf, Rydges Sydney Harbour, Novotel and Ibis hotels at Darling Harbour, Rydges North Sydney and the Jasper Hotel in Melbourne.
“Hotels, by and large, are going concern investments with no income certainty or security,” JLL head of investment sales Peter Harper said.
“Trading interferences and volatility will remain heightened as we progress through the recovery phase and therefore profitability won’t be as high or consistent as what was experienced pre-Covid where the Australian hotel market was one of the most stable in the world.
“Put simply, hotels remain a highly sought-after asset class globally. Like most real estate asset sub-classes, they have been impacted throughout the pandemic, however, their inherent investment fundamentals haven’t materially changed.
“For the year-to-date to September almost $US39 billion (about $55bn) hotels have traded globally, which is only 24 per cent down on the same period in 2019.”
Buyers who have been prepared to wait and negotiate through the pandemic have been able to secure hotels for well below their asking price.
A JLL Investors’ strategy survey revealed that the weighted average discount sellers are willing to accept is 2 per cent while buyers are seeking a discount to 2019 pricing levels of 17 per cent.
One such prominent deal, that only settled in the second half of 2021 despite the deal being agreed more than 14 months ago, was Crystalbrook’s purchase of Brisbane’s The Fantauzzo Art Series Hotel.
Crystalbrook is backed by Syrian billionaire Ghassan Aboud, who has ambitions to spread the group’s influence into the mainstream hotel market in the eastern states.
“We want to balance our portfolio and this was a good opportunity presented to us. It is a fairly new hotel with good design ethos,” Crystalbrook chief executive Geoff York said.
York says that the deal to buy The Fantauzzo, now re-named The Vincent, came through a third party approaching the group on behalf of the Deague family.
“We were never going to buy a standard hotel.
“After three months of negotiating, we were able to get the price we wanted. We had a price range in mind and there was a gap and eventually we met in a good place.
“We have ambitions to buy mainstream hotels on the east coast of Australia but we are not in a hurry.”
The Crystalbrook Collection Hotels and Resorts group now owns seven hotels and is watching both macro- and micro-economic trends as it pursues both on- and off-market opportunities.
“We are a four-year start-up,” York said. “I have been here from the start and we have one main investor.
“We started in Cairns with one investment and we are now in capital cities. We want to balance our portfolio to CBDs, and away from leisure to corporate and meetings.”
York is optimistic that 2022 will provide a solid year in terms of hotel bookings with enquiries for conferences more than “1000 per cent” than in 2021.
“I think the first half of next year will see a return of leisure travel, especially within Australia, as long as this Coronavirus strain doesn’t impact too much,” York said.
“International travel will take a bit longer to be fully embraced but certainly businesses are looking into conferences and events across Australia from 50 to 500 people, which is very encouraging.
“While people are confident business travel will return, I will think it will increase but not significantly until 2023, which obviously affects the hotel market.”
Yields achieved across hotel assets largely range on location. On average, the yield rates for core Sydney CBD hotels have transacted at less than 5 per cent, while regional hotel yields have seen a compression, and have been hovering in the bracket of 8 per cent to10 per cent.
CBRE Hotels national director Wayne Bunz believes that while there are still considerable obstacles to entry to buying hotels within Australia, we provide excellent sound investment grounds.
“We have stable government, a strong economy, we have handled the coronavirus well compared to other countries and we offer strong returns,” Bunz said.
“There are incredibly high barriers to entry in the hotel sector and in many instances assets are still being sold below replacement value. This is fuelling interest in available opportunities in what continues to be a very low interest rate environment.
“Investors are taking a mid- to long-term view on the sector’s future performance, underpinned by expectations of a relatively sharp recovery in trading conditions as borders re-open and international travel resumes.”