Australia bucks cooling investment climate in APAC

AUSTRALIA – There are fewer hotel deals Down Under, but brokers aren’t at all gloomy. Thanks to significant M&A in the first half of 2023, and notable properties that are going on the block currently, they expect hotel transaction volume in Australia this year to reach the same, or even surpass, last year’s level of $1.3 billion (A$2 billion).

The optimism isn’t misplaced. Transaction volumes in 1H23 rose 208% over 1H22 to $760 million, according to JLL Hotels & Hospitality Group’s Adam Bury, based in Sydney. The executive vice president, Investment Sales and head of Hotel Debt Advisory expects full year 2023 to haul in more than $1.5 billion, adding it could even potentially reach 2021’s level of $1.7 billion if a few significant transactions in the short-term are completed.

Over at Savills Australia and New Zealand, the company’s Managing Director of Hotel Capital Markets Mark Durran said he’s aware of about $570 million worth of deals that are already under due diligence with a few more opportunities entering the market. Savills conservatively expects volumes for 2023 to be close to 2022 activity. 

‘Robust’ and ‘active’ are words that describe Australia’s M&A scene. Throw ‘exciting' into the pot as well. Prestigious assets such as Ritz-Carlton hotels in Melbourne and Perth, owned by Hong Kong’s Far East Consortium, are being sold. The former just opened in March, while the latter in 2019.

Hong Kong’s Ovolo is also putting up the for sale sign on its boutique property, The Woolstore 1888, as part of its plan to recycle capital and grow the Ovolo brand throughout Australia, New Zealand and selected APAC markets. The hotel is located near Sydney’s Darling Harbour, with Ovolo retaining management rights.

Likewise, InterGlobe Enterprise’s Quincy Hotel in Melbourne, located in the hip Flinders Lane, is available, with vacant possession.

Record-breaking deals

These fresh listings follow a string of hotel deals last month that fetched record prices. Savills negotiated the record-breaking sale of the Sofitel Adelaide to Salter Brothers for A$154 million. It’s the largest single asset sale in South Australian history and sets a new benchmark for the Australian state on a price per key basis of about A$612,000 per room.

Over in Melbourne, Singapore’s Worldwide Hotels Group bought the 472-room dual hotel, Novotel & Ibis Melbourne Central Hotel, from Well Small Investment for A$170 million – the largest hotel transaction in Melbourne in six years.

Other transactions in 1H23 included the A$520 million Waldorf Astoria Sydney in February and the A$190m Sheraton Grand Mirage Gold Coast in June.

“We are seeing a variety of sellers, including developers exiting from hotel components of new mixed-use developments, some legacy transactions from pre-COVID times now getting completed on the back of strengthening market fundamentals, and improved trading performance,” Savills’ Durran said. “As a result, over the next 12 months the bid/ask spread will narrow as we move into 2024, resulting in an increase in hotel transactional activity.”

JLL’s Bury observed that sales year-to-date are driven by “strategic disposals and typical capital recycling.” For the rest of 2023 and 2024, he said balance sheet pressure from rising interest costs will likely factor in some disposals. “The extent of any potential movement in valuations and subsequent bank treatment of covenants will determine exactly how this plays out,” Bury said.

Who’s buying and why

Big private equity, which was the most active buyer type in early 2022, is now almost exclusively on the sidelines, according to Bury. High Net Worth Individuals remain active but are generally selective in the asset selection.

“Fund managers and syndicators are then factoring in the increased cost of debt for the acquisitions they are targeting, whereas sellers are generally still trying to achieve ‘last year pricing,’” Bury said.

Deloitte Australia’s Real Estate Lead Partner David Hagger observed a lot of activity among syndicated investors pooling finances to gain purchasing power to acquire assets. “Some of this is done privately on an ad hoc basis and some through wholesale-managed investment schemes run by professional fund managers,” he said.

Interestingly, Hagger noted less investment from overseas, saying this could be potentially due to concerns on foreign investment approvals and proposed changes in the corporate tax regime.

“Additional time taken to get approval adds significant execution risk, especially in a challenging financial environment,” Hagger said.

On the proposed tax changes, Hagger elaborated, “There are a number of changes which reduce deductibility of interest and also make it harder for offshore investors to secure a more beneficial tax structure that has been used often in the past. This effectively doubles the tax borned in Australia.

“However, it is not just the outcomes of the changes but rather that there have been significant changes which were pushed through quickly by the government and which investors were not expecting. Australia may then be perceived as a higher risk jurisdiction.”

Momentum from recovery

While sellers are looking to cash out equity gains at a time of higher debt service costs, one factor that motivates buyers is the exposure to recovery in international visitors, Hagger said.

Australia forecasted nearly 3.5 million international visitors in 2022, for arrivals to top pre-pandemic level at 9.5 million by 2025, rising to 11 million in 2027, according to a media release from the trade ministry. It said domestic travel recovery has been much quicker, though uneven across states and territories. It forecasts domestic visitor nights to be at least 9% higher than pre-pandemic by 2027.

“Don't underestimate the resilience of the Australian consumer. While rising interest rates will impact some sectors of the economy, those at the upper ends are likely to keep traveling, so domestic leisure properties may continue to outperform in the near term,” said JLL’s Bury.

Added Hagger, “Hotels as an asset class have performed more favorably with strong rate and reasonable occupancy and there is less perceived risk than other classes such as office.”

Even in Melbourne, where there are concerns of oversupply, preliminary March 2023 data shows occupancy, at 77%, was at the city’s highest for any month since February 2020. ADR was A$245 and RevPAR was A$317.

Said Worldwide Hotels Managing Director and CEO Carolyn Choo on acquiring the Novotel and Ibis Melbourne, “We have been pursuing [Melbourne] since last year. We didn’t have very motivated sellers. But construction or replacement costs are so high now in Australia, and with the current high interest rate environment, sellers have become a bit more motivated to sell.

“Melbourne has a good reputation as Australia’s predominant culture and sporting center. And the hotel sector is definitely recovering. There’s some concern about oversupply but not in the CBD area, perhaps in Southbank [area]. It’s very difficult to find a good hotel in the CBD, plus we take a long-term strategic horizon on all of the assets we invest in.”

Hot spots

Major capital cities remain “incredibly” popular, said JLL’s Bury.

“Sydney, as the financial hub of the country, remains ever in demand, although is tightly held by existing owners,” Bury continued. “Melbourne is currently the most liquid market and we believe that generally fears of oversupply, especially for well-located properties, are unfounded. Brisbane has been the stand-out performer coming out of COVID-19 and, with an Olympic games on the horizon in 2032, we expect it to remain in vogue. Opportunities may be thin, so investors would be encouraged to compete where they do come up.”

Bury added, “As some asset values recalibrate, we are also seeing change of use becoming increasingly popular. In Sydney, in particular, a number of investors consider the repurposing of other commercial uses, particularly office, into hotel. Similarly, in Melbourne, we’ve seen a number of older properties which would have likely struggled to compete in the coming cycle converted to alternative use, most obviously build-to-rent [multi-family residences].”

Savills’ Durran agrees that most of the transactions of large hotels in post-COVID has been in Sydney, but said in 2023 deals are occurring in all major destinations, such as the Sheraton Mirage Gold Coast, Sofitel Brisbane and most recently the Savills-negotiated Sofitel Adelaide.

“Adelaide continues to strengthen as a visitor destination with numerous new luxury and boutique hotels opening in recent years and ADR demonstrating strong growth at the upper tier,” Durran said. “Predict Adelaide will attract more investors interest over the next 12 months, as will Perth.”