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Colliers: conversions are the opportunity

Stephen Burt

The tightly held ownership of Australian capital city hotels is the impetus for investors to examine the prospect of converting office buildings to hotel accommodation.

According to the latest research from Colliers International, there is presently a window of opportunity for office conversion due to hotel values rising relative to B-grade and lower office space, which is suffering from rising vacancy and escalating incentives.

“Hotel investors clearly have a preference for existing stock but there is presently a lack of hotels for sale so they are being forced to look at alternative options,” said Stephen Burt, Colliers International Managing Director of Hotels.

He believes well located, existing B-grade or C-grade office buildings burdened by smaller floor plates, central core and poor lease tenure ironically offer the key attributes for a good hotel conversion.

Colliers Australian Property Index Returns“The feasibility of office conversion is particularly attractive in Brisbane and Sydney, where escalating incentives and vacancy for non-premium offices has coincided with rising hotel values,” Burt said.

“These rising values have been offset partially in the last six months in certain markets impacted by the slowdown in the mining sector and reduced government spending.

“Over the year to June 2013, IPD figures report that returns generated from the hotel sector halved to 6.3%, down from 12.8% the previous year.

“However, over the last three years returns from the hotel sector averaged 11.8% compared with 9.5% for retail, 10.0% for office and 9.7% for the industrial sector.

“The NSW Government’s offering of two heritage buildings in Bridge Street, Sydney will be a good test of the office conversion market.

“Both these heritage buildings have great presence and will attract interest from the luxury brands.

“This is anticipated to be a good outcome for Sydney’s premium hotel market and will actually provide impetus for growth in average rates across the total hotel market.”

Office conversions already underway include the 12 storey former B-grade office building at 34 Hunter Street in Sydney, which is being converted to a 282 room hotel by Cititel Hotels, while in Brisbane, Fraser Hospitality Group recently purchased 80 Albert Street, with plans to convert to an apartment hotel.

Transaction activity during 2013 has been the strongest since 2007, reflecting interest from sovereign wealth funds and global institutional investors focusing on the Australian tourism and hospitality sector.

Total hotel sales activity for the year-to-date 2013 is in excess of AUD$1.550 billion, an increase of 24% on the total value for 2012. The high level of sale activity would indicate a highly liquid hotel property market but the figures are dominated by just two sales namely, the Tourism Asset Holdings Limited portfolio for a reported approximate AUD$800 million and the Four Seasons Hotel Sydney for AUD$340 million.

Colliers Major Hotel Sales in Australia

Over the year to June 2013, the major city hotel markets monitored by Colliers International saw average revenue per available room (RevPAR) increase by 2.5%.

In Sydney occupancy rates for the financial year 2012/2013 were the highest in the country at 83.8%.

Notwithstanding the strong occupancy, Colliers research indicates average room rates in Sydney have not matched CPI over the last eighteen years.

However, Burt said there were some green shoots emerging that are likely to have a positive impact on the escalation of Sydney City room rates including the redevelopment and revitalisation of Darling Harbour and Barangaroo, the likelihood of new small to medium luxury hotels, the rise of the ‘boutique’ and ‘lifestyle’ brands and the growth in independent travellers out of the major Asian markets.

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