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market reportMarch 2017

savills.com.au

Savills Hotels

02 Introduction

04 Performance snapshot

07 Australian cities overview

12 Sales trends

22 Savills key contacts

02 Introduction

04 Performance snapshot

07 Australian cities overview

12 Sales trends

22 Savills key contacts

Contents

Introduction 2

The eastern seaboard markets of Sydney and Melbourne are the standout performers in 2016 with the continued achievement of strong market KPI’s against a backdrop of compressing yields.

As a result, the hotel property class is currently outperforming other property classes in the Australian market.

With International and Domestic visitors growing 11.5% and 5% respectively in CY 2016, the hotel industry has not seen growth at this level since the Sydney 2000 Olympics. Chinese visitor growth of 22% is the dominant contributor to this stellar performance, which is being driven by a growing Chinese middle class having access to increased air capacity between China and Australia, as well as the relatively low Australian dollar making the country a more affordable destination.

In a very positive sign for the depth of the market, the stellar international inbound growth has been experienced across a wide range of markets, with inbound visitor growth from most established Asian markets, as well as the US, above 15%.

Tourism Research Australia’s 10 year forecast provides a positive outlook for continued growth with International visitor nights and Domestic visitor nights expected to grow at 5.6% and 3.1% annually respectively. Australia can expect to see increased room night demand nationally for the foreseeable future.

Hotels – the highest returning real estate asset class

3

Source: MSCI

ImprovingHotel

Healthcare

Industrial

Office

Five-year annualised return

12-m

on

th r

etu

rn

All Property

Retail Slipping

20%8%8%

10%

12%

14%

16%

18%

20%

10% 12% 14% 16% 18%

Forecast world GDP growth of 3.5% underpinned by China’s “steady as she goes” 6.5% GDP forecast and USA’s expected GDP improvement of 2% - 3% under Trump's “Make America Great Again” mantra, augurs well for Australia’s economic outlook. In this regard the high level of corporate movement between Sydney and Melbourne and the unprecedented infrastructure projects underway in those states is also driving healthy GSP growth.

Forecasts from Deloitte Access Economics point towards potential interest rate rises in USA, strengthening the US Dollar against the Australian dollar to a forecast range of between US65c and US70c. Should this occur, Australia will become more affordable, promoting further tourism growth and increased foreign direct investment.

Hotel capital markets have once again been dominated by eastern seaboard transactions, not surprisingly given Sydney and Melbourne are among the strongest performing hotel markets with the largest populations in Australia. The scarcity of hotel product for sale, particularly in the CBD markets, matched against a wall of foreign and local capital searching for opportunities, continues to drive yields firmer within a highly competitive transaction environment. Should inflation and interest rates remain low, capitalisation rates will continue on their downward trend for at least the next 12 months.

Graph 1 – Hotels outperforming other property classes in Australia

Conversely the mining dependent cities of Perth, Brisbane and Darwin have not fared so well following the cessation of the resources boom which drove capital investment, with market KPI’s also being negatively impacted by new supply.

CY 2016 ended with one group of key markets performing strongly against a backdrop of positive economic indicators and strong trading fundamentals, as compared to the mining dependent cities which have seen falling market KPI’s.

The following market report provides further detailed analysis on both trading and capital market performance.

We hope you enjoy the latest addition of our hotel research and find it insightful. Please feel free to contact any member of our expanding team whose details can be found at the back of this research.

Michael SimpsonManaging DirectorSavills Hotels

4

Performance snapshot

The Australia wide market achieved a RevPAR for CY 2016 of $139, which represented YOY growth of 2.2%. All Australian cities posted RevPAR growth except Perth, Brisbane and Darwin with RevPAR declining 9.3%, 8.7% and 9.6% respectively1. The decline in performance of these markets is primarily a result of the curtailment of resource investment activity following

Australia & City Hotel Market Operating Performance

Graph 1 – Australia and City Market KPI'sYear Ending December 2016

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

50.00

100.00

150.00

200.00

250.00

Sydney Melbourne Perth Australia Hobart Gold Coast Canberra and ACT

Cairns Adelaide Brisbane Darwin

ADR CY 2016

RevPAR CY 2016

Occupancy CY 2016

Sydney Melbourne Perth Australia Hobart Gold CoastCanberra/

ACTCairns Adelaide Brisbane Darwin

Occ Occ Occ Occ Occ Occ Occ Occ Occ Occ Occ

85.1% -0.1% 83.4% 1.1% 79.0% -2.8% 75.7% 0.9% 82.6% 2.5% 72.9% 1.0% 74.5% 1.6% 83.4% 3.8% 77.1% 2.4% 71.9% -2.0% 67.2% -0.4%

ADR ADR ADR ADR ADR ADR ADR ADR ADR ADR ADR

220.50 4.5% 184.94 -0.4% 183.34 -6.7% 184.65 1.3% 168.29 2.3% 185.64 6.0% 166.17 2.0% 139.95 7.8% 149.80 0.5% 160.15 -6.8% 154.82 -9.3%

RevPAR RevPAR RevPAR RevPAR RevPAR RevPAR RevPAR RevPAR RevPAR RevPAR RevPAR

187.55 4.4% 154.20 0.8% 144.90 -9.3% 139.84 2.2% 139.06 4.8% 135.29 7.0% 123.79 3.7% 116.65 11.8% 115.56 2.9% 115.07 -8.7% 104.10 -9.6%

the end of Australia’s resource boom, and increases in room supply. For the remaining performing markets, growth in market KPI’s can be attributed to an increase in leisure demand from domestic and international markets, stimulated by a lower Australian dollar and stronger economic activity underpinned by construction and infrastructure projects.

