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ISSUE 2 | 2017

CBRE HOTELS | AUSTRALIA

1 FOREWORD

2 2017: WHY SO QUIET?

4 CHINESE CAPITAL RESTRICTIONS ARE HAVING AN IMPACT

6 THE CHANGING FACE OF HOTELS – WHAT DO GUESTS WANT?

10 WHAT IS A LIFESTYLE BRAND?

12 ARE LIFESTYLE BRANDS COMING TO AUSTRALIA?

16 OBSERVATIONS ON THE HOTEL MARKET

18 CLOSING REMARKS

1CHECK-IN | ISSUE 2

FOREWORDWelcome to the second edition

of Check-IN, a paper focussed

not on the detailed numbers but

interpreting and commenting on

some of the longer term trends.

This edition looks at a number

of subjects, in particular why

2017 has been slow in terms of

transaction volumes. We also look

at some of the changes in demand

and the resultant growth of

lifestyle brands and their potential

impact on the market.

Despite the slowdown in volumes

the demand for hotels has remained

strong and the continued lack of quality

stock has inhibited investors and,

in some cases, hotel guests. Yields

remain low but the expectations for

further reductions are now limited.

Governments are trying to increase

interest rates and stimulate economies

but avoid excessive expenditure – a

difficult balance.

The challenge increasingly will be to

ensure that assets perform well; capital

growth is less certain than previously.

In hotels this will require excellent,

and innovative, management; owners

who understand the business and are

prepared to reposition assets when

required; and good marketing will

be key coupled with focussed asset

management.

1 FOREWORD

2 2017: WHY SO QUIET?

4 CHINESE CAPITAL RESTRICTIONS ARE HAVING AN IMPACT

6 THE CHANGING FACE OF HOTELS – WHAT DO GUESTS WANT?

10 WHAT IS A LIFESTYLE BRAND?

12 ARE LIFESTYLE BRANDS COMING TO AUSTRALIA?

16 OBSERVATIONS ON THE HOTEL MARKET

18 CLOSING REMARKS

Locations within the region have been

performing very differently. The relative

weakness of the Australian dollar

coupled with economic stability and

safety has resulted in improvements in

overall hotel performance. Location

by location, however, the story is very

different. Sydney continues strongly

whilst Perth languishes, Darwin shows

some signs of recovery when Melbourne

looks like slowing. Some regional

markets, such as Cairns, continue

strongly.

The changing types of demand,

where customers are looking for more

experiential stays, may mean that

hotels will have to change from their

broad, generic, satisfy-the-general-

market, style. There has been a clear

move over the last few years from

large inefficient rooms to smaller, well

serviced and designed accommodation.

The public areas are less grand and

more welcoming and relaxing. The food

and beverage outlets are more exciting

and enticing. Check-IN discusses these

issues and the impact they are having

on the market.

We hope you enjoy this edition and that

it adds to your insight into where the

market is moving and why.

Robert McIntoshExecutive Director, CBRE Hotels – Asia Pacific

Ben Martin-HenryResearch Manager, CBRE Research – Australia

We are now more than three-quarters of the way through 2017 and unless there is

a flurry of significant deals in the last quarter of the year, 2017 will see the lowest

transactional volume since the late 2000s. But why the lack of deals? Have hotels lost

their appeal? Have investors chosen to invest in other commercial sectors such as

office or retail rather than hotels? The answer is emphatically no.

Hotels maintain their appeal to investors and developers alike because there is considerable

interest for quality assets that generate secure, long-term income streams. But why then have

transaction volumes been so much lower than in previous years? One of the main reasons is due

to record volumes of previous years: there is simply not a lot of stock available for purchase now.

The amount of investable stock has significantly diminished due to the high levels of transactions

between 2012 and 2016 when all property markets benefited from the relaxation of policies

in China regarding offshore investment. During this period approximately $150 billion worth

of commercial property transactions took place in Australia: more than the total recorded over

previous decade. Of this, approximately 32% of acquisitions were by offshore investors, and 26%

of these were by Chinese investors.

2017: WHY SO QUIET?

