There’s a lot of untapped potential in Australia for hotel investment, but also a lot of red tape.
Investment executives who spoke on a panel titled “The Capital Stack” at the recent Australia and New Zealand edition of the Hotel Investment Conference Asia-Pacific highlighted two major, recent acquisitions in Australia's hotel space: a record-setting single-asset transaction in downtown Sydney and a private-equity firm's investment into a major hotel-casino player.
In August, Baring Private Equity Asia announced its affiliated real estate funds, BPEA Real Estate, acquired the 587-room Hilton Sydney for 530 million Australian dollars ($343.9 million). The deal was the largest single-asset transaction on record in Australia's hospitality sector.
Paul Gately, managing director of Baring Private Equity Asia, described the Hilton Sydney as “a hell of an asset” and added the property was a perfect fit for the firm’s “opportunistic” buying streak.
“We did some homework. It was all waiting for the right deal. There’s always an upside if something is occupied at 1%," he said. "It’s a [central business district] asset, and we have confidence in the Sydney market that it will pay off."
Globally, new hotel development has slowed, and the same conditions are present in Sydney's hotel market, said Tony Ryan, principal of Ryan Capital Partners.
“Sydney doesn’t have a lot of supply coming online, so there’s not a lot of competition there,” Ryan said.
According to Gately, the projected yields on the Hilton Sydney at the time of purchase were based on 2019 performance benchmarks from STR, CoStar’s hospitality analytics firm.
“But we haven’t predicted we’ll get back to those rates until year three, so we know that there’s still a little uplift to go,” he said.
Gately said he is seeing a “tangible comeback in conferencing and corporate business" in Sydney over recent weeks, and Baring Private Equity Asia is counting on that.
He described the "four floors of conferencing rooms and such” as the hotel’s “engine room.”
The HICAP conference was held at the Sofitel Sydney Darling Harbour, which is part of Schwartz Family Hotels, Australia’s biggest private hotel group. The company's director Jerry Schwartz said the Sydney Harborside district is “the new future center of Sydney.”
He added the hotel was performing well despite the lack of Chinese visitors.
“I don’t expect the Chinese to travel out of their country until mid-next year, which gives an opportunity to focus on the India as an emerging market,” he said.
Blackstone Invests in Crown Resorts
In June, Blackstone announced it would acquire the gaming-hotel Crown Resorts brand for 8.9 billion Australian dollars. Crown Resorts has properties in Melbourne, Perth and Sydney, and Ryan called the deal a “monster transaction.”
It was the “biggest deal [and] public company takeover,” he added.
The long-term gains from the Blackstone-Crown Resorts deal will take some time to manifest, Ryan said. He added that the U.S. private-equity firm bought 10% of Crown Resorts, but then had to sit on that number over five separate bids for the rest of it.
“The happy end was that Blackstone finally got the board to accept the offer at about 35% premium on pre-COVID numbers,” he said.
Chris Tynan, head of real estate in Australia at Blackstone, said the deal was the firm’s “largest investment we’ve had to date in Asia."
"Because of the risks, the size of the capital investment, regulators took us through our paces … it did take 18 months to get the approval,” he said.
At the time, the gaming operator also was embroiled in a money-laundering scandal.
Ryan agreed it was a “very high risk” transaction, adding that “16% to 17% of the asset” could have been lost to class-action suits, he said.
“Up to a billion dollars of potential claims could be made against you if you bought this asset, and you went and did it,” Ryan said.
Tynan said the risk paid off despite a “two-year, running water torture investment committee experience at 2 a.m.” because of the time difference.
“We got three iconic assets that are either monopolies or duopolies in Sydney’s case," he said. "The biggest single employer in Melbourne, the biggest single-site employer in [Western Australia]. And the opportunity in Sydney was to also curate a series of brands and experiences on the non-gaming side."
Tynan said Blackstone has solid casino expertise. For instance, it sold The Cosmopolitan on the Las Vegas Strip to MGM Resorts International in May for $4 billion.
“If we had not had the experience operating the assets and being able to bring some of those key personnel into positions at Crown, than we probably would never have gone beyond 10%,” Tynan added.
About 10% of Blackstone’s investments are in hospitality, he said.
Blackstone wants to reestablish Crown as an “iconic destination for travel and leisure,” Tyanan said, adding he thought Crown’s journey is “a lot less murky now.”
Farther Afield
Beyond Australia's major cities, hotel investors are keeping busy. Siddhant Jhunjhunwala, vice president at KSL Capital Partners, pointed to KSL's habit of buying operating resorts such as the Silky Oaks Lodge in Queensland, near Daintree National Park.
“People are working harder to get better leisure experiences, so even though these properties are quite remote, we’ve seen tremendous growth in both domestic tourists and from the U.S.,” he said.
Jhunjhunwala said KSL “is almost 100% hospitality-centric … [and] wants a share in the domestic market and [has] willingness to pay top dollar."
“Right now, 80% of clients are in the domestic market, and they’re ready to pay in the range of 1,500 to 2,000 Australian dollars per night. Much like other luxury leisure properties, there has been a 20% to 30% rise in pricing,” he said.
GCP Hospitality, part of Gaw Capital Group, is similarly opportunistic about Australia, CEO Erwann Mahe said.
“The way we look at business is pretty much if there’s an opportunity that we feel that’s where we want to be, that’s where we go,” Mahe said. “Whatever’s in the market, whatever is complex, and whatever we can turn into a success story.”
One recent asset that fit that agenda is the Novotel Melbourne Preston, which GCP Hospitality transformed after an “operational deal” with Accor.
Gately said one outcome of the pandemic is that “Australian hospitality can sustain the business on its own.”
Mahe agreed “it’s the new normal to see deals come back."
There are still deals to be found in Australia's hospitality sector, Jhunjhunwala said.
“Australia has, we think, a lot of untapped potential,” Jhunjhunwala said. “In our view, very long-term. Australia has strong domestic visitation and very strong inbound. I don’t think Australia’s resorts have done a good enough job to service this population.”
He added the main barrier to investment is that “the spread has gone down.”
“And that’s what’s keeping us out of the market, but at the same time, that kind of interest also drives price recovery. So, I want the problem to go away, but not too much,” he said.
Gately said the absence of Chinese capital is one of the obstacles to current investment and growth in Australia, along with red tape.
“There’s just so much to satisfy in terms of documentation, compared to Japan for example, to be more competitive,” he said.