Banks squeeze Australian hotels out of race with construction falling more than 13 per cent last year
The local hotel market was battered last year with planning, construction and sales plunging, amid second year of Covid woes and squeeze by banks.
Australia’s hotel market was hard hit over the past year with the level of planning, construction and the sale of hotels plummeting, compared with rival markets such as Europe, Asia Pacific and the Middle East which fared reasonably well.
The only market to perform worse than Australia over the 12 months to December was the Americas where the planning of new hotel construction dropped 39 per cent and the amount of hotels under construction fell nearly 17 per cent.
In Australia, the amount of hotel construction dropped more than 13 per cent last year, the planning of hotels decreased by more than 11 per cent and in bad news for real estate agents the number of hotel transactions dropped 10.7 per cent, according to STR research commissioned by The Australian.
In comparison, European hotel construction fell just 7.6 per cent over the 12 months while the number of hotels under contract dropped a paltry 3.5 per cent. The entire Asia Pacific region produced a 16.3 per cent increase in hotels under construction as did the Middle East where the planning of hotels shot up nearly 3 per cent.
While banks refused to lend on Australian hotel construction and investment, there were several transactions of local hotels late last year including the sale of the Sofitel Wentworth for $315m and the sale of the Chinese-owned Primus Hotel also in Sydney for $130m. Other hotels remain under construction such as the Greaton-owned W Hotel at Darling Harbour which is months from opening.
Hotel owner Jerry Schwartz, who now owns 14 east coast hotels, has been forced to sell one of his properties, Sydney’s Four Points by Sheraton, due to Covid and his former bank’s decreasing appetite for hotels.
“Most hotel owners are able to refinance their hotels in Sydney and we expect the hotel industry to rebound so strongly we would not want to sell hotels,” said Dr Schwartz on Wednesday.
“I have had a few offers from people wanting to buy my hotels thinking they are distressed assets, but they are not. We had to sell the Four Points by Sheraton because of the structure of the bank refinancing due to Covid.
“Banks are very short sighted and I have had particularly differences with one of the big four, it has been our family bank for the past 50 years and has not supported me over this difficult period and initiated the need for me to sell one of my hotels.
“The finance model has changed such that a lot of people have left the big four and gone to private financiers,” Dr Schwartz added.
Despite the poor Australian performance industry experts were nonplussed by the new STR data claiming the lack of construction of new hotels will lead to more conversions of secondary hotels into build to rent or apartments or major refurbishments of existing hotels to compete with newer hotels about to hit CBD markets.
JLL Hotels managing director and head of investment sales, Peter Harper, says over the past couple of years there has been an enormous amount of hotels developed in Sydney, Melbourne, and Brisbane.
“This slowdown is symbolic of the Australian hotel market coming to the end of what is arguably an unprecedented supply cycle,” Mr Harper said, adding that the decrease in hotel construction and sales has had nothing to do with the Covid pandemic.
“Given the volume of new hotels that have recently opened or are currently under construction such as the Chinese-owned Greaton Group’s W Hotel at Darling Harbour coming into certain markets in Australia and Covid, along with the banks significant decrease in appetite for hotel development over the short to medium term, it is simply not feasible in a lot of instances to consider the development of hotels.
“There is limited appetite among banks to fund new development,” he said adding that until recently some city markets were experiencing new hotel supply of 20 per cent and up to 30 per cent.
“We certainly will have ample hotels for the foreseeable future. And another positive is the reality that all these new hotels will force exciting hotels to refurbish and this will significantly enhance the overall product offering which sets the market up for some strong average daily rate improvements over the coming years.”
Mr Harper added that through the pandemic hotel prices have held up strongly, but there’s now a two tier market.
“With secondary assets in lesser locations, which are vulnerable to supply we are seeing investors approach those assets with the thought of conversion.”
“Some of these older hotels can’t compete with the new stock such as a property at Sydney’s Rushcutters Bay which is being redeveloped into apartments, the Stamford in Sydney’s Macquarie St which has planning permission for apartment conversion and the Bayview on the Park in Melbourne which is being redeveloped into build to rent.
Mr Harper said high profile hotels still under construction include the W Hotel in Sydney, the 900-room Queens Wharf hotel in Brisbane and the Ritz Carlton in Melbourne.
But perhaps Dr Schwartz puts it best.
“Construction is still occurring … Australia has been very tight in hotel inventory and has had a need for new rooms.
“The question is whether the amount of new hotel inventory will be less or more than is required by the forthcoming demand,” he said, adding that the STR figures were no surprise given the current economic crisis due to Covid.