Room for Investment

Room for Investment

Business Sales Article

Room for Investment

Major hotel chains and branded operators are seeking involvement in the New Zealand market because of the recent exceptional growth in hotel values driven by tourism – the country's biggest economic sector.

The most significant players are offshore hotel developers, with Bayleys selling two of the most significant development sites to come onto the market in recent years – Auckland CBD sites on the corners of Wyndham and Albert Streets to Sydney-based Pro-invest Group and Albert and Wolfe Streets to a wealthy Singaporean investor.

Several other international developers have indicated they are keen to get a foothold in the New Zealand market.

These include Melbourne-based 94 Feet, who are planning to build a $250 million Indigo hotel at 51-53 Albert Street, a 41-storey, 225-room mixed-use development with 24 private apartments, behind a historic facade. This project is currently in the planning stages.

Meanwhile, those brands already in the market are expanding. For example, Hong Kong-based Langham Hotels recently announced they plan to significantly expand its upgraded five-star Cordis Hotel on Auckland's Symonds Street, from 411 rooms to more than 600, in time for the America's Cup and Asia-Pacific Economic Cooperation forum in 2021.

There is plenty of demand for new hotels, backed up by New Zealand Trade and Enterprise research showing Auckland, Rotorua, Wellington, Christchurch and Queenstown need another 4526 hotel rooms by 2025 to cope with tourism demand. However, suitable sites are difficult to find as hotels are strongly dependent on the right location.

Developers are looking at hotels and asking whether they can build them with a decent margin; many find they can't. As a rule of thumb, banks are still looking at only 50 percent leverage on lending for a hotel, leaving developers and owners to find a considerable amount of equity.

Most of the hotels being built or in the pipeline are for long-term hold by the owners, who like the cashflow aspect of the business compared to other property investments. Many have been looking for a hotel for sale or a building to convert for some time and if they can't buy they will build.

New hotel builds will have a small construction margin of 5-10 percent, which is not enough for a developer who might want 20-30 percent. A long-term owner won't worry about the development margin. Even at 10 percent, it is regarded as a good deal. Bayleys is seeing this scenario regularly.

Bayleys Director of Hotels and Tourism Nick Thompson says hotels come up for sale, though not as frequently as other business or property classes. “They attract excellent prices and are eagerly sought after – and now is a good time to sell, with tourism at record levels and big events in the next three years.”

The peak value for a hotel is different to many other assets. Selling a hotel off-plan is difficult; selling when it is built is reasonable; but the best time to sell is after three years when there is a set of trading accounts that show what it should be priced at and what it is worth.

“Waiting the three years or longer for trading figures eliminates all the guess work,” says Thompson.

One emerging answer to the hotel building cost problem, and to the challenge of rapidly delivering new rooms, is modular construction.

Contact one of our specialist business brokers for an informed and timely take on the market and how we can achieve a great result for you.