The impact of a recent deterioration in Australian and New Zealand hotel trading conditions, combined with a continuation of adverse capital markets for all categories of real estate have been highlighted by the findings of a leading hotel industry survey. However the survey also revealed some surprising findings that provide cause for hope in the investment outlook.

The Hotel Capital Survey (in its 8th year) of leading local and international hotel investors was undertaken over recent months by industry specialists HTL Capital Advisors. The full Survey findings will be released at the Australian, New Zealand & Pacific Hotel Investment Conference (ANZPHIC 09) that will be held on 2nd and 3rd July 2009 ().

The Survey confirms that sentiment has fallen dramatically in the past year, with 61% of investors declaring the investment outlook to be “reasonably negative” to “very negative”, which compares to 75% of investors assessing the outlook to be “reasonably positive” to “very positive” when the last Survey was undertaken in early 2008. The industry’s relative standing compared to other real estate sectors has also suffered a pronounced fall, with 53% of investors in 2009 declaring hotels to be “somewhat less attractive’ than other real estate (such as office buildings and retail). This compares to 58% of investors indicating in the 2008 Survey that hotels were more attractive than other real estate.

The reasons for current investor concerns were explored in a Survey question that requested respondents to nominate the largest threats/constraints for investment in the year ahead from a list of 20 possibilities. Predictably the economy was a leading factor however the response that ranked highest (by a significant amount) was the “shortage of debt or equity”. Other major factors were “prices of hotels being too high to do deals” and “room discounting risk”.

“This quartet of issues – ranging from capital constraints and asset pricing through to economy led demand and pricing problems, sums up the major challenges presently facing the industry and respondents are not expecting any short term improvement in these key areas” HTL Capital Advisors Managing Director, Mr John Smith said. He revealed that two thirds of investors in the Survey expect the current hotel trading downturn to last 1 to 2 years, whilst another 22% expect a 2 to 3 year horizon.

Consistent with this negative outlook, 44% of investors also expect a downturn in hotel investment conditions for a 1 to 2 year period whilst a further 28% expect a 2 to 3 year duration for the investment downturn.

Of some small comfort to hotel operators will be the fact that, at least to date, investors don’t seem to be blaming their managers for the gloomy outlook – amongst the listed possible causes for the negative outlook, the option of “hotel mismanagement” was not selected by any of the investors.

Reflecting the negative short term outlook, investors forecast 2009 to be only the 6th best year for hotel trading in the past decade, which compares to the previous year’s Survey in which 2008 was forecast to be the 2nd best year of the decade. Investors also forecast 2009 to be only the 7th best year for investment returns, whereas in the previous year’s Survey, 2008 was forecast to be the 3rd best year of the decade.

Whilst the investment outlook might not be promising, investors nonetheless don’t appear to be either panic sellers or likely to switch away from the sector, with 47% of investors declaring hotels a “hold” in 2009 and an almost equal number (42%) indicating a desire to “buy” (presumably attracted to the possibility of value buying opportunities and an expected increase in distressed hotel sales). Only 11% indicated an intention to “sell” in 2009.

For those hotel owners that do have to sell, the Survey findings will make for disappointing reading with respondents suggesting that a steep decline in values may have occurred recently. Substantial increases in capitalisation rates were reported across all sixteen Australian and New Zealand markets surveyed, with the rate of increases ranging from 110 to 170 basis points in the prime markets of Sydney, Brisbane, Melbourne and Perth; and from 200 to 230 basis points in the resort markets of the Gold Coast, Sunshine Coast and Cairns/Far North Queensland. New Zealand markets reflected increases from 220 to 320 basis points. The lowest increase across all sixteen markets was Darwin (100 basis points increase) and the highest increase was for the Whitsundays (390 basis points increase). Overall, the year on year increases were the highest reported since the Survey began.

“If sales were made on the basis of the indicated capitalisation levels, it would amount to a major correction in hotel values in the region, however past experience has shown that general market sentiment is not necessarily reflected in individual transaction terms and in any event since only 11% of Survey respondents have declared that it’s time to sell, currently advised capitalisation rates may not be demonstrated in many forthcoming hotel sales” Mr Smith noted. “What the Survey findings do clearly confirm however is that the market direction is sharply down, even if the jury is still out on the extent of the decline” he added.

Brisbane and Sydney were the most desired investment markets in Australia and New Zealand, with Brisbane ranking first for the first time since the Survey began. Perth ranked third, whilst Melbourne, facing a period of over supply as a result of recent and pending new accommodation construction, was placed a long way back in fourth place (its worst ever ranking). Cairns/Far North Queensland had the dubious distinction of yet again being ranked the least desired market for hotel investment (by a large margin), whilst the Whitsundays and Queenstown also remain well out of favour with investors. Looking forward, one bright ray of hope for investors is the likelihood of limited additional room supply beyond those funded projects presently under construction. The expected lack of funding for further hotel development was reflected in 61% of investors in the Survey assessing that the availability of debt for this purpose would “significantly worsen” in the next 12 months (from an already low level). This compares to 39% of investors expecting a significant worsening of debt availability for existing hotels (ie for acquisition or re-financing). However not all investors in the Survey have a gloomy outlook on capital with almost a quarter of them expecting the availability of both debt and equity for existing hotels to “marginally improve’ over the next year.

“Overall whilst many of the Survey findings are predictably disappointing given current market conditions they are actually better than what we expected and our assessment is that thus far, investor and lender industry sentiment appears to have been shaken, but not broken” Mr Smith said.

About HTL Capital Advisors
HTL Capital Advisors is a network of offices created by principals of Horwath HTL in various cities around the world to provide transaction and capital raising services to hotel industry participants. HTL Capital Advisors works in parallel with Horwath HTL offices to provide a comprehensive suite of services for clients locally, regionally and globally, under a brand without boarders principle.

John Smith & Vasso Zographou
HTL Capital Advisors