1 Source: STR

Source: STR

6

Australia received over 7.4 million international visitors (up 11.5%) and 251 million international visitor nights (up 3.8%) for the year ended 30 September 2016 (refer to top 10 international visitor markets chart). Tourism Research Australia has recently released International visitor numbers for CY 2016 which totalled 8.3 million representing a healthy YOY growth of 11%. The New Zealand market continues to contribute the highest number of visitors to Australia however, the China visitor market recorded YOY growth of 21.9% enabling it to exceed 1 million visitors, who more importantly,

1 Source: Tourism Research Australia

USA Singapore

Japan

New Zealand

Korea

China UK

Hong KongIndiaMalaysia

Share of Total Visitors ('STV')

Total Visitor Nights ('TVN '000)

Total Visitors ('TV '000')

Share of Total Visitor Nights ('STVN') Visitor Nights Annual Growth YOY ('VNAG')

Visitors Annual Growth YOY ('VAG')

Graph 2 – Top 10 International Visitor Markets Year Ending September 2016

spend an average of 40 nights in Australia when touring down under. As a result, China produced 43 million room nights representing almost three times the volume produced by New Zealand1.

Tourism Australia have attributed growth in Chinese tourists to the following factors:

� Streamlining visa application processes

� Aggressively targeting China’s rapidly emerging middle class

� Increase in air capacity from secondary cities in China. For the year ending September 2016, direct

capacity to Australia from China increased by 37%, with eight airlines operating 25 direct routes to Australia

China visitation growth is expected to continue, following the China-Australia open skies air services agreement signed in December 2016, which will add new routes together with the removal of capacity restrictions thereby increasing further the reciprocal visitation between both countries.

Save for UK, European countries were absent from the top 10 international visitor markets, with most notably limited growth in arrivals from France and Italy.

International Visitors

TV '000 1 215STV 16.3%VAG 3.3%TVN '000 15 313STVN 6.1%VNAG -4.4%

TV '000 365STV 4.9%VAG 21.9%TVN '000 9 158STVN 3.6%VNAG 4.7%

TV '000 1 093STV 14.7%VAG 21.9%TVN '000 43 241STVN 17.2%VNAG 10.2%


TV '000 667STV 9.0%VAG 5.1%TVN '000 24 026STVN 9.6%VNAG -7.6%





TV '000 220STV 3.0%VAG 13.7%TVN '000 7 490STVN 3.0%VNAG -2.0%

7

International Visitors – Who Goes Where?

Of the 7.4 million international visitors to Australia to 30 September 2016, over 50% of those visited New South Wales, with Victoria and Queensland following at 35% and 34% respectively. Apart from Western Australia (12%) all other Australian states have a single digit share of visitors.

International visitors to Tasmania increased by 14.8%, albeit Tasmania represents the second least visited state (3%), marginally ahead of the ACT.

Share of total visitors for both International and Domestic Visitors exceeds 100% due to multiple state visits.

2 Source: Tourism Research Australia

Share of Total Visitors ('STV')

Total Visitor Nights ('TVN '000)

Total Visitors ('TV '000')

Share of Total Visitor Nights ('STVN') Visitor Nights Annual Growth YOY ('VNAG')

Visitors Annual Growth YOY ('VAG')

International visitors stay the longest in Western Australia with an average of 31 visitor nights, which compares to the Australian average of circa 23 visitor nights.

NSWInt'l Domestic

TV '000 3 760 29 069STV 50.5% 32.5%VAG 12.6% 4.5%TVN '000 87 071 94 129STVN 34.7% 28.5%VNAG 5.6% 4.4%

SAInt'l Domestic

TV '000 430 6 248STV 5.8% 7.0%VAG 9.6% 9.8%TVN '000 9 864 22 898STVN 3.9% 6.9%VNAG 7.0% 11.0%

VICInt'l Domestic

TV '000 2 630 21 671STV 35.3% 24.2%VAG 13.3% 2.3%TVN '000 59 927 64 031STVN 23.9% 19.4%VNAG 3.9% 1.9%

NTInt'l Domestic

TV '000 293 1 531STV 3.9% 1.7%VAG 4.6% 27.4%TVN '000 3 847 8 875STVN 1.5% 2.7%VNAG -12.6% 10.9%

QLDInt'l Domestic

TV '000 2 551 20 091STV 34.3% 22.5%VAG 13.1% 1.6%TVN '000 53 087 79 489STVN 21.2% 24.1%VNAG 5.0% -1.4%

TASInt'l Domestic


WAInt'l Domestic


ACTInt'l Domestic

TV '000 207 2 351STV 2.8% 2.6%VAG 11.2% 10.5%TVN '000 4 419 6 116STVN 1.8% 1.9%VNAG -13.2% -3.1%

Graph 3 – International & Domestic Visitors – Who Goes Where? Year Ending September 2016

