Inflation won’t stop Australian hotel sector’s rise
Aussie Hotels fuelled by record occupancies, re-branding trend and reduced Airbnb stock
Australia’s burgeoning hotel sector continues to attract strong levels of investment despite inflationary pressures with leading property agency, Savills Australia predicting $2.5 billion in hotel transactions for 2022.
According to the company’s Hotel Market Overview Q3 report, Australia’s hotel sector. underpinned by strong occupancy and record-breaking performance indicators, has recovered more swiftly from the pandemic than expected.
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And as a result, the sector is now tipped to continue on a growth trajectory into 2023 when it is set to be on the radar for offshore investors and travellers alike thanks to the weak Australian dollar.
Record occupancy levels are expected to continue into 2023 fuelled by increased demand coupled with reduced competition as AirBnB properties convert to permanent rentals, capitalising on the groundswell of residential tenant demand.
Hotel Transactions: The Great Re-brand Trend
Savills says investment in the hotel sector for 2022 is tracking at the same pace as 2021, which saw sales volumes exceed $2.8 billion.
While $1.7 billion of hotel stock has transacted in the first half of 2022, economic uncertainty around interest rates and inflation has led to slower-paced deals in the last few months.
Savills State Director – Hotels (NSW & VIC), Nick Lower said as of September 2022, hotel sales were tracking at close to $2 billion in hotel sales.
The report also points out a notable trend towards the re-branding of hotels, exemplified by the sale of Rydges Sydney Harbour for around $100 million to Crystalbrook and the sale of Peppers King Square in Perth to Rydges for $26 million.
“The re-branding trend is definitely one that is here to stay, with major hotel brands able to acquire new stock to reposition at well below replacement cost – it makes solid financial sense and will help boost the portfolios of our major hotel brands,” Mr Lower said.
Hotel Yields Under Par
The overview also shows initial yields continue to tighten despite the return of positive EBITDA (earnings before interest, taxes, depreciation and amortization) levels. Initial yields average at 1.53 percent so far in 2022, significantly below the long-term average of 6.07 percent.
Savills National Director, Valuations & Advisory – Hotels, Adrian Archer said initial yields remain low as investors are focussed on repositioning opportunities where assets are underperforming and require capital investment.
Mr Archer noted that foreign investment in Australia’s hotel sector is earmarked to rise in 2023, with increased attention anticipated from offshore investors, with the Australian dollar at its lowest against the US dollar since peak COVID-19 and the GFC.
Deloitte Access Economics has also forecast an extended period of weakened Australian dollar of US$0.70 per AUD$1.
Pre-COVID Occupancy Levels to Be Boosted by Lower AirBnB Stock
According to Savills, 2022 has been a year of positive change for Australia’s hotel sector, with most State markets back at pre-COVID 19 occupancy levels and reduced AirBnB stock set to further boost hotel occupancy.
Sydney recorded its highest ADR since February, 2018 in September, 2022 at $253.79.
Perth is a notable performer and needs to wind the clock back to March, 2015 to beat the $213.51 ADR achieved in September 2022.
Occupancy has been slowly ramping up over the last three months at mid to high 60 percent levels in Melbourne and Sydney, while Brisbane and Perth forge ahead at mid-70 percent occupancy levels.
The Gold Coast remains Australia’s best performing market with RevPAR at $178.37 so far, with summer school holidays still to come.
“We expect to see a further boost to hotel occupancy statistics as AirBnB stock dries up. High demand from residential tenants has driven the conversion of many AirBnB properties to the permanent rental market,” Mr Archer said.
Brisbane, Perth and The Gold Coast are already at annual pre-COVID RevPAR levels, with Melbourne and Sydney forecast to achieve annual pre-COVID RevPAR levels by CY2024, sooner than originally anticipated.
Australia’s Star Performer: Adelaide Breaks Records
Adelaide is one of Australia’s most stable performers, leading the way for the Australian CBD hotel market recovery.
Adelaide recorded a 46.5 percent RevPAR growth rate for YTD to September 2022 – reflecting ADR growth of 22.8 percent and 19.3 percent occupancy growth.
Further, Spring 2022 has shown the highest number of Adelaide hotel rooms filled in one night than ever before, with more than 9,000 hotel rooms occupied on a weeknight.
The record-high room nights were the result of major events including AFL Masters Carnival, World Indigenous Peoples Conference on Education (WIPCE) 2022, and other major conferences at the Adelaide Convention Centre combining to draw around 5,000 visitors to Adelaide’s CBD.
Adelaide accommodation reached a new record for room nights occupied – with 9,001 rooms nights occupied on Tuesday 27 September 2022, of the 9,911 available.
The State’s record-breaking performance has seen it top its previous record of 8,967 rooms occupied – reached only the week prior (week ending 24 September) – and saw nightly occupancy reach 91 percent, its highest since the onset of the pandemic.
“The outstanding performance of Adelaide’s hotels should put them firmly on the investment radar – with limited new supply expected to keep occupancy levels strong.,” Mr Lower said.
There is a great opportunity at the premium end of the market, with limited new luxury hotels proposed or under construction, creating a solid opportunity for high-end operators.”
According to Savills, Adelaide’s medium-term hotel supply outlook is extremely limited, with only 528 rooms under construction in the CBD submarket, including Vibe Hotel Adelaide, TRYP Pulteney Street (both in Q1 2023) and the Marriott GPO Adelaide (Q2 2025).
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