The Australian hotel investment market declined in the middle of the 2020, with investors adopting a ‘wait and see approach’ as international and state border closures brought great uncertainty about future trading, according to research from Colliers.
An uptick in activity during the last quarter of 2020 saw transaction volumes total just over $900 million for the year, with several larger deals still currently in play – a higher level of scrutiny from financiers and the Foreign Investment Review Board (FIRB) mean deals take longer than usual.
Overall, annual transactions fell well below the long-term average of $1.6 billion, making it the lowest annual transaction volume since the peak of the Global Financial Crisis (GFC) in 2008.
Deal flow has primarily comprised smaller assets being acquired by private investors with only two transactions above $100 million.
The average ticket size was $34 million – a decline of 25 per cent compared to 2019.
Private investors dominated both buy-side and sell-side activity, with developers the second most active investor group on the sell-side as they have looked to dispose of newly developed hotels and recycle capital into new development projects.
Hotel owner operators emerged as the second most active group on the buy-side, reflecting ongoing confidence in the Australian hotel sector.
Sydney was the most active investment market with nine deals including one site sale and more assets currently in play
“The accommodation market offers the ability to bounce back quickly, due to the daily dynamic pricing of room rates, once demand recovers,” the report explains.
Domestic capital accounted for 45 per cent of deal flow in 2020, however offshore investors still dominate market for purchased of $50 million, acquiring the top three highest value single assets throughout the year.
Capital was sourced from Singapore, Middle East and China, as well Thailand and Taiwan.
“The ongoing active role of foreign capital in Australia’s hotel investment market will continue to be crucial to underpinning valuations over the near term,” the report explained.
“Offshore groups have accounted for over half of the capital invested over the last 20 years and are playing a more active role in the development of new accommodation stock.”
“Valuations now place more emphasis on the 10-year discounted cashflow approach and likely rate of return an investor will require over this period, as well as the stabilised earnings or yield approach .”
Australian hotel investment outlook for 2021
Revenue performance is expected to be somewhat better in 2021, with demand expected to slowly improve as the vaccine rollout program takes hold.
“It is anticipated that the leisure segment will be the driver of the recovery, but with room night production still only a fraction of what it was in 2019,” the report explained.
“In part this reflects the lack of international leisure demand particularly through the shoulder periods and the dampening effect that the unwinding of government stimulus and support mechanisms may have on consumer spending.
“Domestic leisure still presents as a bright light when compared to other segments and hotels will need to pivot their offerings to compete with disruptors to meet the needs of this leading segment.”
Australia’s management of the health crisis and size of the domestic tourism market is expected to bring opportunities for offshore investors.
“A return to pre-coronavirus thresholds for FIRB approval will deliver greater certainty and streamlined transaction timeframes, which will be critical for foreign investors viewing Australia as a favourable investment market, given the successful manner in which we have handled the pandemic,” the report explained.