Domestic Visitors Of the 89.4 million domestic visitors to Australian states, over 32% of those visited New South Wales, with Victoria and Queensland following at 24% and 22% respectively.2

YOY growth was largest in the Northern Territory at 27.4% which also boasts the highest average length of stay of circa 5.8 visitor nights which compares to the Australian average of circa 3.5 visitor nights.2

8

Australian cities overview

The following analysis in descending order of CY 2016 RevPAR achieved in a particular market, considers the economic and market fundamentals influencing current and future hotel performance.

Sydney’s strong performance is set to continue with occupancies reaching capacity during peak holiday and corporate activity periods, providing the opportunity for hoteliers to grow ADR. Sydney’s Luxury segment capitalised on the strength of the market achieving an occupancy of 85.9%, and ADR of $339 (up 7%), delivering a RevPAR of $291 (up 5.7%), which exceeded Melbourne’s Luxury segment RevPAR of $2711. The key factors underpinning Sydney’s current and expected future performance are a combination of buoyant economic metrics, strength in banking, finance, insurance, professional services and construction/infrastructure projects, which are collectively fuelling a tsunami of activity in Sydney.

The improvement in trading performance in a climate of compressing yields has ignited a new hotel development boom in Sydney, not seen since the Japanese inspired hotel boom of the 1980s/1990s.

The following table provides an overview of Sydney CBD’s current supply and hotel pipeline which indicates that an additional 4,000 rooms are under construction, approved and/or in planning and proposed, which would represent a 25% increase to supply. Sydney will welcome the Sofitel at Darling Harbour in Q3/2017.2

Notwithstanding, the anticipated increases to Sydney’s hotel room supply, with Sydney room night demand having grown an average of 2.8% in the last three years, our medium term forecast is that Sydney occupancies will continue to punch above 80% which will continue to provide an environment for room rate growth.

Graph 4 – Sydney Market KPI’sCY 2013 to CY 2016

Sydney: Occupancies to remain strong despite new supply

� Gross State Product A2016: $537bn (Growth 3.2%)

� Gross State Product F2017 – 2019: 2.4%

� Low unemployment rate A2016: 5.1%

� Low unemployment rate F2017 – 2019: 5.5%

� Sydney CBD Office Vacancy rates (absolute numbers as at 31/12/16): 6.2% (lowest compared to all capital cities) – Premium: 12.3% – A: 4.2% – B: 4.0% – C: 6.6% – D: 2.9%

� Office Construction Pipeline: – 2017: 84,000sq m – 2019+: 128,000sq m

� Sydney House growth (CY 2016 YOY): 16.8%

� Infrastructure projects of circa $20bn: – Sydney Light rail – Sydney metro rail – Barangaroo development – West Connex road connections – Darling Harbour Live

� Residential construction boom fuelled by a surge in Sydney’s housing prices.

� Low interest rates & low AU$ are stimulating financing and transaction activities which represent a significant contributor to NSW’s GSP

� Growing international tourists and foreign students (fuelled by low AU$) of which Sydney receives circa 50% of International Visitors

� An increase in international visitor nights (CY 2016 YOY): 5.6%

� An increase in domestic visitor nights (CY 2016 YOY): 4.4%3

Room Inventory Supply Pipeline

Inventory 2017 Opening Construction Approved/Planning Proposed

15,776 600 242 2,858 3003.8% 1.5% 18.1% 1.9%

Source: ABS/Cordell/Savills

66%

68%

70%

72%

74%

76%

78%

80%

82%

84%

86%

50

75

100

125

150

175

200

225

250

CY13 CY14 CY15 CY16

ADR $ RevPAR $ Occ %Source: STR

1 Source: STR2 Source: ABS/Cordell/Savills3 Source: Australian Property Council/Tourism Research Australia/Savills

City Occupancy % ADR $ RevPAR $

Sydney CY16 85.1% 220.5 187.55YOY Change -0.1% 4.5% 4.4%

State of the Nation

10

Melbourne is the second highest performing market in CY 2016 with an increase in occupancy for the fourth consecutive year. Conversely, ADR declined marginally suggesting that whilst occupancy remained strong, hoteliers were unable to grow rate during non-peak periods. As a result RevPAR remained relatively stable in CY 2016, when compared to CY 2015. The inability to significantly grow ADR in CY 2016 is also demonstrated by Melbourne’s Luxury segment which reflected steady YOY market KPI’s, achieving an occupancy of 89.5%, ADR of $302 and delivering a static RevPAR of $2711.

