THE PROPERTY DEVELOPMENT REVIEW
In terms of deal flow, what have been the major trends or themes that you’ve observed over the past three or so quarters. Deal flow has been lower than usual. The “bid-ask spread” between sellers and buyers is quite considerable as sellers are anticipating the rate cut cycle, and buyers are leaning into the impact of higher un-hedged debt costs relative to initial yields on assets. On a positive note, our recent campaigns have seen a rise in investor activity from both domestic and off shore capital, as the market anticipates an interest rate cutting cycle to commence in the short-term future, acknowledging the cuts which have already occurred in USA, UK, Europe and Canada. From there, let’s talk about sentiment - presumably the level of interest rate stability that we’ve seen in 2024 has had a net positive impact on demand, how have you & the team witnessed this affect in the trading performance of assets. While interest rates in Australia have been stable, the commentary around them has not been. This is exemplified through the commentary in May and June about increases (which has not eventuated). Throughout the past six weeks this commentary has reversed, helped in part by lower inflation prints and the commencement of interest rate cutting cycles in the United Kingdom, Europe and the United States. The market has responded as seen through the material cuts to the 3-year base rate hedge/fix in Australia. Hotel Trading performance across the board has generally been soft across the past two quarters, which reflects a return to the normal seasonality of the Australian capital city market. However, our owner clients are quoting very positive business on the books for the balance of the calendar year 2024 and for the first half of 2025.. Whether it’s global institutions, private domestic groups or other capital players, I’d be interested to get a sense as to what makes the hotel & hospitality sector an attractive investment class. Hotels remain an attractive investment class given the daily “mark to market” nature of hotel average daily rates and resultant hedge against inflation. They have also seen a significant rebound of performance despite the high interest rate environment. And then with respect to the international capital piece, I understand that historically, Singapore, Japan, Hong Kong, and the US have been the most active buyer groups investing into the hotel & hospitality sectors in Australia - walk us through if you could how you’re observing interest from global players. Interest has been relatively subdued over the last few quarters for major global players due to the perceived value differential between Australia and some other global markets where values have fallen drastically – for instance, some of our off-shore
colleagues have advised that hotel assets in their markets (e.g. USA and UK) are trading at up to 50% below their peak pricing. Australian hotels have not suffered the same price dislocation. Traditionally, Australia offers a lower risk but lower return environment, and now that we are entering an interest rate cutting cycle the relative value of Australia will emerge, which we are now seeing this in various of our current campaigns. Utilising your expertise, what are the key considerations new market entrants need to make prior to deploying capital into leisure assets. Key considerations include a considered view on direct and indirect taxation in different markets in Australia, as well as understanding the key economic drivers in these markets, future supply, demand sources and future domestic and international visitation trends. Throughout the pandemic, one of the key trends was the enormous investment into regional leisure assets - is this still the case or has the balance returned to capital city / metropolitan assets. As Australians are departing Australia through outbound travel at a faster rate than international travel is recovering, this has slightly weakened the demand for regional assets. However, we expect this demand to return once inbound travel returns to its pre-pandemic levels. The pandemic allowed people to appreciate how strong the Australian domestic market is, with those who have reinvested in their regional assets seeing strong performance and growth. Looking ahead to the immediate future, broadly speaking, what are some of the assets you & the team are anticipating bringing to market this year (general location, asset subtype, value etc). CBRE Hotels currently have campaigns in various stages across a range of major markets including the Hilton Adelaide, Ace Hotel Sydney, Kimpton Margot Sydney, and the Pro Invest portfolio comprising nine Holiday Inn Express assets throughout Australia and New Zealand. In closing, over the longer term, what makes Australia’s leisure markets so resilient & where are the opportunities for investors over the years ahead. Tourism and hospitality in Australia is set to keep growing throughout the next decade. International inbound visitors are expected to grow to 12.8 million in 2028, and domestic overnight visitor expenditure is already approximately 40% above 2019 levels. Given the high construction cost environment, new supply will be limited in the short to medium term.
October / November 2024 – 27
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