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New Zealand hotels sector experiencing strong demand

New Zealand hotels sector experiencing strong demand

The New Zealand tourism sector is currently riding on a wave of optimism and growth, with several new hotel developments planned, international and domestic investors actively seeking to secure properties in new markets and operational indicators on the improve. This strong demand profile is set against a supply profile that has been remarkably stable over the long term.

The catalyst for growth has largely been due to the record number of international visitor arrivals. Total visitors reached 2.7 million, up 6% in 2013, according to Statistics New Zealand.

However, despite growing guest demand, the hospitality market has been characterised by a lack of new supply. For example the only addition to supply in the Auckland market since 2011 has been the completion of four Quest Serviced Apartment hotels offering a total of 178 rooms.

The hotel market has responded to the lack of new supply, with increasing hotel occupancy rates in increases in room tariffs. For example, occupancy within Auckland has improved 3.8 per cent between 2012 and 2013 with the average occupancy rate now sitting at 78.8%. Alongside this increase, room rates improved by 3.4 per cent to an average of $140 per night.

Other tourism centres such as Rotorua, Wellington, and Queenstown have also experienced demand led growth, with Christchurch’s hotel market holding its position, despite significant new room supply re-entering the market.

Stephen Doyle, National Director of Hotels and Strategic Advisory for JLL says, “International visitor arrival statistics and hotel performance indicators for the start of 2014 have reinforced the positive trend. This is likely to provide a high level of confidence to hotel owners and operators over the long term.”

Hotel trade activity in Asia Pacific surged last year fuelled by record low interest rates, plentiful capital and increasing regional confidence. Transaction volume in the second half of 2013 increased some 70.9% on the first half of the year with this trend continuing into 2014. The sector was also less volatile and higher-yielding over the seven years to 2013.

International investors are likely to continue to focus on New Zealand’s yield advantage over other markets within the Asia Pacific region as well as strengthening economic fundamentals. It is expected that Auckland will be the most sought after market in 2014, followed closely by other gateway cities exhibiting growth in their hospitality markets.

Hotel assets in New Zealand were historically perceived as risky assets by comparison to other CBD investments such as office towers and retail centres, but as the yield spread between hotels and these other asset types has narrowed, hotels have become a viable option for diversifying investment portfolios.

Investors are challenged however by a lack of prime stock being available for sale. Although several hotels were offered for sale prior to 2012, such as Auckland’s Hyatt (now Pullman) and Hilton hotels and Wellington’s Intercontinental Hotel, only one prime city hotel transacted in 2013.

This has led to many active investors, particularly those with existing hospitality properties in the Asia Pacific region, seeking to secure sites for new hotel development.

Mr Doyle says, “The feasibility of new hotels is significantly improving. Interest in hotel development is not only confined to Auckland but we are also seeing proposals for new properties in Wellington, Christchurch, and Provincial areas such as New Plymouth, Havelock North and Whangarei.”

Projects outside of CBD locations are also being actively investigated, although most of these surround key infrastructure assets such as airports, sports stadiums, golf courses and business parks.

JLL research indicates that close to 2,900 rooms are currently being speculated over 16 projects throughout New Zealand, which would comprise a 12 percent addition to inventory. Almost one-third of projects are being proposed by offshore developers, with no existing interests in New Zealand hotels.

Proposed new hotels have the potential to bring new hotel brands to New Zealand, such as Ritz Carlton, Four Seasons, many of which have shown interest in the upscale and luxury market. New hotels are also seeking to target the Chinese guest market which has substantially grown from approximately 100,000 visitor arrivals in 2009 to over 230,000 people in 2013.

Key projects around New Zealand either already under construction or gaining significant momentum include:

• NDG Centre, Elliot Street Auckland – 266 Rooms
• Fu Wah Hotel, Wynyard Quarter, Auckland – 200 Rooms
• Sofitel So, Customs Street – 133 Rooms
• Sofitel Wellington, Bolton Street – 130 Rooms
• Wellington Airport Hotel – 125 Rooms

Mr Doyle notes that “All hotel projects currently committed and under construction comprise either office conversions, extensions or partial rebuilds. These projects have shorter timeframes for completion than other more ambitious new-build projects and offer much greater certainty of cashflow performance”.

He adds that “For many new-build projects, timing will be the key to success, with the market potentially entering into a period of supply imbalance if all speculated projects proceed, particularly if each hotel is targeting a similar guest market.”

ENDS

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