Melbourne’s construction boom of Residential apartments, commercial space and continuing development of Docklands, has also encompassed new hotel development. The following table provides an overview of Melbourne CBD’s/Docklands current supply and hotel pipeline, which indicates that an additional 8,562 rooms are under construction, approved and/or in planning and proposed, which would represent a 55% increase to supply2. Of course not all projects will proceed and the typical market dynamic of “first to market” entrants will quash plans for projects which have missed the market opportunity due to the inability to obtain bank funding.

Despite the strength and enduring nature of Melbourne’s events calendar and symbiotic corporate activity Melbourne enjoys with Sydney, we anticipate that Melbourne market KPI’s will be under pressure to match RevPAR’s of recent years as new supply enters the market.

Graph 5 – Melbourne Market KPI’sCY 2013 to CY 2016

Melbourne: KPI’s to falter with new supply


Inventory 2017 Opening Construction Approved/Planning Proposed

15,610 554 1,073 4,339 2,5963.5% 6.9% 27.8% 16.6%


ADR $ RevPAR $ Occ %

66%

68%

70%

72%

74%

76%

78%

80%

82%

84%

50

75

100

125

150

175

200

CY13 CY14 CY15 CY16

Source: STR



� Gross State Product F2017 - 2019: 2.6%

� Relatively Low unemployment rate A2016: 5.8%

� Relatively Low unemployment rate F2017 - 2019: 6.1%

� Melbourne CBD Office Vacancy rates (absolute numbers as at 31/12/16): 6.4% (second lowest compared to all capital cities)

– Eastern Core: 3.1%

– Docklands: 3.3%

– Flagstaff: 3.7%

– Civic Precinct: 5.4%

– Western Core: 2.9%

� Office Construction Pipeline:

– 2017: 40,200sq m

– 2018: 51,400sq m

– 2019: 165,000sq m

� Melbourne House growth (CY 2016 YOY): 13.1%

� Infrastructure projects:

– Western Distributor

– Monash Freeway upgrade

– City-link Tullamarine widening

– Melbourne Metro rail project

– Level crossing removal project



State of the Nation


Melbourne CY16 83.4% 184.94 154.2YOY Change 1.1% -0.4% 0.8%

11

Perth’s RevPAR declined for the fourth consecutive year, which follows the end of the “resources capital investment boom”. The decline in Perth’s overall economy is clearly evident in anaemic GSP figures and a forecast increase in unemployment. Perth experienced a decline in ‘room nights sold’ of 0.5% for both CY 2015 and CY 2016 as compared to an increase in room supply of 3.5% over the same period1. Compounding an already softening hotel market is the construction of five new hotels, totally 1,128 rooms, over the next three years. Despite significant infrastructure projects, the arrival of new hotel supply will result in a continuing deterioration in market KPI’s until demand is able to absorb new supply.

The following table provides an overview of Perth CBD’s current supply and hotel pipeline, which indicates that an additional 5,798 rooms are under construction, approved and/or in planning and proposed, which would represent a 92% increase to supply2.

Not all projects will proceed and accordingly we expect a number of planned or proposed projects will not materialise.

Graph 6 – Perth Market KPI’sCY 2013 to CY 2016

Perth: Declining KPI’s amidst a supply tsunami


CY13 CY14 CY15 CY1666%

68%

70%

72%

74%

76%

78%

80%

82%

84%

86%

50

75

100

125

150

175

200

225

State of the Nation



� Relatively high unemployment rate A2016: 6.2%

� Relatively high unemployment rate F2017 - 2019: 6.4%

� Perth CBD Office Vacancy rates (absolute numbers as at 31/12/16): 22.5% (equal highest (with Darwin) compared to all capital cities)

– Premium: 16.0%

– A: 20.6%

– B: 30.3%

– C: 21.3%

– D: 37.5%

� Office Construction/Pipeline: 55,000sq m

� Perth House growth (CY 2016 YOY): 0.6%

� Private & Public Infrastructure projects of circa $10bn:

– Elizabeth Quay renewal – $2.2bn

– New Perth Stadium & transport connectivity – $1.2bn

– Perth City Link – $5.3bn

– WA Museum – $0.5bn

– Perth airport & Freight Access – $1bn

� A decrease in international visitor nights (CY 2016 YOY): 0.6%



Inventory 2017 Opening Construction Approved/Planning Proposed6,269 407 778 3,357 1,256

6.5% 12.4% 53.5% 20.0%


Source: STR



Perth CY16 79.0% 183.34 144.9YOY Change -2.8% -6.7% -9.3%

12

State of the Nation

Hobart’s strong performance stems from increasing popularity as an international and domestic tourist destination which recognises Tasmania’s pristine environment and notoriety for quality produce and food. Whilst these attributes will continue to attract leisure visitors, which is the main occupancy market segment, confirmed additions to hotel supply in the short term (circa 600 rooms) will place downward pressure on Hobart’s market KPI’s.

