australian hotel sector outlook - folkestone –...

1

AUSTRALIAN

HOTEL SECTOR

OUTLOOK

October 2015

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EXECUTIVE

SUMMARY

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EXECUTIVE SUMMARY

Tourism to pick-up

• Declining Australian dollar is encouraging domestic tourists to holiday locally and makes Australia a more

attractive destination for overseas visitors

• Strong growth in international tourism especially China and SE-Asia

• International visitor numbers increased 7% in FY15 to a new high of 6.6m visitors

• China is now Australia’s second-largest inbound market behind New Zealand and the most lucrative in terms

of money spent per visitor

Australian Hotel Sector Positioned to Provide Strong Returns

• Hotels generated a total return for the year ending June 2015 of 14.2%, up from 12.8% in year to March 2015

and outperformed office, retail and industrial property in year to June 2015

• The average occupancy rate across Australia was 74.4% with Sydney and Melbourne recording 84.5% and

82.0%

• CBD markets - Sydney and Melbourne markets performing strongly – RevPAR growth of 7.4% and 4.5%

respectively and above 80% occupancy - capitalising on both stronger corporate market and inbound tourism

• Strong appetite for hotels especially from international investors – yields to continue to firm

• More than $4.2bn in hotel sales in FY15, up 107% on FY14 – foreign investors accounted for more than 54%

of transactions

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AUSTRALIAN TOURISM

AND HOTEL OUTLOOK

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No. Rooms Growth % Head Office

Accor 200 26,902 1.2% France

Mantra Group 102 14,345 4.5% Australia

Choice Hotels Australasia 280 11,500 13.3% Australia

Amalgamated Holdings Ltd 46 8,236 9.2% Australia

Toga Far East Hotels 57 7,686 3.1% Australia

Quest Apartments 111 6,915 0.7% Australia

InterContinental Hotels

Group 24 6,140 -5.9%

United

Kingdom

Best Western 161 5,884 -8.0% United

States

Oaks Hotels and Resorts 43 5,796 15.5% Thailand

Hilton Hotels of Australia 14 4,083 4.7% United

States

Total 1,038 97,487 3.5%

Hotels Motels Serviced

Apartments

5 Star 19,888 599 4,462

4 Star 46,315 23,720 40,629

3 Star 17,324 53,655 11,326

2 Star and Below 4,769 6,454 505

Total 88,296 84,428 56,922

Australia’s Graded Room Supply:

June 2014

Source: ABS/JLL

Australia’s Top Ten Accommodation Operators:

December 2014

Source: JLL

AUSTRALIAN HOTEL INDUSTRY

• Australia had 229,646 rooms at June 2014 – 38% are hotels, 37% are motels and 25% are serviced apartments

• Supply is anticipated to continue over the coming years as major projects are completed in the short to medium term within

Sydney (Crown Hotel at Barangaroo, Sydney Convention Centre Hotel), Melbourne (Aloft Hotel, Hotel Windsor extension,

the Queensbridge Tower), Brisbane (40 Elizabeth St and the W Hotel), Perth (Elizabeth Quay Westin Hotel, AVANI Hotel,

Crown Burswood)

• Top ten operators accounted for 43% of Australian total room supply - 1,038 comprising properties with 97,487 rooms

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Top 30 Australian Accommodation Owners – Origin:

December 2014

Source: JLL

Australia’s Top Ten Accommodation Owners Hotels:

December 2014

Source: JLL

AUSTRALIAN HOTEL INDUSTRY

• Top ten owners accounted for 11% (25,876 rooms) of total room supply

• Offshore groups account for 52% of the rooms owned by the top 30 operators by rooms down from 77% in 2000 – the

decline is due to the growth in the serviced apartment sector which is dominated by local owners

