As Australia's major business center, and a growing Asia-Pacific travel hub, Sydney is becoming an increasingly popular destination for hotel investment.
Over the last nine months alone, there have been three hotel sales of around AUD450 million ($310 million) each in Sydney: the Westin Hotel sold to Singapore developer Far East Organisation and Hong Kong's Sino Group, the Hilton Hotel to Singaporean investment house Bright Ruby, and the Sheraton on the Park to China's Sunshine Insurance Group.
Matt Whitby, group director, research & consulting at Knight Frank Australia, cited four key draws for foreign investment in Sydney hotels:
1) growing short-term visitor arrivals,
2) a rise in Chinese visitors,
3) greater spending and longer stays
4) high occupancy and returns.
Government stats show that monthly short-term arrivals to Australia have been growing continuously since February 2013, surpassing 612,000 in June. The current trend estimate for short-term visitor arrivals is 6.16% higher than a year ago.
The largest source of visitors to Australia remains New Zealand, which in June posted a record number of monthly (109,300) and annual visitors (1,268,000). The big story, however, is China.
"In June 1991, 1,200 Chinese nationals visited Australia, compared to a record 85,100 Chinese nationals visiting Australia in June 2015, equivalent to an increase of 6,992 percent," Whitby said. "To put that growth into perspective, the number of visitors from New Zealand, the UK, and the US have grown by 184 percent, 161 percent and 121 percent over the same period."
The biggest growth in Chinese visitors to Australia has occurred in the past six years, with the annual number of short-term visitors more than doubling from 347,900 in June 2009 to 933,500 in June 2015.
China offers Australia more than a large source of visitors. It offers visitors who spend more than anyone else.
At present, the average visitor to Australia spends around AUD$5,090 per visitor. However, the average spend by a Chinese tourist is around 60-percent higher at AUD$8,095, increasing by 8.5 percent over the past year.
"Soaring inbound Chinese tourists numbers and rising average spend is due in part to advantageous exchange rates, but mainly down to the rise of the middle class and their associated wealth," Whitby said.
"The number of tourists to Australia, from China and other Asian nations, is only going to increase, as estimates suggest that Asia will represent 66% of the global middle class by 2030, equivalent to growth of 3.1 billion people from 2009."
The Australian hotel market is cyclical, with performance reflecting economic trends. However, due in part to the boost from Chinese tourists, all key hotel performance indicators, Occupancy, Average Daily Rate (ADR) and Revenue Per Available Room (RevPAR) have shown annual increases. Occupancy across Australia now (July 2015 YTD) trends at 74% whilst ADR ($181) and RevPAR ($134) have increased by 5 percent and 8 percent respectively since the same period three years ago.
Knight Frank Research has assessed the current (September 2015) ownership of investment grade hotels in the Sydney CBD, using January 2010 as a basis of comparison. Its analysis includes 4 and 5 star hotels in the Sydney CBD, totalling approximately 10,850 rooms.
There has been little change to supply levels of investment grade stock over the past five years, Whitby says.
"Since the base date of January 2010, 13 hotels have sold in the Sydney CBD, representing 4,825 or 45 percent of the 4 & 5 star hotel rooms," he said. "100% of these rooms were bought by offshore groups."
In January 2010, 69 percent of four- and five-star hotel rooms in the Sydney CBD were foreign-owned; as of today this proportion is at 88 percent. Despite a shrinking market share, Singaporean investors remain the dominant players in the market, accounting for 28.7% of all Sydney CBD 4 & 5 star hotel rooms, down from 32.1 percent in January 2010.
Whitby said that Chinese ownership of CBD 4 & 5 star hotel rooms in Sydney has increased from zero in January 2010 to 1,342 rooms as of this month (12.4 percent of CBD room stock). This increase has stemmed from recent acquisitions including Hilton Sydney, Sheraton on the Park and The Westin Sydney (50 percent).
Other Asian investors active in the Sydney CBD four- and five-star hotel market include Malaysia and Hong Kong, who currently own 1,932 and 649 hotel rooms respectively.
Like many Asia-Pacific markets, supply in Sydney is an issue.
"Whilst we anticipate room nights demand to increase and development of new hotel capacity to remain a challenge due to the differential between development cost and value on completion, we expect appetite for hotel assets to strengthen," Whitby said.
This demand growth will be headed by Asian high-net-worth individuals, operators and institutional investors, he added.