Chart 1 - Annual Hotel Sales Volumes

2CBRE HOTELS | AUSTRALIA

$0 0

10

20

30

40

50

60

70

2000

2001

2002

2003

2004

2005

Sales Volume Number of Sales (RHS)

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

$500

$1,000

$1,500

$2,500

$3,500

$2,000

Mill

ions

($)

$3,000

$4,000

Source: CBRE Research

3CHECK IN | ISSUE 2 | 2016

3CHECK-IN | ISSUE 2

In the same period over 250 hotels transacted across the Australian market totalling almost

$15 billion. These volumes were unprecedented and owed much to the increased interest in the

Australian property market – particularly hotels – from Asia. Asian capital is enticed to Australia

because of its relatively attractive yields across all property sectors; its steady economic growth;

and stable political environment.

It can be argued that most of these factors haven’t changed: the economy remains robust

(notwithstanding concerns about an overheating residential market); the political climate is stable

and transparent; and even though yields in most sectors are significantly tighter than in previous

years, relative to other markets across the globe they still represent an attractive investment.

The increased volume of transactions, however, had the effect of reducing the amount of stock

available to investors, particularly in the hotel segment. The hotel market probably benefited more

than any other sector when China relaxed its offshore investment policies as Chinese investors

are particularly keen on acquiring trophy assets and investments held chiefly for generating stable

income returns.

The problem with being the sector of choice for a particular demographic of investors is when an

exogenous shock occurs, such as new capital restrictions on offshore investment, suddenly there is

a lack of buyers, which brings us to the second major reason for a relatively quiet year: a lack of

Chinese buyers.


“The Chinese government imposed greater regulatory control over capital outflows over fears that its reserves were being eroded which was negatively impacting its ability to control the Chinese currency.”

These fears were not unfounded as during 2016

the Yuan fell 6.5% against the US dollar which put

pressure on the government to reign in capital flight

and stabilise the currency. The Chinese government

also had concerns about investors overpaying for

assets in order to simply get large sums of capital out

of the country and away from government oversight

committees.

Chinese investors have been aggressively investing

in the property sector overseas which the Chinese

government views as risky, especially hotels. Indeed,

the latest round of restrictions imposed on offshore

investments classifies property as “non-core” and

“restricted”.

These restrictions have unquestionably had an

impact on Chinese outbound investment globally

with decline estimates ranging from 20-50% on

the previous year. Australian property has not been

immune to this downturn and the hotel market has

suffered more than other sectors with year-to-date

transaction volumes declining ~70% on 2016. With

one quarter remaining the situation may improve,

but it is highly unlikely enough transactions will take

place to reach levels seen in any of the last five

years.

CHINESE CAPITAL RESTRICTIONS ARE HAVING AN IMPACT

Chart 2 - Sales volumes year-to-date 2017 vs full year 2016

0%

-10%

-20%

-30%

-40%

-50%

-60%

-70%

-80%

Hotel Industrial Retail Office All Property


% C

hang

e on

2016

5CHECK-IN | ISSUE 2

WHAT’S IN STORE FOR 2018?

Owners will remain reticent about taking assets to market due to the

perception that Chinese investors are more willing to pay a premium

to secure quality assets. Therefore, the lack of investors from China

indicates that owners will be unable to secure the high price level

they prefer so are unlikely to divest. Rightly or wrongly this perception

impacted the market in 2017 with a handful of assets withdrawn

because owners were unable to attain their desired price point.

The difficulty in finding existing product to purchase coupled with the

current favourable trading conditions – strong tourism market, high

occupancy and room rates – suggests that investors should and will seek

other ways to get into the market. The main way they will do this is to

build. And build. And build.

“The lack of available stock and tightening of restrictions on Chinese outbound capital will continue to cool the investment market for the foreseeable future. Whilst there will still be a number of smaller deals taking place, particularly by domestic investors, big-ticket items won’t be coming to the market with the same regularity as in previous years.”


THE CHANGINGFACE OF HOTELS – WHAT DO GUESTS WANT?The development cycle of the Australian hotel market is in full swing with hotels opening

up on an almost daily basis across the country. With over 10,000 new rooms entering

the market over the last few years, and another 25,000 expected over the next five,

there is certainly a lot of new product about. But just what exactly is coming? Are we

seeing the same old brands? Or are owners and operators looking to venture into

unchartered waters with funky new lifestyle brands to compete with the experience-

driven Airbnb market and cater to the next generation of travellers?

