Australian M&A hotel market: A perspective
The Australian hotel M&A market boomed in 2021 with total transaction value amounting to $2.8 billion, a nearly 200% increase on 2020 and surpassing the 5-year average investment value, and reached $1.7 billion of transaction value in the first nine months of 20221.
Sydney has been the most active hotel investment market in Asia Pacific as investors seek to acquire prime upscale hotel assets within this tightly held market, taking a medium-term view beyond the subdued 2022 performance. Chinese investors, who aggressively expanded into Australian hotel markets over the past decade, have been the net sellers of several bigger hotel and hospitality properties recently, such as the Hilton Sydney, Primus Hotel and InterContinental Double Bay, as the Chinese government put the brakes on further capital investment by Chinese enterprises in offshore for luxury projects.
Private equity real estate firms such as Blackstone, KKR, Brookfield and Baring have been actively pursuing opportunities in the hotel sector as the bid-ask spread narrows. In late June 2022, Blackstone completed the $8.9b takeover of Crown, whose portfolio includes three premium resort and casino properties in Melbourne, Perth and Sydney. This was Blackstone’s largest transaction in the Asia Pacific region and also the largest completed M&A transaction in the Australian hotel and hospitality market in the year.
Table: Recent notable Australian hotel & hospitality M&A transactions
Source: Deloitte Market Intelligence
The Australian tourism market outlook
According to Deloitte’s Tourism Market Outlook 2022 Edition 2, domestic tourism is now in full swing while international arrivals are going to take a while longer to recover to 2019 levels. The recovery from the pandemic is facing an array of challenges including persistent high inflation, rising interest rates, and a volatile geopolitical environment which together have raised the risk of a global recession. While the Australian economy is better placed than most, the domestic growth outlook remains finely poised. Although the tourism sector’s recovery is accelerating, headwinds mean the sector should brace for potential turbulence.
Domestic tourism bounced back more quickly than expected, with demand picking up significantly across the first half of 2022. The appetite for and momentum around domestic travel is expected to continue in the short term, and to have reached 2019 levels when data about the end of 2022 is known. Domestic overnight trips are forecast to surpass 2019 levels in early 2023, reaching 124 million trips with growth then moderating to reach 132 million overnight trips by the end of 2024.
There has been steady growth in inbound travel to Australia since the full reopening of borders in early 2022. In the period to November 2022, Australia welcomed 3.0 million international visitors, fuelled initially by those visiting family and friends. Holiday arrivals have returned more slowly but started to pick up pace in the September quarter.
International arrivals were estimated to have reached around 3.6 million in 2022 (approximately 38 per cent of 2019 levels). 2023 will see a significant lift, with international arrivals forecast to reach 7.3 million (doubling 2022 arrivals), with growth then expected to moderate in 2024 as international arrivals reach 9.3 million, back around 2019 levels. With the Chinese government’s relaxation of travel restrictions from early 2023 (and in time for the Lunar New Year holidays) along with what would appear to be a thawing of relations between China and Australia, it is expected that Chinese travellers to Australia will start to increase and international tourism may recover to the 2019 levels sooner than initially expected.
Chart: Outlook for domestic overnight trips (000)
Chart: Outlook for international trips to Australia (000)
Source: Deloitte Access Economics' Tourism Market Outlook 2022 Edition 2, December 2022
The Australian hotel market outlook
As lockdowns lifted and travel restrictions eased in late 2021, hotel demand started to recover. Hotel occupancy across both capital cities and regional destinations showed a steady upward trend throughout 2022, with regional destinations tracking ahead in the recovery and surpassing 2019 levels during key holiday periods of April (Easter) and June (school holidays). As at November 2022, occupancy rates across Australia were hovering just below 2019 levels, and are expected to further improve across Australia’s summer holiday period.
The improvement in hotel occupancy has buoyed hoteliers who were already seeing strong growth in average daily rates (ADR). In fact, ADRs have been outstanding, with average rates across Australia achieving 2019 levels in 2021 and breaching pre-pandemic levels in the first quarter of 2022. However, the uplift in room rates for capital cities lagged regional destinations given higher exposure to international demand and corporate travel demand which is returning more slowly. Average room rates are expected to remain high leading into 2023 as positivity and confidence for travel continues to strengthen.
Chart: Hotel occupancy and average daily rates – rolling seven-day average
Source: STR
Note: Major markets include Sydney, Melbourne, Brisbane, Perth, Adelaide, Hobart, Darwin, Canberra
The Australian Hotel M&A outlook
Being hit hard by pandemic travel restrictions and border closure, the hotel sector was once considered to become a target for investors seeking opportunistic distressed deals. However, with lower cost of capital during the period, it was not the case as banks held back on foreclosures and owners held on in the hope of market recovery as domestic travel picked up.
Nevertheless, with significant interest rate increases starting from May 2022, the removal of government assistance for impacted owners and rising inflation, bank patience may dry up. Hotel owners under tight cash flow pressures might be forced to sell. In addition, given the labour-intensive nature of the sector, labour shortages have been a challenge for the industry and may have a direct impact on profitability and asset pricing in the short to medium term.
Offshore capital, which was a major player in Australian hotel M&A activity previously but quietened during the COVID-19 period, has recently re-emerged motivated by the opportunity to acquire trophy hotel assets in the tightly held hotel space. The trend is expected to continue in the near future, especially with the active pursuit by global private equity real estate firms as evidenced by recent hotel M&A transactions by KKR, Baring and Blackstone.
Among the expected increasing trend of hotel transactions in 2022, the resort subsector may attract the most interest being likely the quickest to rebound given increasing demand for leisure travel after a prolonged lockdown period and also increasing international arrivals fuelled by lower AUD and the Australian government efforts to boost international travel, such as Sydney WorldPride, SXSW, FIFA Women’s World Cup 2023, Vivid Sydney, etc while urban hotels may be a harder sell as the MICE [meetings, incentives, conference and exhibition] market may not fully recover until 2024.
Our cautiously optimistic outlook for Australian hotel M&A is generally in line with our report on the Global 2022 real estate M&A outlook. The report noted that global M&A activity in the hotel and leisure sector has started to show promising signs of recovery after two challenging years despite high inflation and interest risks and labour shortage headwinds. With the relaxation of Chinese travel restrictions in early 2023 and pent-up demand for domestic travel, Australia’s tourism and M&A activities in the Australian hotel sector are expected to strongly recover in 2023.
Key take aways
- Australian hotel M&A deal volumes have been strong in 2021 and 2022 and have had a great start in the new calendar year 2023.
- The Australian hotel market also started to show signs of recovery but will take time to recover to pre-COVID 19 levels.
- The resort / leisure subsector may attract more M&A investors and recover first before the MICE subsector.
- Interest rate, inflation risks and the labour shortage are significant challenges for the sector.
1Savills, Hotel market overview Q3 2022.
