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Increased Investor Interest In The Hotel Sector

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Increased investor interest in the hotel sector.

The hotel sector could be set to see further demand from investors as interest rises. According to CBRE, Australian hotel sales reached $2.14 billion in 2022, the second-highest transaction volume on record.

The hotel sector was one of the most in-demand assets during the pandemic, with a record 53 hotel sales across Australia valued at over $10 million in 2022, which was 39% above the 10-year average.

CBRE's Australian Head of Hotels Research, Ally McDade, said as economic conditions stabilise, we should see capital markets benefit from greater investor certainty, translating into more demand for hotel assets.

CBRE Regional Director of Hotel Valuations, Troy Craig, said domestic travel is also likely to continue driving the Australian tourism industry.

"Occupancy levels in domestic demand-dominated cities are expected to edge upwards from already strong levels, while Sydney and Melbourne should continue to see occupancy gains as inbound demand recovers," Mr Craig said.

According to CBRE, while short-term overseas arrivals remain 40% below pre-pandemic levels, the reopening of China's borders is likely to see Australia's inbound tourism economy fully recover in 2023.

CBRE's forecast reveals that the hotel market's expansionary phase is set to peak in the next 12 months, with around 8,400 rooms to be delivered across the country's major hotel markets in 2023 and 2024. Following this wave of additions, higher debt and construction costs are anticipated to suppress the hotel development pipeline, largely limited to key strategic sites with mixed-use appeal.

Meanwhile, high inflation and elevated interest rate levels will place upward pressure on yields and IRR expectations according to Ms McDade.

"Improving tourism demand fundamentals and impressive performance indicators are likely to cushion any impact of higher credit-funding costs," she said.

Despite this, CBRE is forecasting moderate Average Daily Rates (ADR) growth over 2023 and Mr Craig said that most city markets will still post gains as hotel operators maintain strong rate policies in favour of returning to pre-pandemic occupancy levels.

For now, the hotel sector has been largely insulated from the effects of rising inflation due to recovering occupancies and strong growth in ADR.

CBRE's national occupancy rate averaged 65%, just 10% below pre-pandemic levels and ADR rose 24% over the year to $228, outpacing 2019 rates by 23%. Domestic travel nights have also reached or surpassed pre-pandemic levels in Queensland, South Australia, Western Australia and Tasmania and spending in these states is up by approximately 40%.

This trend is benefitting Australia's gateway cities of Sydney and Melbourne, which have recorded the strongest year-on-year growth rates in relation to both ADR and occupancies, aided by a recovery in corporate travel and international travel.

CBRE said it’s optimistic about the future of the hotel industry and expects to see investors return as well as the reopening of borders, a growing tourism industry and the addition of new hotels all being factors contributing to the positive outlook of the industry.

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