Chart 3 shows the scale of product coming into the market (and any hotels that have

opened in the last 12 months) and their respective growth. The fastest growing sector is

Luxury, which is good news for those more discerning visitors such as the Singaporeans

and Chinese who tend to prefer stays in more luxurious accommodation. Owners and

operators have identified the need to modernise and upgrade existing Luxury hotels so

are undertaking refurbishments. An example is the Intercontinental Sydney’s $200 million

upgrade, which should allow it to compete on a quality basis with the proposed 181

room Wanda Vista close to it in Sydney’s Circular Quay.

Other new builds such as the Sofitel Convention Centre Hotel in Sydney (the first luxury

hotel built in the city since 1999) and the Westin Brisbane will also cater to the needs

of those with a taste for luxury and should help elevate the standing of Australian hotels

worldwide whose reputation has suffered in recent years due to a lack of quality product

at the top end of the market.

7CHECK-IN | ISSUE 2

“Comparing hotels across Asia to those of Australia highlights the fact that the local market is playing catch-up in the luxury segment and a ~30% increase in luxury accommodation will help.”

Chart 3 - Supply Pipline and Percentage Growth by Scale

0

2,000

Economy

2%

3%

15%

14% 23%

31%

Midscale Upper Mid-scale

Upscale Upper Up-scale

Luxury

6,000

10,000

4,000

8,000

12,000


Num

ber

of K

eys


WHAT DOGUESTS WANT?

China is arguably Australia’s most

important source of visitors and recent

surveys have revealed that one of the

top complaints that Chinese visitors

had about Australia was the quality of

hotels. Comparing hotels across Asia

to those of Australia highlights the fact

that the local market is playing catch-up

in the luxury segment and a ~30%

increase in luxury accommodation will

help.

Chart 4 shows the relative position of

Sydney and Melbourne in terms of the

proportion of luxury accommodation

compared to major cities across the

Asia Pacific region. Currently, just 7%

of city hotels in Sydney and Melbourne

can be classed as luxury compared to

Singapore’s 15% and Seoul’s 14%.

This is not to say that due to the quality

of Seoul’s hotels Chinese tourists are

more likely to travel to Korea instead of

Australia, but in the highly competitive

market that is the travel industry the

quality – and value for money – of

hotels is a factor in peoples decision-

making. Given that 122 million Chinese

residents travelled overseas in 2016

and Australia took just 1% of these, it

seems prudent to “give the people what

they want”.

CONTINUED

0%

4%

8%

12%

16%

Hon

g Ko

ng

Sing

apor

e

Seou

l

Kual

a Lu

mpu

r

HC

MC

Bang

kok

Sydn

ey

Mel

bour

ne

Shan

ghai

Beiji

ng

Toky

o

Chart 4 - Percentage of Luxury Supply


Historically the cost of building luxury

hotels has been a significant barrier

for developers as they struggled to

recoup the cost of construction once

the hotel was completed and sold on.

However, such is the demand for hotels

in the current market that this is no

longer a significant impediment. The

lack of available stock – of any scale

but particularly at the top end – has

resulted in investors paying significantly

higher prices in order to secure quality

assets and has given developers the

confidence to build luxury product.

Perhaps of more importance with

regards to hotel development is the

strength of the residential market.

The ability to offset some of the costs

by building a mixed-use product

has been extremely beneficial for

developers. Hotels and residential are

a natural fit as they have overlapping

amenity requirements, and including

a residential component in a hotel

development allows developers to

pre-sell to partially fund the hotel

development. These types of mixed-

use developments have become

increasingly popular over the last few

years as developers take advantage of

the strength of both the residential and

the hotel markets. Examples of these

types of developments include The Ritz-

Carlton in Sydney and Wanda Vista in

Circular Quay.

In terms of overall volume, it is the top

end of the market that will have the

largest influx of rooms, and it’s mainly

in this area that we are seeing the

emergence of lifestyle brands. Since the

growth of Airbnb, people have decided

that they want a more experience-driven

stay and there is little doubt that Airbnb

has shaken up the accommodation

market by offering viable alternatives to

hotels that offer travellers a more local,

and tailored, experience.

