Lack of Australian hotel sales in 2017 mask opportunities in 2018: Savills

GUEST OBSERVER

While hotels in Sydney and Melbourne are experiencing unprecedented trading performance, there was a relative dearth of sales activity in 2017 with national transaction values down 35% compared to the 2016 calendar year.

There were no significant hotel sales recorded in Sydney’s core CBD and only a small number of investment grade hotel transactions in Melbourne’s CBD.

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Since the peak of transaction sales set in CY 2015, there has been a precipitous decline in the total dollar- value of hotels transacted across Australia. Many owners seem to be opting to hold their hotels for fear of being cashed up without the ability to re-enter the market; which is becoming a self-fulfilling prophecy.

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In 2018, we anticipate that Sydney and Melbourne markets will continue their strong trading performance given record international and domestic tourist numbers and visitor spend, and relatively muted supply growth.

There continues to be a fairly substantial (and apparently growing) price gap between Buyers and Sellers. This “gap” is accentuated in Perth and Brisbane where Sellers consider Sydney and Melbourne cap rates as being applicable to their markets.

We see counter cyclical opportunities in 2018 in Brisbane, which we consider has bottomed and will bene t from the Commonwealth Games and activities associated with the Queens Wharf Development, as well as a number of other signi cant public infrastructure projects and large scale private developments. Conversely, Perth has additional new supply still to enter an already soft market, which in the short term will lead to further downward pressure on both occupancy and room rate. Likewise, this should give rise to buying opportunities for well capitalised counter-cyclical investors.

We are expecting developers in Sydney and Melbourne to exit their hotels to take advantage of robust capital values, lack of availability of existing investment grade hotels, and to capture the ubiquitous and deep pools of capital still searching for hotels in these key markets. The Developers exit point will be either a site sale with associated DA, turnkey sale with fund through obligations or project take out at completion.

Yield compression continues as the dearth of opportunities drives up pricing and leads to tighter yields (refer Graph 1):

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This lends weight to Savills Hotels often quoted notion of a global synchronisation of real estate investment yields, particularly in gateway markets like Sydney and Melbourne.

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With the evolving situation regarding Australian Prudential Regulation Authority regulations, the spotlight on international bank capital adequacy ratios and the implementation of the so called “Basel IV” accord (arguably just a completion of the Basel III reforms), bank lenders in the Australian market will continue to scrutinise more carefully hotel assets, forecast cash flows and borrowers for the strength of their covenant. 

The likely effects include:

1. Assets or development projects which are not showing generous returns (and in the case of developments, a strong positive delta between total development cost and on completion value), adequate security (in essence, more modest loan to value ratios), serviceability and interest coverage will be rejected by Australian trading banks

2. Borrowers themselves will be heavily scrutinised – those with experience in hotel investment and ownership in the market, as well as healthy balance sheet positions, will obviously be preferred by traditional lenders and are therefore more likely to re-emerge as the most active buyers

3. Non-bank lenders will have an opportunity to supplant themselves over Australian banks and provide a range of debt products from ordinary senior debt to a range of structured debt solutions. This in itself should assist with a further maturation of the Australian hotel investment market

Direct overseas buyers and overseas equity (managed by local Australian funds) from mainland China, Hong Kong, Japan and Singapore continue to be the main sources of capital scouring the Australian market for hotel opportunities; however, local investors should not be disregarded and have been active players in the market, particularly in the second half of

We also foresee a return of traditional US, UK and European private equity and fund managers as active players in the local hotel investment landscape in 2018 and beyond.

Michael Simpson is the managing director of Savills Hotels.