Hotels Rooms % Growth Origin

Abu Dhabi Investment

Authority (ADIA) 31 4,096 -3.9%

United Arab

Emirates

Meriton Serviced

Apartments 13 3,256 0.0% Australia

Schwartz Family Company 12 3,031 -0.09% Australia

Toga Far East Hotels 21 2,807 13.3% Australia

Amalgamated Holdings

Limited 19 2,685 4.8% Australia

Crown Limited 5 2,292 0.1% Australia

Mirvac Investment

Management 13 2,072 0.1% Australia

Ascendas Hospitality Trust 7 2,038 0.0% Singapore

TCC / Fraser Hospitality 7 1,833 31.1% Thailand

Stamford Land Corporation 7 1,766 0.0% Singapore

Total 135 25,876 2.9%

Rooms % of Total

Australia 22,587 48%

Singapore 12,548 27%

Middle East 4,096 9%

Global 2,898 6%

Malaysia 1,914 4%

Thailand 1,833 4%

Hong Kong 754 2%

Total 46,630 100%

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HOTEL PERFORMANCE – INVESTMENT

• Annualised total return for the year ending June

2015 was 14.2%, up from 12.8% in year to March

2015

• In the year to June 2015:

• hotels outperformed industrial 12.9%, office

11.1% and retail 10.8%

• CBD hotels outperformed non-CBD hotels by

110bps

• NSW hotels generated strong performance - total

return of 18.7%, compared to QLD and VIC which

returned 10.2% and 17.3% respectively

Hotels Annualised Total Returns:

To June 2015

Source: MSCI

8

HOTEL PERFORMANCE – INVESTMENT

• Weighted average cap rate at June 2015 was

7.60%, below the long-term average of 8.22%

• Cap rates firmed 35 bps in FY15

• Wide spread in cap rates between CBD and non-

CBD hotels – 7.8% versus 9.0%

• Sydney hotel cap rates average 7.4% - 40 bps

higher than industrial at 7.0% and 6.75% for office

Australian Hotels – Weighted Average Cap Rate:

June 2006 – June 2015

Source: MSCI/Savills Research

9

AUSTRALIAN HOTEL TRANSACTIONS

• More than $4.2bn in hotel sales in FY15, up 107% on FY14

• Circa 66% of transactions over $100m

• Foreign investors accounted for more than 54% of transactions

Australian Hotel Sales:

2005 - 2015

Source: Savills

Key Hotel Transactions:

Nov 2014 – June 2015

Source: Savills Hotels

Hotel Date Price per Room Passing

Yield

Rendezvous on George,

Brisbane June 2015 $297,980 6.2%

The Westin, Sydney May 2015 $1,069,712 4.0%

Hilton, Sydney May 2015 $763,385 5.8%

Pullman International,

Cairns May 2015 $224,548 7.0%

Marriott, Surfers

Paradise May 2015 $258,359 4.65%

West End Backpackers,

Sydney May 2015 $220,930 6.65%

Zagame’s Surfers

Paradise Mar 2015 $195,531 6.36%

Diamant Kings Cross,

Sydney Mar 2015 $290,000 6.75%

NEXT, Brisbane Jan 2015 $324,013 7.75%

Sheraton on the Park,

Sydney* Nov 2014 $903,052 5.6%

*Includes capital expenditure commitment

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AUSTRALIAN HOTEL TRANSACTIONS

Recent Cross Border Flows - The Australian Hotel Investment Market Continues

to Attract Strong Levels of Foreign Capital

Source: JLL

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HOTEL PERFORMANCE – KPIs

Location Occupancy (%) ADR

($)

RevPAR

(%)

Australia 74.4 180.87 134.64

Adelaide 75.8 148.81 112.80

Brisbane 73.0 175.14 127.89

Cairns 75.8 125.20 94.88

Canberra 73.4 162.70 119.48

Darwin 67.7 175.37 118.73

Gold Coast 69.9 169.77 118.74

Hobart 80.8 161.73 130.68

Melbourne 82.0 187.37 153.58

Perth 80.5 197.63 159.10

Sydney 84.5 204.75 173.06

Hotel Performance KPIs:

YTD July 2015

Source: STR Global

• CBD markets - Sydney and Melbourne markets performing strongly – RevPAR growth of 7.4% and 4.5% respectively and above

80% occupancy - capitalising on both stronger corporate market and inbound tourism

• Non-CBD - Gold-Coast and Cairns/Far North Queensland have rebounded with Rev PAR growth of 10.3% and 9.3% respectively