Hotel operators were slow to react to

the threat of the sharing economy and

offer experience-driven stays rather

than simply a bed, but this has changed

and the industry has been evolving in

recent years. The proliferation of lifestyle

brands globally is a testament to the

seriousness with which hotel operators

are now taking the emergence of

Airbnb. But just what exactly is a lifestyle

brand?

WHY NOW?

9CHECK-IN | ISSUE 2


Lifestyle brands are not easy to

define. There are a number of

them that exist and they are all

quite different, which in itself

forms part of the product offering:

uniqueness. They have taken

many of the characteristics of

boutique hotels and packaged

them into brands that can be

replicated and rolled out across

the globe. This may sound like

a contradiction in terms and this

forms part of the problem that

operators have: how do you

offer uniqueness that can be

reproduced?

A lifestyle hotel focuses heavily on

being creative and innovative, so upon

entering you are immediately hit with

an array of vibrant colours and eclectic

surrounds. The concept of a traditional

lobby is often replaced with a space

more akin to that of a lounge or a

bar that invites guests to socialise with

each other, a key part of the lifestyle

experience.

The latest generation is highly social

and is not content with being holed

up in their room. They want to have

somewhere to go and meet likeminded

individuals and share past experiences

and create new ones. These spaces

need to invoke a feeling of acceptance

and belonging and radiate a warmth

similar to the feel of walking into your

own home – or someone else’s home

which is what Airbnb offers.

These characteristics all form part of the

experience of staying in a lifestyle hotel,

which is essentially what operators are

selling as opposed to the product itself.

Operators have been focused on

perfecting this mix of uniqueness and

scalability and the results are making

an impact and have given the lifestyle

sector some traction in competing

with the likes of Airbnb and bringing

millennials back to the hotel market.

Moxy is one of Marriott’s ventures into

the lifestyle space and the quote below

comes from their website describing the

Moxy Frankfurt Eschborn:

The language used, as well as the

actual content, is clearly targeting a

particular demographic that perhaps

the more traditional brands do not. Key

messages in this statement are that the

hotel has: Wi-Fi to keep you connected

to the outside world allowing you to

share your whereabouts and photos

with the online community; the ability to

eat and drink whenever you like so are

not restricted to the concept of “meal

times”; and a lobby more akin to a

playground that a traditional lobby.

This type of brand does not necessarily

appeal to every demographic. It is

unlikely that the average 55-year-old

corporate traveller will be found having

a go on the “Moxy pink punching bag”

at 3 am, but they are not the primary

target for this particular brand.

However, a number of corporations

pride themselves on being up to date

with new trends and a growing number

of corporate travel companies make

bookings through Airbnb for their

clients. And let’s not forget that the

millennial generation will make up the

majority of the global workforce by the

middle of the of the next decade so

these brands need to be well placed

to capture the next generation of

corporate travellers.

WHAT IS A LIFESTYLE BRAND?

“Add one-part razzle to one-part dazzle, mix well, and Moxy Eschborn! Get everything you need and nothing you don’t. We’re

talking mind-bending connectivity, 24/7 food and drinks, a lobby like a playground, and our

superhero Moxy crew. And if you have energy left, we’ll

even let you hit our Moxy pink punching bag!”

11CHECK-IN | ISSUE 2

One particular subcategory that

falls within the lifestyle category

that differentiates itself from the

more “razzle dazzle” brands and

does appeal to existing corporate

travellers is the Wellness brand.

Healthy living has been of great

importance to all generations,

but over the last 30 years there

seems to have been more of a

focus on maintaining a healthy

lifestyle. Workplaces have been

at the forefront of this evolution

as the majority of the population

spends most of their time indoors

and a great deal of time at work.

But hotels have also cottoned on to

the appeal of being more health-

focused whilst travelling.

EVEN Hotels by IHG is one

such brand that offers guests

the opportunity to maintain a

healthy lifestyle whilst travelling

by equipping their hotels with

fitness facilities, healthy eating

options and comfortable

surroundings that promote a

feeling of wellbeing.


ARE LIFESTYLE BRANDS COMING TO AUSTRALIA?

YES. SLOWLY.


One of the largest and most well-known lifestyle brands is the W Hotel chain by Marriott International which currently has one

under construction in each of Australia’s three largest cities: Sydney, Melbourne and Brisbane. W Hotels fall into both the lifestyle

and luxury segment due to their high-end finishes and quality amenities. The positioning of the Sydney building in Darling

Harbour will certainly appeal to a younger crowd given the agglomeration of bars and restaurants in the area, but with the

reopening of the International Convention Centre and the Barangaroo office precinct nearing completion, it may appeal to the

corporate market as well.

