The Australian city of Sydney is experiencing a hotel building boom on a scale not seen since the lead-up to the 2000 Olympics. Local agents predict that more than 5,300 rooms will be added over the next five years, adding around 20% capacity to the city’s hotel market.
Construction activity is a consequence of a lack of new supply into the market in recent years, which is pushing occupancy up as demand rises; in a recent Bloomberg ranking, Sydney stood as the 15th most expensive hotel market, at an average USD221 per night.
Figures from STR Global put Sydney occupancy at 84.6% in the first four months of 2014. Occupancy is expected to peak at 88.8% at the end of 2016, according to research by Deloitte’s local office, before new supply starts to kick in; at that point, rates will have advanced just 4% with revpar up 4.9%, they predict.
One issue has been securing sites for new hotels, and many new properties are developed out of property conversions, or part of mixed use developments that help improve total development returns. Asian investment has helped drive up the price of apartments in the city, meaning residential development is an attractive alternative to building hotels.
Among new hotels in the pipeline are the 650 room International Convention Center hotel, being developed by Lend Lease for a 2017 opening, but with no operator yet signed. The same company is building what is promised as the city’s first six star hotel, a 350 room development with casino, for Crown Resorts.
Asian investors are also making their mark. Singapore-based M&L is reacting to full occupancy by extending the Four Points by Sheraton, at 683 rooms the country’s largest hotel. And Greenland is developing a 171 room hotel to operate under its Primus flag, looking to attract Chinese visitors to the city. The Asian interest extends to other Australian cities. Earlier this year in Melbourne, Chinese investor Fu Wah International paid AUD135m for the Park Hyatt, and Singaporean developer World Class Land paid AUD42.3m for a hotel and apartment tower project.
Elsewhere in Australia, there are shortages of hotel accommodation. In 2013, Brisbane launched a bid to encourage hotel development in the city, backing their bid with research suggesting the local market had capacity to absorb 450 new rooms a year, for a decade. The local authority said a shortage of hotel rooms was costing the city AUD130m in lost visitor spend.
JLL note that a rump of motel product could offer an opportunity for a select service operator to move in, reflag and build market share. Hilton launched its DoubleTree brand in Australia in 2013, with three conversions of properties in Darwin and Alice Springs. More recently it has signed new builds in Perth and Fremantle, due to open in 2016 and 2017.
However, conversions do not suit everyone. Also last year, IHG signed a USD150m joint venture with Abu Dhabi backed Pro Invest Group that will see 15 Holiday Inn Expresses built and opened across the country. The first, in Sydney, is due to open within a year, as will a second in Perth, while IHG recently announced details of the second, a 226 room property in Brisbane. Pro Invest is led by hotel industry veteran Ron Barrott, who developed a portfolio of Holiday Inn Express hotels in Europe in the 1990s.
In a tight market, soft brand signings are also the order of the day. A year ago, Choice signed the first three Australian hotels to its Ascend collection, while more recently Marriott signed its first Autograph hotel in Sydney.
HA Perspective [by Chris Bown]: It’s hard to associate the Australian psyche with a lack of self-confidence. Yet that is what the Australian hotel sector appears to be suffering from, with the industry in general failing to increase prices up to a level where profitability stands international comparisons. As John Smith from Horwath’s Australian office pointed out recently, gross operating profits have slipped over the last five years, and at 34% are substantially below the 43% recorded in Singapore and 48% in Hong Kong. The Australian market stands accused of discounting too readily, with the result that returns have slipped while the market looks, fundamentally, strong.
Despite this, speakers at the recent Hotelsworld conference in Sydney were a bullish bunch. Foreign capital is flowing into the market as never before, helping to push up prices. Ian Crooks of Resort Brokers predicted another seven good years of growth.
However, other international factors could take the shine off that seven year growth prediction, and temper the excitement of the international brands. In Australia, there are wider questions about an economy that has grown off the back of selling natural assets to China; a slowdown there means lower demand for iron and copper ore. And, with its first world wage costs, the country stands out in the region as being one of the more expensive places to build, and operate, hotels.