ADR and RevPAR Growth:

2014 - 2015

Darwin

ADR Growth -3.8%

RevPAR -11.8%

Cairns

ADR Growth 2.1%

RevPAR 10.3%

Brisbane

ADR Growth -1.9%

RevPAR -5.7%

Gold Coast

ADR Growth 4.7%

RevPAR 9.3%

Sydney

ADR Growth 4.8%

RevPAR 7.4%

Canberra

ADR Growth 0.5%

RevPAR 7.2% Hobart

ADR Growth 1.9%

RevPAR 5.7%

Perth

ADR Growth -1.6%

RevPAR -3.4%

Australia

ADR Growth 2.1%

RevPAR 3.7%

Melbourne

ADR Growth 2.7%

RevPAR 4.5%

Adelaide

ADR Growth -0.4%

RevPAR -4.1%

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Leisure Based City RevPAR:

2000 - 2022

HOTEL PERFORMANCE – KPI FORECASTS

• RevPAR average growth of 4.4% p.a. through to FY2023

with most cities showing steady growth

• Sydney is forecast to remain the highest RevPAR city, a

title it has held for all but one year, and regained following

the resetting of the Perth market in late 2012/13

• Perth and Brisbane are continuing through a small

correction however will revert to similar growth profiles in

the long term

• Recovery in Queensland’s leisure based markets is

expected to continue, and largely catch up to Darwin

which is going through a correction following strong

demand from the resource boom

Major Capital City RevPAR Comparison:

2000 - 2022

Source: Dransfield

Secondary Capital City RevPAR:

2000 - 2022

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Visitors by Country of Residence:

2014 -2015

Source: Tourism Research Australia

Visitors by Country of Residence - % Change:

2014 -2015


INTERNATIONAL VISITORS - VOLUME

0 200 400 600 800 1,000 1,200 1,400

New Zealand

China

UK

USA

Singapore

Japan

Malaysia

India

Korea

Hong Kong

Germany

Indonesia

Canada

Taiwan

France

Scandinavia

Thailand

Italy

Switzerland

Netherlands

Year ending June 2014 ('000) Year ending June 2015 ('000)

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

New

Zea

land

Chin

a

UK

US

A

Sin

ga

pore

Jap

an

Ma

laysia

India

Ko

rea

Hon

g K

on

g

Ge

rma

ny

Indo

nesia

Can

ad

a

Ta

iwan

Fra

nce

Scan

din

avia

Th

aila

nd

Italy

Sw

itze

rlan

d

Neth

erl

an

ds

• International visitor numbers increased 7% in FY15 to a new high of 6.6m visitors

• NZ is still the largest source of visitors

• China visitor numbers increased by 22% to 864,000 – Australia’s second largest source of visitors

• India increased 20% to 207,000 driven by the World Cup Cricket

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INTERNATIONAL TOURISTS – ROOM NIGHTS

Room Nights by Country of Residence:

2014 - 2015


Room Nights by Country of Residence - % Change:

2014 - 2015


• Visitor nights increased by 8% to 236m

• China’s visitor nights increased by 18.0% to 36,776 – 41% higher than the UK in second place

• Chinese visitors stayed an average of 44 nights

0 10,000 20,000 30,000 40,000

China

UK

New Zealand

India

USA

Korea

Taiwan

Germany

Japan

Hong Kong

France

Malaysia

Singapore

Italy

Canada

Indonesia

Scandinavia

Thailand

Netherlands

Switzerland


-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Chin

a

UK

New

Zea

land

India

US

A

Ko

rea

Ta

iwan

Ge

rma

ny

Jap

an

Hon

g K

on

g

Fra

nce

Ma

laysia

Sin

ga

pore

Italy

Can

ad

a

Indo

nesia

Scan

din

avia

Th

aila

nd

Neth

erl

an

ds

Sw

itze

rlan

d

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INTERNATIONAL TOURISTS - EXPENDITURE

Expenditure by Country of Residence:

2014 - 2015


Expenditure by Country of Residence - % Change:

2014 - 2015


• International visitor spend grew by 10% to a record $33.4bn - $3.2bn more than the previous year

