The FINANCIAL — According to Jones Lang LaSalle Hotels' recently released Hotel Investor Sentiment Survey, Australian hotel real estate is commanding the attention of global investors, while ‘buy' sentiment for hotels throughout Asia Pacific has also increased to its highest level since September 2000 as buyers outnumber sellers by almost 7:1.
"While trouble in the global debt markets is expected to result in a lull in Australian hotel transaction activity in 2008, behind the scenes investor demand is building," said Mr David Gibson, CEO Asia Pacific, Jones Lang LaSalle Hotels.
The release of the research coincides with several major hotel transactions around Australasia over the past month, including the sale of Holiday Inn Townsville to Indigenous Business Australia, while Hotel Lindrum in Melbourne and the Harbour Rocks Hotel in Sydney sold to TMG Developments together with Amco Capital.
"Hotels are being sold under competitive bidding processes where strong levels of interest are being received from offshore and domestic investors, as well as boutique property funds," said Mr Craig Collins, Managing Director – Investment Sales, Jones Lang LaSalle Hotels. He added, "In another vote of confidence for the sector, and despite the current credit crisis, recent hotel transactions support the survey results where initial yields range from 7.5% to 8.0%."
However, Mr Gibson said higher interest rates and lower loan to value ratios were continuing to hold back the wave of capital keen to invest in Australian hotels. "Not surprisingly in a climate of global economic uncertainty, expectations for leveraged IRRs (Internal Rate of Return) across Australasia have softened by 70 basis points since our last survey, whereas initial yields tightened marginally as investors apparently recognise that hotels still represent fair value with strong income growth expected in the sector over the medium term," he said.
Investor sentiment for trading performance declines short term, positive medium term
Across the region, while investor sentiment for short-term trading has declined, it remains positive and almost double that of sentiment for trading in the closest regional rival, EMEA (Europe, Middle East and Africa). "Investors signal that they expect the adverse impacts of the current economic uncertainty to be short-lived," said Mr Gibson. "With no sign of a slow down in the resources boom, Perth was ranked highly for ongoing trading performance, having recorded the highest room yield growth of all Australian markets in 2007," he added.
Sydney was another Australian market where investors expect to see a trading upturn over the next couple of years.
Investment yields – has the bull market come to an end?
With new hotel supply expected to remain relatively contained, investors still perceive Australia's major hotel markets as offering considerable opportunity for medium-term income growth.
"The change in expectations for leveraged IRRs is reflective of the greater global economic uncertainty rather than an indication of a decline in sentiment for hotel markets," said Mr Collins.
Initial yields contracted or remained unchanged in 24 (83%) markets throughout Asia Pacific. "While most commentators are purporting a flight to quality, the results are contrary to the short- term trend highlighted in our last survey when investors indicated that they expected initial yields to increase in 16 of the surveyed markets over the previous six month period," said Mr Gibson.
"Indicating that the bull market has come to an end for hotel investors, this trend has continued with investors showing even greater acquiescence that initial yields will increase through 2008," said Mr Collins. "In our latest Hotel Investor Sentiment Survey, even though sentiment for an upward trend was most pronounced in Australia and New Zealand, recent transactions suggest otherwise," he said.
Investment intentions – opportunistic purchasers are circling
While the bull market may have come to an end, the survey indicates that opportunistic purchasers are circling. "Investor sentiment for buying hotels in Asia Pacific has sky-rocketed to the highest level since we started the survey in 2000," said Mr Gibson.
On the contrary, ‘hold' sentiment, and to a lesser extent ‘build' sentiment, have marginalised by 600 and 380 basis points respectively, while ‘sell' sentiment has also crept upwards to its highest level in eighteen months.
While no market is highlighted as a ‘sell' in the latest Hotel Investor Sentiment Survey, places with the highest sentiment include Fiji, Sydney and Gold Coast.
"While the temporary suspension of investment activities by some global private equity players and real estate funds has reduced the number of players in the market, reducing the overall quest for deals and moderating transaction activity, our survey results show that investor demand persists," said Mr Gibson. Mr Collins added, "The recent hotel transactions around Australasia add weight to this where interest from global players was exceptionally strong."
Investors' hot markets include Australia's market supernovas – Sydney, Brisbane and Perth.
Building sentiment took another twist in the most recent survey, against the trend of the last four years. "Higher land prices and spiralling construction costs, as well as a slight softening in sentiment as an air of cautiousness prevails, may result in developers finding it harder to secure finance, almost certainly at a higher cost. Projects that offer lower operational risk, such as those in prime locations with an experienced operator, are more likely to proceed," Mr Gibson concluded.
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