Graph 7 – Hobart Market KPI’sCY 2013 to CY 2016

Hobart: Can the Apple Isle maintain its bite

CY13 CY14 CY15 CY16


66%

68%

70%

72%

74%

76%

78%

80%

82%

50

75

100

125

150

175



� Relatively High unemployment rate A2016: 6.7%

� Relatively High unemployment rate F2017 - 2019: 6.3%

� Hobart CBD Office Vacancy rates (absolute numbers as at 31/12/16): steady at 8.2%

– A: 5.7%

– B: 13.3%

– C: 11.0%

– D: 6.0%

� Hobart House growth (CY 2016 YOY): 0.3%

� Infrastructure projects of circa $1.8bn:

– Road and bridge improvements: $0.65bn

– Upgrade Education facilities: $0.1bn

– Royal Hobart Hospital Redevelopment: $0.5bn

� An increase in international visitor nights (CY 2016 YOY): 3%


Source: STR

1 Source: Australian Property Council/Tourism Research Australia/Savills

City Occupancy% ADR $ RevPAR$

Hobart CY16 82.6% 168.29 139.06YOY Change 2.5% 2.3% 4.8%

13

State of the Nation

Four years of continued growth has elevated the Gold Coast to the 5th highest performing RevPAR market in Australia. Market KPI’s are being primarily driven by International visitors which grew by 16.2% (YOY Sep 2016) and exceeded one million for the first time; with China (295K) leading the charge followed by New Zealand (195K). Occupancies which are now in the low 70s, confirms that there are periods of surplus room capacity all year round, highlighting Gold Coast’s dominant reliance on the leisure holiday market. We anticipate that continued growth from China/Asian markets will drive demand and therefore market KPI’s.

Savills is aware of 14 projects with a total of 2,250 rooms either under construction, approved or proposed. This includes a new 700 room casino hotel planned in 2020. Post Commonwealth Games will be a good test for the Gold Coast to see whether the infrastructure projects continue to boost investment in the area.

Graph 8 – Gold Coast Market KPI’sCY 2013 to CY 2016

Gold Coast: Growing up

CY13 CY14 CY15 CY16


66%

68%

70%

72%

74%

50

75

100

125

150

175

200

� Gross Regional Product A FY 2015: -0.7%


� Low unemployment rate F2017 - 2019: 5.5%

� Gold Coast Office Vacancy rates (absolute numbers as at 31/12/16): 12.2%

– A: 12.9%

– B: 11.2%

– C: 5.8%


– 2017 – nil

– 2018 – nil

– 2019+ – 4,000sq m, mooted ‘The Base’ by Robina Land Corporation

� Major Infrastructure projects:

– Gold Coast Health & Knowledge Precinct (PDA) which includes Gold Coast Commonwealth Games Village and Sporting Venues (under construction)

– Gold Coast Light Rail Stage 2 (under construction)

– Gold Coast M1 Upgrade (planning)


� A decrease in domestic visitor nights (CY 2016 YOY): 1.5%1

Source: STR


City Occupancy% ADR $ RevPAR$

Gold Coast CY16 72.9% 185.64 135.29YOY Change 1.0% 6.0% 7.0%

14

State of the Nation

Canberra’s resumption of ‘business as usual’ (following the Abbott Government’s cost cutting measures), has seen a return of government and associated business which has resulted in continuing improved performance in all market KPI’s. Whilst rolling down the lawns of Parliament house is now a banned activity, the nation’s capital will continue to draw international and domestic leisure tourists. Add to this a pipeline of infrastructure projects and the scene is set for improving market performance against a backdrop of limited new supply.

Graph 9 – Canberra Market KPI’sCY 2013 to CY 2016

Canberra: Steady improvement

CY13 CY14 CY15 CY16


66%

68%

70%

72%

74%

50

75

100

125

150

175





� Canberra CBD Office Vacancy rates (absolute numbers as at 31/12/16): 12.6%

– Civic Precinct: 9.4%

– A: 9.8%

– B: 8.7%

– C: 18.7%

– D: 23.1%

� Office Construction/Pipeline: 9,000sq m

� Canberra House growth (CY 2016 YOY): 0.7%

� Infrastructure projects of circa $2bn:

– Urban Renewal Program: $0.5bn

– Road Infrastructure: $0.25bn

– Education and Health Care infrastructure/facilities $0.53bn

– Light Rail – Stage 1 & ACT Law Courts Facilities $.76bn



Source: STR



Canberra & ACT CY16 74.5% 166.17 123.79YOY Change 1.6% 2.0% 3.7%

15

Cairns market KPI’s have continued to grow for the fourth consecutive year, driven by an increase in international and domestic visitors, with China remaining as the largest market (24.9% of all international travellers to the region). An increase in ADR has resulted in Cairns achieving the highest RevPAR growth rate in CY 2016 (11.8%) in comparison to the top ten markets1.

The GA Group have closed the Rydges Tradewinds for a major renovation of 256 bedrooms and announced plans to build an adjoining new tower with 55 new bedrooms. The group have also announced plans for two new hotel towers next to the Novotel Oasis Report on Abbott Street for 220 hotel rooms and 110 resort apartments. In addition, Merecliffe Pty Ltd have lodged plans to build a new 161 room hotel over the existing Bellview motel on the Esplanade. If approved, the projects are due to open in 2019 adding 546 rooms to Cairns. The projects are the first major hotel additions to Cairns for 20 years. However, the forecast for a continual increase in international visitors, Cairns market KPI’s will continue to remain strong in the short term.