• FY15’s growth is the second largest on record since FY01, when Sydney hosted the Sydney Olympic Games

• China visitors’ trip spend increased by 32% to $7.0bn – 32% higher than FY14, just behind India (due to World Cup Cricket)

• Chinese visitors account for 21 cents in every $1 spent by international tourists in FY15

0 2,000,000 4,000,000 6,000,000 8,000,000

China

UK

USA

New Zealand

Japan

Singapore

Korea

Malaysia

Hong Kong

India

Germany

Canada

France

Taiwan

Scandinavia

Indonesia

Italy

Switzerland

Thailand

Netherlands


-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Chin

a

UK

US

A

New

Zea

land

Jap

an

Sin

ga

pore

Ko

rea

Ma

laysia

Hon

g K

on

g

India

Ge

rma

ny

Can

ad

a

Fra

nce

Ta

iwan

Scan

din

avia

Indo

nesia

Italy

Sw

itze

rlan

d

Th

aila

nd

Neth

erl

an

ds

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China Travel to Australia:

1992 - 2015

Source: ABS

INTERNATIONAL TOURISM TO AUSTRALIA

• Emerging Asia will continue to be the driving force – accounting for 60% of total growth – but the outlook for several of

Australia’s traditional markets is also strengthening

• Visitor numbers are projected to grow at an average pace of 5.2% p.a. to December 2017

• China visitors to increase by 8.3% - the fastest of the major visitor sources

• Based on current growth rates, China is on track to overtake New Zealand as our largest inbound market in 2016

International Visitor Arrivals Forecast:

3 Years to Dec 2017

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

Jun

-199

2Jun

-199

3Jun

-199

4Jun

-199

5Jun

-199

6Jun

-199

7Jun

-199

8Jun

-199

9Jun

-200

0Jun

-200

1Jun

-200

2Jun

-200

3Jun

-200

4Jun

-200

5Jun

-200

6Jun

-200

7Jun

-200

8Jun

-200

9Jun

-201

0Jun

-201

1Jun

-201

2Jun

-201

3Jun

-201

4Jun

-201

5

No of Arrivals % of Total Arrivals

Source: Deloitte Access Economics

17

Aviation Routes From China to Australia

Source: CAPA-Centre for Aviation, Tourism Australia

Direct Aviation Capacity From China to Australia:

2005 - 2014

Source: Bureau of Infrastructure and Regional Development

AIR TRAVEL – CHINA TO AUSTRALIA

• New China-Australia bilateral air services agreement signed in Jan 2015

• Immediately increased the current weekly seat capacity by 136%, adding 4,000 seats for airlines flying from the main

gateway cities of Beijing, Shanghai or Guangzhou and 26,500 seats a week for airlines flying from a second or third tier city

• Total capacity between Australia and China will almost triple from 22,500 seats to 67,000 seats a week by 2016

• Past five years, Chinese airlines doubled seat capacity to Sydney, with the number of weekly services rising from 48 to 82

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INTERNATIONAL TOURISM TO AUSTRALIA

Where do international leisure visitors travel

in Australia?

By tourism region. Leisure denotes those who travel for a

holiday or to visit friends and relatives. Visitors may travel to

more than one region.

Source: Productivity Commission/TRA

• Most international tourism activity is concentrated in

capital cities and along the east coast of Australia

• Propensity of international visitors to travel to regional

areas varies depending on, for example, their purpose of

travel - holiday visitors are the most likely to spend nights

in regional areas, and employment

• Visitors from Asia have a lower tendency to travel to

regional areas than visitors from other countries - Tourism

Research Australia found that in 2013:

• 62 per cent of visitors from Asia were unlikely to visit

multiple destinations, destinations in regional

Australia, or capital cities other than Sydney,

Melbourne, Brisbane and Perth

• 84 per cent of visitors from Asia were unlikely to visit

destinations in regional Australia or capital cities other

than Sydney, Melbourne, Brisbane and Perth,

although they might visit multiple destinations

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TOURISM INVESTMENT PIPELINE

• 168 projects valued at $53.7bn

• Aviation projects - $31.3bn

• Arts, recreation and business services

infrastructure projects - $13.9bn

• Accommodation projects - $8.5bn, potentially

adding 15,915 rooms

• An additional 69 mixed-use developments -

$33.6bn, potentially delivering an additional

18,315 rooms

Number and Total Value of Large Scale Tourism

Projects: 2014


20

TOURISM 2020 – INDUSTRY POTENTIAL

• Tourism Australia’s 2020 strategy focuses on enhancing growth and competitiveness of the Australia tourism sector

