THE PROPERTY DEVELOPMENT REVIEW
a gaming element to that, but a large proportion of the end value of that acquisition related to a number of the hotels within that group that support the gambling operation. So, the large-scale acquisition was highly attractive for an offshore player like that who needs scale. Similarly, you talked about KKR, I mean essentially Australia in my view is a lower beta or risk environment, but kind of lower returns aswell. And so that’s why for the past several years the private equity firms haven’t been in the market because they haven’t determined that they were able to meet their hurdle rates of return. But as there’s some dislocation in the market, which there has been in the last kind of two to two and a half years, they can devise strategies to hit those hurdle returns. So, in a market that is reasonably liquid, and I’m talking about the availability of assets to acquire and the transaction volume, really good depth of buyers, not just private equity but obviously diversified investment groups, ultra-high net worth and the level of transparency and strong rule of law - it’s an attractive market to invest in. Certainly, some of those investors that need exposure to real estate across Asia look to Australia. There are a number of markets in Asia that don’t have the liquidity in terms of that transaction volume or aren’t transparent enough or don’t have the right rule of law for these investors to get their investment committees comfortable on, and so it’s harder for them to invest there. But Australia provides that regional exposure with all those other benefits. Equally, it appears there’s been an increasing mandate from superannuation funds looking to deploy their resources into investments that are either existing hotel assets or offer hotel redevelopment in the long-term. Talk me through how you’re seeing this theme play out. MICHAEL SIMPSON: Australian superannuation assets total $3.3 trillion, and as we all know, it’s growing rapidly. We all see the superannuation coming out of our pay packets each month. So even with an allocation to real estate of about 10%, that means that the ANZ superannuation funds need about $330b of exposure to real estate. And again, my view is some of that money has to go into hotels & that there simply aren’t enough assets in listed, unlisted and the direct space if your sole focus is office and logistics to be able to satisfy that mandate. So, I think more money will have to flow in and as people get more comfortable around the tax treatment of that income, I think more money will flow into the hotel sector from those superannuation funds. Just from an outsider’s perspective looking in, it looks like there’s been huge amount of investment and capital going into the refurbishment of existing hotels. What are the key themes that you are seeing in the hotel space when it comes to the physical aspects of hotels? MICHAEL SIMPSON: Australia’s been criticized that some of its room inventory is a bit tired and dated, and certainly in the early two thousand’s where the cash rate was higher and perhaps hotel market KPIs didn’t support a lot of new development or even spending a tremendous amount of money renovating a hotel. As we got into kind of 2013 and beyond, we had a situation where the debt cost was quite low and the market KPIs were very strong. If you looked across Sydney, Melbourne, a number of other markets, the RevPAR was growing high single digit or early double digits every year. And that provided support for the investment case or feasibility to go and build new hotels. So we had quite a growth of new hotels in most major capital city markets around Australia. At the same time, we had
the challenge that some of the existing hotels were performing very, very well. And if you’re an owner, it’s hard to say, okay, I’ve got a hotel that’s making me lots of money. I haven’t renovated it for a while, but guess what? I’m going to take it out of circulation now. I’m going to spend a whole bunch of money on it, and then I’m going to reposition it back into a market later where I’ve got a little bit of uncertainty about what that market’s going to look like. So it didn’t happen or probably didn’t happen enough. When the pandemic happened, a lot of people said, okay, my demand is low, so I’m not displacing any of that demand. My debt cost is cheap. I do think we’re going to get through this. We have to. And they looked through that. So a lot of those parties, and you mentioned Intercontinental Sydney, Mulpha was one of them who said, we’ve been planning a renovation for a while, this is a great opportunity to spend the money. And I think also if you look at the fact that a number of other new properties were coming on board, they really had to reinvent themselves a bit. And I think it’s great to see some of the new properties coming on. Crown’s amazing. The W that’s coming online will be amazing. The Capella. We’ve just had some new brands coming into Sydney, beautiful properties, and then we’ve had other brands renovating and reinventing themselves. I don’t see that competition as a bad thing. I think particularly when our Australian dollar is low, which makes us cheaper to international inbound travellers, people think I can go to Australia and get a beautiful hotel room. I can see the Harbour. I can do all of these great things, and it’s not a cost-prohibitive destination. It’ll just make it more and more attractive. So, I think that competition is a great thing and it really is a case of the rising tide lifting all boats argument for the market. Just in closing, what’s your long-term outlook for Australia’s hotel markets & what are the benefits of investing in this asset class? MICHAEL SIMPSON: I say it all the time, but Australia’s clean and green and safe. And whilst we’re highly taxed at an investment level, it’s a wonderful place to invest. And when I say it’s safe, I don’t just mean walking down the street in Brisbane and not getting attacked. I mean it, it’s a safe place to invest. There’s a strong rule of law, there’s lots of liquidity in terms of who am I going to sell this asset to? There’s plenty of liquidity there. And so it really is attractive, and I think I keep coming back to that comment that our client made about the last real estate asset class to be disrupted more and more. The prevailing sentiment amongst all the people that we talk to is that people want an experience and people are combining business travel with a bit of leisure travel as well, because they want that experience. And there’s great experiences all around.
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27 MINUTES
February / March 2023 – 15
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