Australian hotel sales stall as COVID-19 saps confidence

About $400 million worth of Australian hotels sold during the first half of this year, well down on the nearly $2bn in sales typically achieved each year.

The big four banks have scaled back their lending on hotels, while vendors are also concerned that Australia’s slow COVID-19 vaccination rollout will drive traditional foreign investors away from our once lucrative hotel investment market.

But while most of the big four banks have significantly reduced their exposure to the hotel sector, several international banks and non-bank lenders have emerged.

All up, there were $US3.7 billion ($4.9 billion) in hotel sales across the Asia Pacific, including Australia, in the first half of this year, a decline of 3.7% year-on-year.

According to JLL, the largest year-to-date deal was Dr Jerry Schwartz’s sale of the Four Points by Sheraton Sydney, which was acquired by US-based KSL Capital Partners for approximately $150 million through JLL. Colorado-based KSL has been an active investor in Australian hotels, also snapping up a big stake in the up-market Baillie Lodges a few years ago.

Also in Sydney, the Primus Hotel was acquired from a Chinese vendor, Greenland Australia, by Pro-Invest Group for about $132 million. JLL also negotiated that deal.

JLL Hotels managing director Peter Harper says more sales occur in the second half of the year. Like the rest of Asia Pacific, investors in Australian hotels continue to view the industry through a longer-term lens and transaction volumes have held up well within the backdrop of ongoing lockdowns, border closures and changes in corporate and leisure travel behaviour, according to JLL.

Other sources are concerned about Australia’s international reputation.

“Australia enhanced its reputation last year as a quality investment destination but moving forward the fact our COVID vaccination rates have been so low, the rest of the world is opening up and we are closing down,” a senior source said.

There are other deals in train apart from the $600m TraveLodge sale, with the Salter Brothers backed by GIC buying the TraveLodge portfolio from Mirvac and the NRMA is yet to consummate. Some say the deal has been renegotiated at a much lower price.

Other hotels on the market include Dr Schwartz’s Ibis hotel on Sydney’s King Street Wharf.

In Melbourne, the Kuwaiti royal family’s Action Group has a bullish price expectation of more than $200m on a portfolio of three hotels including a Novotel and two Ibis hotels. Also in Melbourne, the Ovolo Group is asking an aggressive $80m for its Oaks on Lonsdale, while in Perth a local consortium wants $25m for the Tribe Perth.

“While there is a strong weight of capital sitting on the sidelines, there’s very much a two-tier market at play across Australia,” Mr Harper said.

“Opportunities that are considered tightly held, unique or provide scale have attracted strong buyer interest and a competitive bidding environment has held up pricing.

“However, assets that investors consider ‘secondary’ due to their location, condition, historical trading performance or vulnerability to new supply and the recovery more generally are seeing an adjustment to risk expectations and in turn a more opportunistic view on pricing.”

It is clear there remains a gap in pricing on several hotels that have been brought to the market this year and have failed to transact as yet.

While CBD markets have historically had the eye of most offshore and domestic investors, leisure markets are having their time in the sun. A resurgence of buyer interest on the back of strong performances in these markets and the expected prolonged boom in domestic tourism has resulted in a range of smaller and medium- size deals.

“Key examples include the sale of Dunk Island for around $25m, Long Island Resort for a reported $20m, or more recently the Lateen Lane Hotel in Byron Bay which formed part of the landmark $80m sale of The Great Northern Hotel,” Mr Harper said.

JLL’s expects increased activity in the second half, with a number of major sale campaigns under way.

This article first appeared on www.theaustralian.com.au.