• A key component is to grow demand from Asia especially China

• Tourism Australia estimates:

• between 40,000 and 70,000 rooms needed (assuming avg occupancy rates of 75%)

• aviation capacity will need to grow between 40% and 50% (international) and between 23% and 30% (domestic)

Tourism Industry Potential:

Total Overnight Expenditure at 2020

Band Lower ($bn) Upper ($bn)

China 4.6 - 6.3

UK 2.1 - 3.3

USA 2.2 - 3.2

South Korea 1.6 - 2.2

NZ 1.5 - 2.2

Japan 1.2 - 1.8

Singapore 1.2 - 1.7

India 1.1 - 1.5

Malaysia 0.8 - 1.5

Germany 0.8 - 1.3

France 0.6 - 0.8

Tourism Industry Potential:

Incremental Growth in Expenditure at 2020

Source: Tourism Australia, BDA Marketing Planning, Access Economics

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HOTEL OPERATING MODELS

Key Features and Responsibilities of Parties of the Hotel Ownership Structures in Australia

RESPONSIBILITIES OF PARTIES INVOLVED

Management

Agreement

Owner Operator

• Pays operator a management fee

• Carries out construction and fitting out at its own cost

• Carries out capital works and supplies and maintains furniture,

fixtures and equipment

• Provides working capital requirements

• Employs the hotel employees

• Manages and operates hotel for and on behalf of the owner

• Design to operator’s brand standards

• Provides marketing and reservation systems and services

• Provides intellectual property and branding

• Provides technical services

• May be subject to a performance test

Franchise

Agreement

Franchisee Franchisor

• Owns and operates the hotel on its own behalf in accordance with

the Franchisor’s system

• Carries out construction and fitting out at its own cost

• Carries out capital works and supplies and maintains furniture,




• May be subject to performance targets

• Pays franchisor the initial fee plus ongoing loyalty fee

• Design to franchisor’s brand standards

• Provides marketing and reservation systems and services

• Provides intellectual property and branding

• Provides technical services

Management Lease

Landlord Tenant

• Receives rent from tenant, which may comprise a fixed component

and a portion calculated by reference to gross revenue or rooms

revenue of the hotel business

• Tenant (operator) leases the land to run the hotel business for

and on its own behalf (in accordance with the brand standards of

an international/national operator)

• Construction and fitout at its own cost

• Carries out capital works supplies and maintains furniture,




Source: Ashurst

22

HOTEL OPERATING MODELS

A Summary of Some of the Key Terms for Each Hotel Ownership Arrangement in Australia

Hotel Management Agreement Hotel Franchise Agreement Hotel Management Lease

Approximate Use in

Australia 75% 20% 5%

Term Generally between 10-20 years with option

for a further term.

Generally between

5-10 years with option for a further term.

Generally longer than 5 years with option

for a further term.

Fee Structure

Base management fee plus incentive

management fee.

Base management fee is generally a fixed

percentage of revenue throughout the term of

the arrangement.

Incentive management fees may be

calculated as a percentage of the gross

operating profit.

Initial franchise fee plus continuing loyalty or

royalty fee calculated as a percentage of

turnover or gross revenue.

The owner may be required to contribute to the

cost

of the business systems or services made

available (for example, loyalty program).

Rent is usually structured with fixed and

percentage components.

The fixed rent would be subject to annual

rent reviews.

The turnover rent is calculated by

reference to the revenue of the hotel

business.

Performance Tests

The operator may be subject to performance

tests which relate to gross operating profit or

average revenue per available room (RevPAR)

or a competitive set. The operator’s failure to

achieve performance tests may give rise to

termination rights or repayment of fees paid.

