Asian brands buy in to buoyant Australia

• Overseas buyers accounted for a decade-high $1 billion of Australian hotel sales—90% of the total—during the first half of the 2012 financial year, according to JLLH.
• The rash of investments has come about with a surge in available properties on the market, fed by real-estate optimism and an ongoing swell in room demand, said Horwath HTL’s John Smith.
• Shangri-La, Langham and Starhill REIT are among the Asian hotel companies expanding into Australia.

REPORT FROM AUSTRALIA—Enticed by a flourishing high-end corporate sector and exceptional real-estate opportunities, Asian companies are enjoying a spending spree in the Australian hotel market, focusing on the purchase of existing properties in the major east-coast hubs of Sydney, Melbourne and Brisbane. 

In August, Hong Kong-based Shangri-La Hotels & Resorts and Langham Hospitality Group acquired hotels in Brisbane and Sydney, respectively. Earlier in June, Malaysia’s Starhill Real Estate Investment Trust purchased three Marriott hotels in Sydney, Brisbane and Melbourne for 415 million Australian dollars ($411 million).

According to Jones Lang LaSalle, overseas buyers accounted for a decade-high $1 billion of Australian hotel sales—90% of the total—in the first half of the 2012 financial year.

John Smith Horwath HTL Australia

“Australia is a market traditionally scarce of opportunity for buyers of prime hospitality assets,” he said, “but recently some quality city assets have been released onto the market, in part because of improved (earnings before interest, taxes, depreciation and amortization) and positive forward indicators that have rightly caused existing owners to believe they can sell down for strong prices despite the prevailing global economic weakness.”

“The strong forward trading outlook is being fed by continuing growth in room demand, particularly in the corporate sector, and extremely limited new room supply in key cities in recent years,” he added.

According to STR Global, sister company of HotelNewsNow.com, July year-to-date country-wide occupancy has averaged nearly 73% in 2012, while RevPAR increased to AU$126.25 ($130.84) from AU$121.50 ($125.92) last year. 

There are 5,983 rooms in the country’s total active pipeline, according to STR Global’s July pipeline.

Brands riding the bubble
Smith said the bubble is affecting only the city and corporate markets, whereas resort hotels and leisure destinations are suffering a decline in demand due to the ascension of the Australian dollar and subsequent rise in outbound travel to other Asia/Pacific destinations.

Cash-strong Asian investors, on the other hand, have little reason to be discouraged by the increasingly strong Australian dollar.

“Existing Asian investors in Australia have had their facilities in place for many years,” Smith said. “There is also the opportunity to bring into the country low-cost debt to help fund the acquisitions and mitigate the investment cost.”

Shangri-La acquired and will rebrand the Holiday Inn Brisbane into a 4-star Traders Hotel.

“After China and the U.S., Australia is our third largest market, and we are very optimistic about the hotel industry there. The economy is strong, and there is an upward trend in domestic and international travel, particularly to China. To that end, Shangri-La Asia Limited has demonstrated its substantial financial commitment to Australia with these acquisitions, in key strategic cities,” she said.

Meanwhile, Langham Hospitality Group has bolstered its Australian footprint with the reported sale of the former Observatory Hotel by Orient Express Hotels for AU$38 million ($40 million).

Langham CEO Brett Butcher said the purchase, which was funded by local debt financing and equity, presented an exceptional market opportunity to buy into the new-found Australian hotel buoyancy. The property is just the tip of the iceberg for the group’s growing presence there, he added.

“This acquisition of the Langham Sydney is below replacement cost, so for us it was cheaper to buy than build,” Butcher said.

Brett Butcher Langham Hospitality Group

“The Langham Sydney is an important strategic move to grow our presence in the Pacific. Now we have the three financial capitals of the Pacific covered with The Langham hotels in Auckland (New Zealand), Melbourne and Sydney. Our strategy is clear: We are going to continue to expand from this foundation in Australia, and we are going to continue to expand in the Pacific.”

The development of the group’s luxury Langham Place brand is next on the cards, Butcher said. “That is perfect for Sydney. We have been very earnest bringing The Langham here, and we are going to be similarly earnest to bring Langham Place to Sydney as well.”

Starhill REIT’s Marriott deal would be shored up by bank borrowings and cash equity, Francis Yeoh Sock Ping, managing director of Starhill parent company YTL Corporation, said in a statement. Though awaiting regulatory approvals, the acquisition allows the company to invest in the “vibrant real estate market in Australia” he added.

If the purchase goes ahead, more than half of Starhill REIT's property value will be constituted by its hotel assets in Australia and Japan.

Butcher believes the rash of Asian investments is having a positive impact on the Australian hotel market, where there is plenty of room for new developments.

“We have a positive outlook of the hotel industry in Australia. There has been significant inbound visitor growth from the emerging economies of China and India as a result of strong income growth in these markets. This catalyst coupled with sound domestic economic growth in Australia and a dearth of new hotel developments is creating a better recipe for increasing supply in most markets.”

Domestics deals
The offshore hotel investments far outweigh local development projects, the most notable of which is casino operator Crown’s plans for a AU$569-million ($590-million) west coast hotel, the Crown Towers Perth.

Spiraling land and construction costs have inhibited new hotel builds in prime Australian CBD markets for more than 13 years, according to Jones Lang LaSalle. Total room numbers have increased at an average 2.1% (55,000 rooms), despite a room shortage. The West Australian government has introduced incentives to stimulate the development of much-needed hotels in the state, particularly in the city of Perth, and it is hoped that more will do the same.

For Horwath’s Smith, time is yet to tell if and when new developments from “credible and funded developers” will come to fruition against the major obstacles of high land and development costs.

“Past cycles have seen a wave of excessive new room supply when occupancy levels have reached current levels,” he said. “However, at least in the short term, that does not look likely to be repeated because of the dearth of debt capital locally and the continuing caution of domestic banks in relation to property development in general and hotels in particular.”