The Valuers' View - Hotel Property
The Valuers’ View
To assist lenders, investors and owners, the Valuers at m3property have contributed their opinions on the current performance of the property markets and where they expect those markets to head over the short to medium-term.
The survey examines nine property sectors, looking at the key measures of market yields, internal rates of return (IRRs), rents incentives and value. Occupancy rates and average daily room rates were added to the survey for the hotel sector. Indicators including zeros indicate stability was also selected by respondents.
The key themes that will drive the real estate markets in 2021 will be:
Economic recovery as restrictions ease and confidence returns
Low population growth, but likely to rise as the vaccine rollout continues and borders re-open
Record low interest rates
Continued focus on Environmental, Social and Governance (ESG) factors when investing and managing portfolios
Growth in inflation resulting in rent growth for landlords, where rent increases are linked to inflation
The gap between prime and secondary yields is likely to widen
Government spending to remain high, despite stimulus starting to reduce
‘Flight to quality’, flexible terms and convenience expected to continue to drive tenant demand
Rebound in investor demand due to cashed-up investors, low cost of debt and global interest in strengthening countries with stable property returns
Continued investor focus on defensive assets, particularly in sectors with government backing and for properties with long WALEs and minimal need for capital expenditure
Despite strengthening residential markets, the official cash rate is likely to remain on hold in the short to medium-term due to continuing economic uncertainty, low wages growth and labour markets not being at full capacity. The appearance of an asset price bubble is more likely to be remedied with macro-prudential constraints on lending rather than rising interest rates, which could derail the economic recovery if used too early.
If the post-COVID-19 economic recovery does surprise on the upside resulting in asset price bubbles, full employment and rising wages, this would drive up inflation, bond yields and the cash rate. This scenario would represent a risk to the property markets as it could flow through to the cost of capital and yields. That said, the RBA is likely to continue to implement yield curve control to keep bond yields in line with the economic recovery and a strengthening economy would provide stronger cash flows and vacancy would reduce.
The hotel sector was one of the most impacted at the pandemic’s start, with full lockdowns drying up cash flows overnight. With restrictions easing over much of 2020 and hotels taking on the essential job of housing returning travellers, occupancy increased slowly.
While it was thought that many people would transfer their overseas holidays domestically, with state border closures implemented on short notice, consumers lost confidence in booking interstate trips. The deployment of the vaccine is likely to result in increased confidence in domestic borders remaining open and, therefore, should see the tourism sector stabilise in the second half of 2021.
- There have been limited hotel transactions over the past 12 months. However, the sector has been surprisingly resilient, despite subdued cash flows. The sales that have transacted, to date, have reflected nominal softening in yields, and investors remain upbeat in their long-term outlook for the sector.
Occupancy and Room Rates
- The market has been significantly fragmented, with the inner city hotel market remaining soft and impacted considerably by COVID-19. The regional hotel market, which is more reliant on domestic travellers (particularly intrastate vacationers), has shown significant strength, and even growth, over the past six months as travellers substituted international for domestic, largely intrastate, trips.
Rents and Incentives
- Face rents have softened slightly during the pandemic. However, rental relief arrangements have largely cushioned the sector and helped limit the impact on face rents.
- Incentives were required to achieve deals in 2020, but these are forecast to reduce as confidence in the sector returns.
- After a difficult 2020, hotel values are likely to stabilise over 2021, as border uncertainty reduces with the roll-out of the COVID-19 vaccine.
- According to the Tourism Research Australia State of the Industry 2018-19 report (March 2020), Australian spent $64.2 billion on outbound trips. With certainty returning regarding borders, a larger portion of this overseas spend should be consumed in Australia in 2021 than in 2020. The resulting increase in activity is likely to buoy investor confidence in the sector.