Graph 10 – Cairns Market KPI’sCY 2013 to CY 2016

Cairns: China is the new Japan

CY13 CY14 CY15 CY16


66%

68%

70%

72%

74%

76%

78%

80%

82%

84%

50

75

100

125

150

State of the Nation

� Gross State Product A2015: 2.69%

� High unemployment rate A2016: 7.8%

� Infrastructure projects of circa $2.8bn:

– $1bn redevelopment of Cairns Airport

– $500m Mount Emerald Wind Farm on the Atherton Tablelands

– $456m Cairns Hospital Redevelopment

– $250m Sheraton Mirage redevelopment at Port Douglas

– $616m Bruce Highway upgrade at Cairns

Source: STR

1 Source: STR


Cairns CY16 83.4% 139.95 116.65YOY Change 3.8% 7.8% 11.8%

16

State of the Nation

Adelaide’s performance has shown modest improvement in CY 2016 with RevPAR growth being driven by increasing occupancy. A program of State and Federal spending will see an improvement in GSP, which should translate into increased room night demand associated with these projects, from both a national and international perspective. Conversely corporate demand is weak as evidenced by high office vacancy rates. Head winds from expected new supply will inevitably outweigh increasing room night demand, which will constrain growth in market KPI’s. This market dynamic will not correct until new supply is fully absorbed. Notwithstanding, an initial adjustment period, the revitalisation of Adelaide’s hotel room stock is necessary, in order for the Adelaide market to compete with its rival Australian cities.

The following table provides an overview of Adelaide CBD’s current supply and hotel pipeline, which indicates that an additional 2,902 rooms are under construction, approved and/or in planning and proposed, which would represent a 52% increase to supply1.


Graph 11 – Adelaide Market KPI’sCY 2013 to CY 2016

Adelaide: Steady as she goes, awaits a flurry of new supply

CY13 CY14 CY15 CY16


66%

68%

70%

72%

74%

76%

78%

80%

82%

50

75

100

125

150

175



� Relatively high unemployment rate A2016: 7.0%

� Relatively high unemployment rate F2017 - 2019: 7.0%

� Adelaide CBD Office Vacancy rates (absolute numbers as at 31/12/16): 16.2% – Premium: 8.3% – A: 15.4% – B: 15.6% – C: 18.1% – D: 20.2%


– 2017: 10,000sq m

– 2018: Nil

– 2019: 24,000sq m

� Adelaide House growth (CY 2016 YOY): 0.8%

� Transport Infrastructure and Public Facilities projects of circa $2.2bn+ in 2017-2018: – North-South road Corridor – Northern road Connector – Expansion of Adelaide’s

tram network – CBD revitalisation project ($15m) – Royal Adelaide Hospital

Development

� Techport Defence Precinct – Australia’s $50B future Submarine project

� Lower AU$ has benefited SA non-mining export industries: – Agribusiness – International education – Tourism



Source: STR

1 Source: ABS/Cordell/Savills2 Australian Property Council/Tourism Research Australia/Savills


Inventory 2017 Opening Construction Approved/Planning Proposed5,565 – 245 2,047 610

– 4.4% 36.8% 11.0%



Adelaide CY16 77.1% 149.8 115.56YOY Change 2.4% 0.5% 2.9%

17

State of the Nation

Brisbane’s performance KPI’s have continued to decline over the past two years as a result of the following:

� Wind down of the resources capital investment boom

� Corporate activity declined which gave rise to high office vacancies, which is only beginning to correct, now that the influx of new commercial space has ended

� Hotel oversupply as new rooms entering the market exceeded demand.

In CY 2016 “Room nights sold” increased by 3.5% however this was more than offset by an increase in “Rooms available” of 5.6% over the same period1. Brisbane’s economic performance is forecast to improve which is positive however, with the introduction over the next few years of further hotel supply, we anticipate a further decline in market RevPAR over the next two years before seeing a recovery thereafter as demand catches up with supply2. The familiar downward spiral of falling occupancy and reactionary softening of room rate to attract business will present as a key feature of the Brisbane market.

The following table provides an overview of Brisbane CBD’s current supply and hotel pipeline, which indicates that an additional 4,534 rooms are under construction, approved and/or in planning and proposed, which would represent a 56% increase to supply2.