There are a number of other brands such as IHG’s Indigo, Marriott International’s Element and Accor’s Mama Shelter that are

rumoured to be coming to the market, but as yet Australia hasn’t seen the kind of proliferation that other regions have. This isn’t

through a lack of trying by operators, however, as they are keen to get in on the ground floor in this segment, but it is not easy to

find an owner who is willing to venture into uncharted waters.

Owners, in general, have been hesitant to take the plunge and invest in a new type of

product that on face value is very different to the more traditional and familiar class

they are used to. Established brands have proven track records of success, therefore,

present a more appealing investment proposition as there is a myriad of examples of

successful ventures. By choosing a brand already established in the marketplace there

are more opportunities to leverage off previous experience and supply-chains already

put in place by the operator’s parent company. These factors are very appealing to any

owner, particularly those more risk-averse or those making their first venture into the local

market. However, by choosing a brand already established in a market, and one that has

a number of contemporaries as well, differentiating the asset on anything other than price

will prove challenging.

There are owners who recognised the threat of Airbnb and sensed the overcrowding of

traditional brands in the marketplace so ventured into the lifestyle segment. From an

investment perspective delivering a new product to a market is not without risk, but there

has been a shift in the type of accommodation and service that guests want, particularly

in the leisure segment, which will support the introduction of these brands. Millennials

and the following generation, Generation Z, are of course the fastest growing group of

travellers and have significantly higher disposable incomes than previous generations at

a similar age. Add to this the fact that travel has never been as easy as it is now and you

get a very large and captivated pool of travellers who prefer more experiential holidays;

thus will be keen to stay in lifestyle hotels. Investors should be taking advantage of this

and many are.


Location is paramount to the success of any hotel and the decision of where to build a lifestyle hotel is no different, but given the unique characteristics of these brands and the demographics they are targeting, investors need to think outside the box.

Prime CBD locations are the natural

choice for any hotel – you could even

say they are the holy grail (Sydney’s

Circular Quay or Martin Place for

example). However, the market segment

targeted by hotels in these locations is

predominantly the Monday – Thursday

corporate segment, and as mentioned

previously this is not necessarily the case

for lifestyle brands.

Granted, prime locations will still

attract all types of travellers because

the quality and positioning is a strong

drawcard, but generally these more

corporate locations are not “hip”

enough for the patrons that a Moxy or

Mama Shelter would attract. A more

appropriate location would be one

with a bustling nightlife with bars and

restaurants aplenty such as Sydney’s

Darling Harbour or Chinatown and

Melbourne’s Southbank.

LOCATION. LOCATION. LOCATION.


But how about taking a punt and venturing further afield into an area that’s an Airbnb

stronghold? If lifestyle brands will be competing directly with Airbnb, then it makes sense

to target areas where it is having a big impact.

5,000

4,000

3,000

2,000

1,000

0

Sydney

MelbourneWaverley

Port PhillipRandwick

Yarra

Chart 5 - Airbnb Listings

Source: Inside Airbnb, CBRE Research

List

ings

Chart 5 shows the top three areas by Airbnb listing since 2016 for both Sydney and

Melbourne. Unsurprisingly the greatest concentration is in the centre of each city due

to the sheer volume of apartments and strong demand across all demographics for

central locations, but looking at the next two most prolific Airbnb locations for Sydney it

is clear that there is a captive market outside of the city.

Proximity to Sydney’s famous beaches is a strong drawcard for all types of travellers

but particularly millennials who make up over 60% of Airbnb users according to the

company. Given that millennials are the prime target for lifestyle brands perhaps a

foray into the eastern suburbs market is warranted.

Wherever a company chooses to develop a hotel; after they have looked at the various

investment metrics; once feasibility studies have been completed, they then need to

answer one very important question: just what is it that guests want?

OBSERVATIONS ON THEHOTEL MARKET

Transactional levels have been relatively quiet in 2017 after the record levels seen in the previous few years. This is presenting exceptionally sharp yields for vendors willing to part with their hotels. Sydney and Melbourne continue to be the most sought after locations, however, CBRE Hotels are of the strongest belief that investors willing to take the leap of investing into the counter-cyclical markets of Brisbane and Perth, will be seen in the not too distant future to have been ahead of the curve.

