The recent purchase of the Sir Stamford Hotel at Circular Quay by JDH Capital for $210.5 million to be converted into luxury apartments is the start of a more open-minded approach from investors to look at alternative uses for existing assets. JDH Capital also purchased The Vibe Hotel in Rushcutters Bay in late 2021, which is being converted from 260 rooms to 120 luxury residential apartments and is due for completion late 2023. “The Sir Stamford Hotel proposes the conversion of 105 hotel rooms to potentially 90 luxury apartments,” says Dedico development director John Green. “There are very few opportunities for ‘wholly’ luxury residential developments in prime locations in Sydney.  “As the purchase of the hotel is based on redevelopment to luxury apartments, the market shows that this is the highest and best use for this site, particularly given the prime locations.  “We believe the downsizer buyer market is particularly drawn to the unique locations for these luxury apartment locations.” Hotel valuations and occupancy are building back to pre-pandemic 2019 levels, as both businesses and individuals are travelling interstate and internationally again. ▲ A room in the Vibe Hotel, Rushcutters Bay, Sydney. Sold in late 2021, it is being converted into a luxury residential block. CBRE’s Market Conditions Survey released in July 2022 reveals that investors, operators and developers see 50 per cent more investment towards the hotel sector, with the same percentage expecting higher interest rates to flow into yields, while two-thirds see growth in values over the medium term. Sydney, the Gold Coast and Brisbane are expected to be the best performing states in 2023, while Melbourne and Perth have years of struggles ahead. Pessimistically, investors, operators and developers surveyed believe that although demand is recovering, international arrivals are at least three years from returning to pre-pandemic levels. But that may not be the reality, with almost all Covid restrictions removed for any overseas guests wanting to visit Australia. “Hotels are recovering quickly from the effects of the pandemic, and in most capital city markets average daily rates are materially exceeding 2019 levels,” says CBRE’s Michael Simpson, managing director, capital markets, hotels. “However, residential conversions or redevelopments of existing hotels are becoming more common in some markets. Many hotels are situated in prime locations which are attractive for residential uses, subject to applicable urban planning constraints,” he says. “In Sydney in particular, the residual land value of the hotel property which is being used for residential conversion or development often far exceeds its value as a trading hotel.  “The ‘saleable area’ of a residential conversion-redevelopment of a hotel property exceeds that of a trading hotel.  “The achievable price per square metre of net saleable area is usually much higher for residential uses compared to hotel uses, particularly those apartment projects with Sydney Harbour views and other neighbouring amenities such as public open space parks and dining precincts. ▲ The Sir Stamford Circular Quay hotel, Sydney. “A prime example is the recent sale of the Sir Stamford Circular Quay. The most recent valuation as a hotel was $90 million, but the sale transaction price as a residential redevelopment was $210.5 million.” Interestingly, in the CBRE survey, Queensland (77 per cent) and NSW (76 per cent) were seen as the two most attractive markets to purchase hotels.  Victoria came in a distant third at 50 per cent. The split between hotel class was corporate (56 per cent) and leisure (44 per cent). But an appetite exists from local and overseas investors to purchase hotels for other uses . “Hotels are capital-intensive and technology-intensive assets,” says Simpson. “Existing owners of older unrenovated properties may find that it is more profitable to either redevelop or convert their hotels into other uses, including residential, or to sell them to a developer to do the same. “It is most prevalent in Sydney where residential apartment prices per square metre of NSA are the highest in Australia.  “However, it is a factor in each of these cities where the hotel product is not able to perform effectively against their competitors, and where there is demand for new residential apartment stock. ▲ The rooftop pool at the former Vibe Hotel, Rushcutters Bay. “This is a normal cycle of real estate usage and evolution. For the balance of existing hotel stock, the decrease in supply will be positive, given there will be less competition. “It may also create additional opportunities for other sites for the development of newer, more contemporary hotel room inventory.” Overseas buyers are looking fondly at the Australian hotel market with a view, where feasible, to finding alternative asset uses for the existing product. “What we are seeing is investors approach traditional assets with an open mind,” says Savills NSW and Victoria hotels director Nick Lower. “We currently have an overseas buyer looking at purchasing hotels in Australia to turn into student accommodation. There are also investors wondering what to do with traditional offices, as they are not expecting them to be fully utilised again, experts say. “They are asking the questions of how they can repurpose traditional CBD offices but overall the theme is that investors are looking for prime assets that they can upscale into another asset class for better returns.” Indeed, the next 18 months may well see a flurry of A-grade asset sales in Australia for new uses for traditional hotels and offices as investor appetite grows. You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.
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