Graph 12 – Brisbane Market KPI’sCY 2013 to CY 2016

Brisbane: Declining KPI’s and increasing supply


CY13 CY14 CY15 CY1666%

68%

70%

72%

74%

76%

78%

80%

50

75

100

125

150

175

200





� Brisbane CBD Office Vacancy rates (YOY movement & absolute number as at 31/12/16): 15.3%

– Premium: 12.2%

– A: 11.9%

– B: 19.5%

– C: 19.5%

– D: 15.3%

� Office Construction/Pipeline:

– 2017: circa 19,300

– 2018+: Minimal

� Brisbane House growth (CY 2016 YOY): steady

� Major QLD Infrastructure projects (underway/to commence in 2017):

– Brisbane Airport Expansion

– Toowoomba Second Range Crossing

– Gateway Motorway North Upgrade

– Kingsford Smith Drive Upgrade

– Brisbane Central Station upgrade

– Logan Enhancement Project (2017 commencement)

� Potential projects in planning:

– Brisbane Metro Subway

– Brisbane Mega Cruise Ship Terminal

– Gold Coast M1 Upgrade

– Cross River Rail



Source: STR


Inventory 2017 Opening Construction Approved/Planning Proposed8,043 750 982 1,777 1,025

9.3% 12.2% 22.1% 12.7%


1 Source: STR2 Source: Australian Property Council/Tourism Research Australia/Savills


Brisbane CY16 71.9% 160.15 115.07YOY Change -2.0% -6.8% -8.7%

18

State of the Nation

The Darwin economy is highly dependent on the government sector, mining and mining support sectors such as construction and transport. During the resources boom, Darwin experienced a period of strong economic growth, propelled by significant business investment in the Ichthys LNG project. Since the completion of this LNG project, which has transitioned to production phase, the Darwin economy has weakened, compounded further by slowing demand in household consumption and dwelling investment. As a result, Darwin’s RevPAR has declined, most notably in CY 2015 and CY 2016, and currently represents the lowest RevPAR market across Australia’s main cities. In CY 2016 ‘Room nights sold’ increased by 5.8% however this was more than offset by an increase in “Rooms available” of 6.2% over the same period1. On a more positive note, a stronger forecast GSP should assist with improving market conditions, against a backdrop of limited new supply.

Graph 13 – Darwin Market KPI’sCY 2013 to CY 2016

Darwin: Falling KPI’s to be arrested

CY13 CY14 CY15 CY16


66%

68%

70%

72%

74%

76%

78%

80%

82%

50

75

100

125

150

175

200





� Darwin CBD Office Vacancy rates (absolute numbers as at 31/12/16): 22.5% (equal highest (with Perth) compared to all capital cities)

– A: 15%+

– B: 15%+

– C: 49.3%

– D: 15%+

Source: STR

1 Source: STR2 Source: Australian Property Council/Tourism Research Australia/Savills

� Darwin House growth (CY 2016 YOY): 1.5%



City Occupancy% ADR $ RevPAR $

Darwin CY16 67.2% 154.82 104.1YOY Change -0.4% -9.3% -9.6%

19

Sales trends

2016 continued where 2015 left off, with investor appetite for Australian hotels remaining high. Our research shows that investors are continuing to look outside of major city CBD locations for value add opportunities in comparison to tightly held CBD assets. The increased volume of lower value transactions has resulted in a reduction of the average price per room, although passing yields have continued to fall. Passing yields in 2016 finished at 6.76% compared to 7.05% in 2015 and below the long term average of 7.96%.

In comparison to other asset classes, post GFC, hotels have provided yield stability comparable to traditional forms of property investment class. In recent years hotel sales volumes have increased with hotel investment now an established asset class trending in line with core sectors.

Between 2009 and 2016 A Grade Sydney CBD Office yields have fallen 166 basis points, compared to a 174bps fall for All Hotels, 188bps for Melbourne Prime Industrial and 91bps for Regional Shopping Centres.

The chart below provides hotel yields in comparison to a selection of key asset classes across certain markets.

For CY 2016 MSCI reported that the Hotel Property Index recorded a total annualised return of 19.5% ahead of core asset classes (Office 13.4%, Industrial 11.2% and Retail 9.5%).

5%

6%

7%

8%

9%

Pas

sing

Yie

ld

2012 2013 2014 2015 2016

All Hotels (Australia wide) 8.30% 8.00% 7.83% 7.05% 6.76%Sydney CBD A Grade Office 7.03% 6.94% 6.66% 6.31% 5.56%Melbourne Prime Industrial 8.13% 8.06% 7.66% 7.13% 6.78%Regional Shopping Centre 6.31% 6.25% 6.25% 6.09% 5.53%

Graph 15 – Passing Yield TrendsHotels Vs Other Asset Classes

Graph 14 – Average $ per Room and Median YieldsJan 2009 to Dec 2016

Avg. $/room Median Yield

4%

5%

6%

7%

8%

9%

10%

$0

$50,000

$100,000

$150,000

$200,000

$250,000

$300,000

$350,000

$400,000

2009 2010 2011 2012 2013 2014 2015 2016

Source: Real Capital Analytics/Savills Research

Source: Savills Research

21

Overseas investors continue to be a major source of capital, but interestingly domestic based investment has increased market share. Known overseas investment represented 53% of transactions in the last 12 months compared to 61% in the previous 12 months.

The profile of transactions altered in 2016 with hotel sales less than $10 million and between $50 million and $100 million increasing compared to 2015. However, with less 5 star CBD hotel sales the volume of $100 million+ sales declined.