National DirectorCBRE Hotels – Hotel Brokerage

WAYNEBUNZ


The fundamentals for hotel investment in Australia remain strong and continue to drive investor demand. The performance of each market is focused around supply – existing and future. Brisbane and Perth remain soft with significant supply growth. Sydney, whose supply has remained relatively stable for the last 20 years is likely to see a continuation of strong operational uplift, which in turn drives investor demand. Melbourne is potentially the most complex destination. It has enormous supply growth entering the market but historically has defied supply surges by growing demand.

National DirectorCBRE Hotels – Hotel Brokerage

ROBCROSS


With the AUD continuing to hover below US80 cents, Australia remains a key destination for international visitors. The weaker AUD has also ensured more domestic travel rather than overseas holidays, resulting in occupancies maintaining an upward trend, with some markets achieving record levels. Markets that have seen limited new supply have also been well positioned to drive the ADR to unprecedented levels. The challenge for the future will be supply/demand imbalances, along with requirements for refurbishments of older stock to ensure the quality of assets can compete on a global scale.

National DirectorCBRE Hotels – Valuations & Advisory

WESLEYMILSOM

Investor interest in Australia remains relatively active across all hospitality sectors with a particular focus on Sydney and Melbourne. Large-scale investors emanating from Asia continue to chase well located core or value-add hotel opportunities in CBD locations, however, unlocking stock has been a challenge. The low interest rate environment combined with limited deal flow has resulted in general yield compression in a number of major markets. Deal pipeline for existing hotels is forecast to remain relatively tight, but we are likely to see a number of mixed-use development opportunities in 2018.

Head of Capital Markets | WACBRE – Capital Markets, Institutional Investments & Hotels

AARONDESANGE

The messages we delivered in Check-IN

a year ago still hold true:

u Increased demand for

accommodation

u Weakening Australian dollar

u Hotel developments increasingly

viable

u The need to target appropriate

markets

In fact, greater care in respect of all these

issues now needs to be taken. Some markets

are clearly oversupplied, customers are

becoming more discerning and operators are

merging to create better and more efficient

operating models. There are still good

returns for those who pick the right horse but

winning is becoming more important than just

competing.

There are likely to be some significant changes

in the tourism landscape over the next few

years. Those that look ahead and plan to take

advantage of those opportunities will do better

than those who ignore the developing trends.


Proven performance is essential but so is the

ability to adjust to the new paradigms that

are appearing. Competition is fierce at local,

regional and international levels. However the

opportunities to create new, exciting products

is unprecedented as guests become more

knowledgeable, demanding and adventurous.

Those who pick the trends and respond will

outperform the pack. Good information and

increased, but educated, risk taking is now

required.

CLOSING REMARKS

KEY CONTACTS

Ben Martin-HenryResearch ManagerCBRE – Research+61 2 9333 [email protected]

Robert McIntoshExecutive DirectorCBRE Hotels – Valuations & Advisory+61 449 587 [email protected]

Wesley MilsomNational DirectorCBRE Hotels – Valuations & Advisory+61 408 161 [email protected]

For more information on hotel research market updates, please contact:

To learn more about CBRE Research, or to access additional research reports, please visit the Global Research Gateway at www.cbre.com/research-and-reports.

CBRE Disclaimer 2017CBRE Limited confirms that information contained herein, including projections, has been obtained from sources believed to be reliable. While we do not doubt their accuracy, we have not verified them and make no guarantee, warranty or representation about them. It is your responsibility to confirm independently their accuracy and completeness. This information is presented exclusively for use by CBRE clients and professionals and all rights to the material are reserved and cannot be reproduced without prior written permission of CBRE.

www.cbrehotels.com

Wayne BunzNational DirectorCBRE Hotels – Hotel Brokerage+61 419 698 [email protected]

Rob CrossNational DirectorCBRE Hotels – Hotel Brokerage+61 408 418 [email protected]

For more information on how we can assist you in realising your hotel ownership ambitions, please contact:

cbre hotels | australia · 4 cbre hotels | australia “the chinese government imposed greater...

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