Regional Hotel Investment – Avoid the pitfalls
Hotels in hot demand
Australian hotels are back on the radar of domestic and overseas investors, and return expectations are falling.
With yields in CBD and metropolitan areas becoming thinner by the day, investors and owner operators are seeking higher yielding accommodation assets outside the major cities.
Returns for regional hotel assets have not experienced a dramatic change over the last few years compared to CBD hotels. However, an increasingly competitive debt market, the weakening of the Australian dollar and increasing number of overseas investors, is now leading to a reduction in return expectations.
Regional hotels and motels are often the forgotten asset class but for anyone looking for an entry level investment this can prove to be a very rewarding asset. Travellers, whether for leisure or business, always need accommodation and with the low Australian dollar, increase in domestic travel, and the increase in international inbound tourism, there is always a need for good quality, affordable accommodation in regional Australia.
Between 2008 and 2013, investors chased yields between 11% and 15% in regional towns such as Tamworth (NSW), Traralgon (Vic) and Townsville (Qld). In the current market, however, the sale of some hotels are generating yields of between 8.5% and 10%.
The chart below demonstrates the fall in yields and increase of the price per bedroom across the Australian hotel sector between January 2009 and June 2015.
Avoid the pitfalls
Investors looking to capitalise on these falling yields and strong underlying fundamentals are not likely to be based where the asset is located. Investors may be interstate or in many cases overseas. Like maintaining a long distance relationship, regular contact and additional effort is required. Without proactive management hotel trade can decline, reducing returns and impacting on debt repayments. Reduced cash flow also results in a lower level of funds to maintain and improve the physical asset, further negatively impacting on trading. This can be a vicious cycle that ultimately results in lower values.
We recommend the following guidelines are followed when remotely managing a hotel:
- Hire local management expertise with good connections to local businesses;
- Plug into a recognised brand, potentially by way of franchise, to increase national and international exposure via a global distribution system;
- Remain in contact with hotel management either daily or weekly and obtain updates on future bookings and recent occupancy rates;
- Incentivise management by offering bonuses when benchmarks are met or offer shares in the business;
- Track competitive hotel rates;
- Offer a unique selling point that competitors are not providing;
- Engage with the local tourism office; and
- Promote and sponsor local events to gain goodwill within the local community.
These initiatives are not complete answers to a successful business, but should help avoid some of the pitfalls.
The question of whether hotels will remain an in demand asset class depends upon the usual influencing factors; low interest rates; continued good performance of hotel room rates and occupancy; overseas investment; a stable Australian economy; weakening of the Australian dollar and China’s economy. Australia is not immune to global economic shocks and investors must be wary of economic cycles and choosing the right time to exit or enter the sector is key.
Holding a well-managed and profitable asset will assist any owner weather any future storms and benefit from any upsides of another strong economic cycle.
Adrian Archer is a Director of the Savills Hotels team, responsible for valuation and consultancy advice across Australia. Adrian has over 15 years’ experience providing valuation, development, feasibility and asset management advice in over 23 countries and across four continents to include Asia Pacific, Europe, North America and Africa.