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Sydney’s luxury hotels creating “a perfect storm” for investors

Sydney’s five-star hotel market has been labelled a “blue-chip investment” by Savills

Stagnant supply growth and ongoing overperformance of five-star hotel rooms in Sydney is creating a tight situation for hotel investors, according to hotel real estate analyst Savills Australia.

As a result, Savills says returns on investments (ROI) may be tougher in the shorter term but stand to yield strongly as a long-term investment. As a result, while costs per key could soar for the next few sales of prime real estate on which a luxury hotel could be developed, investors not seeking a quick return stand to benefit greatly over a longer period of time.

There’s no doubt Sydney’s market is booming, with occupancy levels routinely nudging capacity. For the six months ending 30 June 2018, STR Global data for Sydney showed luxury hotel rooms routinely selling for $370 per night market-wide, while a select group of properties were consistently achieving rates of $400 or more per night.

Savills’ claims are based on a study of hotel sales results over the last five years, which have notably dropped due to the lack of properties going on the market and new development opportunities increasingly scarce. The study indicated future sales could see hotel owners or investors recouping less than 5% yield on their investment and room construction or development costs surpassing $1 million each.

It used the 2013 sale of the Four Seasons Sydney as an example, citing the eventual sale price of $340 million equating to $606,000 per room at a comparatively high 6.6% yield. Fast forward just a year and the sale of the Sheraton on the Park spurred intense competition and an eventual sale price of $463 million – at the time an Australian record – to a Chinese conglomerate. That deal included a $40 million commitment to improve the 557-room property, working out to more than $900,000 per room – a 40% jump on the Four Seasons price.

Pastures are currently very green for investors in the Sydney luxury hotel market.

This momentum, coupled with surging inbound tourist arrivals, was illustrated that same year as the Westin Sydney was sold for $445 million – around $1.07 million per room – setting yet another new record. For its Singaporean owners, that sale price represented a monumental return from the $160 million it paid for the property just over a decade earlier.

Savills Hotels Managing Director Michael Simpson said Sydney’s five-star market was in a class of its own and as such, opportunity for investors to come to the party were “extremely limited”.

“I think if a quality property did come onto the market that $1 million a room would simply be a starting point, as performance for a well-positioned, new luxury property would materially exceed $55,000 a room.

“Our view is that, given the historical scarcity of central Sydney five-star product and long-term market outperformance, purchase yields could tighten to 4.75% or even 4.5%, pushing the price per room to well above $1 million mark.

“History shows that Sydney five-star hotels are a blue-chip investment and reward those with a long-term perspective. It’s like Mayfair on the Monopoly board – the cost of entry is very high but more than justified by the returns,” Simpson added.

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