The franchisor sets specific performance

targets to protect the reputation of its brand

and ensure its entitlement to fees.

Performance tests vary between

franchisors and may take the form of a

guest satisfaction evaluation system or be

linked to financial

performance of the hotel.

A performance test may be negotiated as

the turnover rent may be a significant

portion of the rental obligations

of the operator. Performance test options are

similar to those for hotel management

agreements.

Other Key Terms

• Extent of owner’s involvement in hotel

management, eg. approval rights for key

employees such as general manager, financial

controller

• Approval of budget

• Intellectual property ownership

• Insurance

• Reporting

• Intellectual property ownership

• Insurance

• Transmission of business provision (for

example, in the event of early termination

where the owner needs to put in a new

tenant or operator)

• Approval of budget

• Insurance

Source: Ashurst

23

DISCLAIMER

This presentation has been published for information purposes only. The information contained in this paper is of a general

nature only and does not constitute financial product advice. This presentation has been prepared without taking account of

any person's objectives, financial situation or needs. Because of that, each person should, before acting on this presentation,

consider its appropriateness, having regard to their own objectives, financial situation and needs. You should consult a

professional investment adviser before making any decision regarding a financial product.

In preparing this presentation the author has relied upon and assumed, without independent verification, the accuracy and

completeness of all information available from public sources or which has otherwise been reviewed in preparation of the

paper. The information contained in this paper is current as at the date of this paper and is subject to change without notice.

Past performance is not an indicator of future performance.

Neither Folkestone Limited, nor any of their associates, related entities or directors, give any warranty as to the accuracy,

reliability or completeness of the information contained in this paper. Except insofar as liability under any statute cannot be

excluded, Folkestone Limited and its associates, related entities, directors, employees and consultants do not accept any

liability for any loss or damage (whether direct, indirect, consequential or otherwise) arising from the use of this paper.

If a product managed by Folkestone Limited or its associates is acquired, Folkestone Limited or its associates and related

entities may receive fees and other benefits. The author of this paper does not receive commissions or remuneration from

transactions involving the financial products mentioned in this paper.

24

DISCLAIMER:

This paper has been published for information purposes only. The information contained in this paper is of a general nature only and does not constitute financial product

advice. This presentation has been prepared without taking account of any person's objectives, financial situation or needs. Because of that, each person should, before

acting on this presentation, consider its appropriateness, having regard to their own objectives, financial situation and needs. You should consult a professional investment

adviser before making any decision regarding a financial product.

In preparing this presentation the author has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from

public sources or which has otherwise been reviewed in preparation of the paper. The information contained in this paper is current as at the date of this paper and is subject

to change without notice. Past performance is not an indicator of future performance.

Neither Folkestone Limited, nor any of their associates, related entities or directors, give any warranty as to the accuracy, reliability or completeness of the information

contained in this paper. Except insofar as liability under any statute cannot be excluded, Folkestone Limited and its associates, related entities, directors, employees and

consultants do not accept any liability for any loss or damage (whether direct, indirect, consequential or otherwise) arising from the use of this paper.

If a product managed by Folkestone Limited or its associates is acquired, Folkestone Limited or its associates and related entities may receive fees and other benefits. The

author of this paper does not receive commissions or remuneration from transactions involving the financial products mentioned in this paper.

DIRECTORY

Folkestone Limited

ASX Code: FLK

Website: www.folkestone.com.au

ABN: 21 004 715 226

Level 12, 15 William Street

Melbourne Vic 3000

T: +61 3 8601 2092

Level 10, 60 Carrington Street

Sydney, NSW 2000

T: +61 2 8667 2800

Board of Directors:

Garry Sladden – Non-Executive Chairman

Mark Baillie – Non-Executive Deputy Chairman

Greg Paramor AO – Managing Director

Ross Strang – Non-Executive Director

Company Secretary:

Scott Martin

Investor Relations:

Lula Liossi

T: +61 3 8601 2668

Email: [email protected]

Registry:

Boardroom Pty Limited

PO Box R67, Royal Exchange NSW 1223

Telephone: 1300 131 856 or +61 2 9290 9600

E-mail: [email protected]

Website: www.boardroomlimited.com.au

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