The volume of sales in 2016 were down 28% on 2015, totalling just over $2.5 billion, although this is not due to a lack of demand but a lack of stock with investors reluctant to sell. Owners of hotels in Sydney and Melbourne continue to enjoy record trading performance hence it is no surprise there is a scarcity in the number of high value transactions.

As Australia enjoys a pipeline of new hotel openings, developers have taken advantage of increased hotel demand and rising values with 2016 experiencing a selection of forward commitments and funds through, such as the W hotels in Darling Harbour (Grocon to Zhengtang) and Melbourne (CBUS to Daisho) and Quest Docklands (MAB to Ascott).

After a few years of relatively few hotel sales, Melbourne was the focus of investors in 2016 with sales of the Novotel on Collins (Frasers), Travelodge Docklands (Sing Holdings), Tune (Aligned), Novotel Glen Waverley (Cornerstone) and W Hotel (Daisho). However Sydney remains the top of many investors shopping list as forecast new supply is not likely to satisfy demand for overnight accommodation.

Graph 16 – National Hotel Sales ($m and No) Dec-06 to Dec-16

0

10

20

30

40

50

60

70

80

90

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

Sales >$5m (LHS) Sales No (RHS)

Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-16Dec-15

Source: Real Capital Analytics/Savills Research

22

A selection of hotel transactions for the year to December 2016:

Savills forecasts that the reluctance of owners to sell will continue in 2017 only intensifying demand and driving up pricing for those assets that do become available, especially in CBD locations. We anticipate 2017 will see sales volumes on a par with 2016 and yields continuing to tighten.

Source: Savills Hotels* Initial yield based upon forecast net income

Month Hotel Price Per Room Passing Yield

Dec W Hotel, 435 Collins St Melbourne VIC $792,517 4.5%* (yr 1)

Dec Ibis Portfolio (Nationwide) $126,342 N/A

Dec Novotel Glen Waverley VIC $368,500 5.12%

Nov Novotel Langley Perth WA $316,206 N/A

Nov Jephson Hotel Toowong QLD $309,804 6.92%

Oct Travelodge Docklands Melbourne VIC $367,698 5.76%

Sept Metro on Pitt Sydney NSW $388,235 5.56%

Sept Novotel on Collins Melbourne VIC $623,684 5.24%

Sept Rydges Esplanade Cairns QLD $165,289 6.84%

Aug Park Regis City Centre Sydney NSW $377,049 6.52%

July Quest NewQuay Docklands Melbourne VIC $321,267 6.85%* (yr 1)

Jun W Ribbon Hotel Sydney NSW $850,000 6.3%* (yr 3)

Jun Mercure Parramatta NSW $243,902 5.83%

May Grand Chancellor Surfers Paradise QLD $196,078 4.6%

April Vibe Hotel & Helm Bar Surfers Paradise QLD $231,156 5.19%

April Quest Adelaide Terrace Perth WA $323,077 8.1%* (yr 1)

Mar Tune Hotel Melbourne VIC $229,778 5.7%

Mar Best Western Port Macquarie NSW $212,500 9.01%

Mar Best Western Tall Trees Canberra ACT $179,747 8.21%

Mar Parklands Resort Mudgee NSW $167,647 9.5%

Mar Mantra Pavilion Wagga Wagga NSW $255,556 10.6%

Mar Quest Mawson Lakes SA $272,727 8.0%

Feb Rydges Tradewinds Cairns QLD $138,211 5.56%

Feb Adina Norwest NSW $286,491 6.67%

23

Savills key contacts

Adrian ArcherDirector +61 (0) 481 037 [email protected]

Tom Shadbolt Senior Sales Executive +61 (0) 423 381 563 [email protected]

Sheriden Bacon Analyst +61 (0) 414 572 141 [email protected]

Iris Liu Valuer +61 (0) 410 060 669 [email protected]

Michael SimpsonManaging Director +61 (0) 431 649 [email protected]

Vasso Zographou Director +61 (0) 449 979 [email protected]

Rob Williamson Director +61 (0) 412 803 482 [email protected]

Nic Simarro Senior Sales Executive +61 (0) 481 036 [email protected]

James Cassidy Associate Director +61 (0) 478 333 [email protected]

24

savills.com.au

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Savills advises corporate, institutional and private clients, seeking to acquire, lease, develop or realise the value of prime residential and commercial property across the world’s key markets.

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For advice that gives advantage, contact Savills.

With a rich heritage and a reputation for excellence that dates back to 1855, Savills is a leading global real estate provider listed on the London Stock Exchange.

Savills is a company that leads rather than follows with more than 700 owned and associate offices throughout the UK, Europe, Americas, Asia Pacific, Africa and the Middle East. With more than 30,000 staff, we seek out people who possess that rare mix of entrepreneurial flair and rock solid integrity, and are focused on delivering clients with advice and expertise of the highest calibre.

A powerful combination of global connections and deep local knowledge provides Savills with an almost unparalleled ability to connect people and property.

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