JLL: Why Chinese investment in Australia's hotels is likely to grow

(Hilton Sydney)

A new report from JLL indicates that investors from China will continue to play an increasingly important role in the tourism real estate industry in Australia. Chinese investment into the Australian hotel property sector has been prolific over the past three years and, based on recent activity, is likely to grow.

"The latest tourism figures released by the Australian Bureau of Statistics paint a remarkably positive picture of Chinese tourism to Australia," said Peter Harper, SVP of investment sales in JLL's Hotels & Hospitality Group. "Not only did the Chinese inbound figures pass the 'magic million' mark in the past year—an increase of over 19 percent on the year to April 2016—but Chinese tourists now account for 23 percent of total expenditure (over AU$7 billion) by overseas visitors."

Fewer than 350,000 Chinese travelers came to Australia in 2009, and those that wanted to visit could only fly from five Chinese cities. Today, they can fly direct from 10 cities, and the prospects for further expansion in the future were highlighted by last month's announcement by China's biggest private airline operator, HNA Aviation Group, to take a 13-percent (AU$159 million) stake in Virgin Australia. This was followed shortly by China's Nanshan Group's announcement that it would buy Air New Zealand's 19.9-percent stake in Virgin for AU$260 million.

Chinese investors have picked up some of the cream of Australia's hotel crop in the past few years, including Sunshine Insurance agency's AU$463 million purchase of Sydney's Sheraton on The Park, followed closely by an entity associated with Bright Ruby's purchase of Hilton Sydney (pictured above) for AU$442 million. Chinese investors also acquired the Park Hyatt Melbourne and transformed the former Sydney Metropolitan Water Sewerage and Drainage Board headquarters in Pitt Street, Sydney, into the five-star Primus Hotel.

And most recently, Chinese group Tianlong Ribbon Property Unit Trust was confirmed as the buyer of what The Australian is calling the country's largest hotel transaction. The deal—which involves the ­development of the 402-room W Sydney hotel—was made between private developer Grocon, take-out party Tianlong Ribbon, government landowner Sydney Harbour Foreshore Authority and U.S.-based Starwood Hotels & Resorts Worldwide.

While these acquisitions demonstrated the Chinese appetite for buying premium "trophy" assets in central-business-district locations, the purchase of the Adina Mascot, Clarion on Canterbury Melbourne, Esplanade River Suites Perth and Il Mondo Boutique Hotel Brisbane also reflects a willingness to invest in a range of hotel assets across emerging commercial districts or fringe precincts.

While the Chinese economy has cooled and Australian governments have become more restrictive about Chinese investment into some real estate sectors, the flow of funds into tourism continues.

"Clearly, the Chinese are taking a wide-ranging and long-term view when it comes to the Australian tourism market and this has been reflected in a series of astute and strategic purchases of Australian assets and business," Harper said. "Australia's reputation for economic stability, the record breaking performance of the hotel sector in cities such as Sydney and Melbourne, and ever-increasing air links have fueled the interest in Australian hotel assets by Chinese investors."

Reasons for Caution

But not every planned hotel project from Asian investors in Australia has come to fruition. In April, two major hotel portfolio sales to Asian investors—that of M&L Hospitality and the Ascendas Hospitality Trust—were called off. Singapore’s Kum family scrapped its $1.5-billion sale of the bulk of its M&L Hospitality hotels portfolio in spite of "hefty offers" for its key properties. These include one of Sydney’s largest hotels—the Four Points by Sheraton Sydney, which is being remade into a major hotel and office complex. The 2,089-room M&L portfolio also included the Travelodge Docklands in Melbourne, the Hilton Auckland, Christchurch’s Chateau on the Park, and Sydney’s Swissotel. At the same time, the rival Ascendas Hospitality Trust, which has a hotel portfolio across the region that is valued at $1.4 billion, was also taken off the market. 

While Harper notes that the tourism and hotel industry will always be cyclical, and that "there can be surprises along the way," the experience over the past three years suggests that China's future in Australia should be long-term and sustainable, even if the growth levels off down the line. 

Photo (c) 2016 Hilton Worldwide