Hotel property investment has greatly increased of late and has already accounted for more than $2bn worth of sales this year, according to property firm Savills.
Individual investors can typically buy into hotels or resorts through a property fund or trust that operates a portfolio of properties, some of which may be in other sectors like the office or residential markets. Some hotel owners also sell individual units to investors just as they would in residential buildings.
Location and occupancy rates
The city in which a hotel is located plays an important role in its success. For example, hotels in cities like Sydney which have large numbers of tourists, or those in resource rich cities like Perth with specialised job opportunities, regularly have better performing hotels.
Well designed newer developments, particularly in Sydney, are improving hotel values and helping the sector compete against residential and retail building investment, said property firm Savills in its October hotel report.
This has been supported by a steady increase in hotel occupancy rates over the last few years, while office occupancies have fluctuated, as per figures from the Australian Bureau of Statistics.
Measuring investment
The performance of hotel investment is generally measured by the revenue generated per room, which is of course affected by occupancy levels. Just like with residential property, this income translates to an annual yield, as a percentage of your investment.
For example, if you own units in an Australian Real Estate Investment Trust (AREIT) which owns a portfolio of hotels, then your return on investment comes partly from regular distributions, based on the amount of rental income the fund receives.
Because AREITs are listed on the share market, you can also make capital gains if the value of the units in the fund increase.
A five star hotel in Sydney worth $350m and with rooms valued at around $650,000 might return 6.6% annual yield at the moment, based on numbers from Savills.
Good rental yields have been a feature of Australia’s hotel market in recent years, in addition to the enticing buying structures available to investors through real estate trusts and generally sound economic conditions, according to Colliers International.
These factors have drawn the interest of offshore investors and Colliers said it expected foreign interest to only increase after jumping 20% between June 2012 and June 2013.
However, a slowdown in capital growth caused overall returns on hotel investments to come down from as high as 13% in 2012 to around 6.5% in the first half of this year, according to Colliers.
Over the last three years, hotels have provided a 12% average return per year though, compared to 9.5% for retail, 10% for office and 9.7% for industrial property.
More visitors should boost hotel profits
It’s worth noting that the number of travellers to Australia has increased in recent years, with short term visitors from China up 17% in the year to June, Colliers noted. Visitors from Singapore, the US and UK have all increased in the last year or so.
In total, there were almost six million international visitors to Australia in the 12 months to June.
More travellers means higher occupancy rates for hotels, which directly impacts yields on these properties. While, occupancy rates in Sydney and Perth have been strong of late, Melbourne and Brisbane have had slightly lower rates.
The largest amount of offshore investment has come from Abu Dhabi and Singapore in recent years. The Abu Dhabu Investment Authority, which is a sovereign wealth fund, has actually become the largest hotel owner in Australia with a portfolio that includes the Novotel and Ibis in Darling Harbour in Sydney and Novotels in Melbourne and Canberra.
Local investors are also active though, especially in New South Wales in both city and regional locations, as well as Melbourne and in Canberra. In the year to June, Australian investors spent $245m on hotel assets.
The good news is that a number of luxury hotel brands are looking to establish themselves in cities like Sydney and these hotels should get strong demand from a growing number of travellers to our shores.
Source: Commonwealth Bank News, 20 November 2013
