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Rydges Hobart – Image Credit JLL
In the current hotel investment environment, we’re witnessing just how crucial strong underlying real estate fundamentals are when it comes to desirability amongst investors and resultant pricing. Like what’s being experienced across the broader CRE sector, certain assets are standing out amongst the pack.
As we discussed in our previous article, year-to-date Australian transaction volumes remain subdued as the cost of debt drives a bifurcation of hotel capital markets, with the mid-markets (≤A$40 million) segment of the market having been the most active for the year to date and seeing the greatest depth in capital.
Hotel fundamentals such as assets with strong historical and current trading, those that are land rich, or have some form of genuine value-add or repositioning potential (brand or use), have proven to be key in the majority of completed sale campaigns over the past 12 months. In addition to this, investors are leveraging the potential for vacant possession (VP) by taking advantage of the competitive landscape in which operators now find themselves in, following the recent new construction wave.
Assets that are seen to meet any of these investment criteria continue to attract the strongest investor interest and attract new capital, as well as still achieving, and in some instances exceeding, pricing expectations. We estimate that approximately 71% of total transaction volumes as of YTD August 2024 (~A$537 million) have fit this mould and included one or more of these asset fundamentals.
Conversely, hotels with less favourable title or location characteristics or viewed as ‘passive’, have proven challenging to transact in the current environment. Given investors and institutional capital are now more than ever focused on running yields, there is a noticeable reluctance to pay for blue-sky or base pricing on projected stabilised earnings, as was the norm only a short time ago, unless the asset is considered trophy or strategic.
These investment trends have been demonstrated by a number of recent noteworthy transactions, in which both existing and new to market investors were provided with increased comfort for assets with strong fundamentals and/or repositioning potential.
A clear demonstration of this was the recent offering of Rydges Hobart, where contracts are now exchanged, which possessed several of the most attractive attributes and fundamentals currently being sought after by investors. These included a large freehold landholding (11,860 sqm), vacant possession of management, an attractive price point, and flexibility of alternative land use potential. This translated to an extremely competitive sales process, culminating in an excess of 100 enquires and seven attractive bids.
Another example is the recently completed sale of the Great Eastern Motor Lodge in Perth, which sold for A$40 m to Singapore based Hiap Hoe Limited. The successful transaction reflected an extremely competitive EOI process, given the opportunity to acquire a significant freehold landholding (11,892 sqm) as well as also being offered with vacant possession.
Great Eastern Motor Lodge in Perth
This article originally appeared on JLL.
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