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News release

Sydney

Hotel leases are making a come back


In contrast to the past few years hotel leases have re-emerged as a trend with hotel operators in recent times, prompted by very few new hotel developments in the pipeline and a positive trading outlook across most hotel markets in Australia.
“In the years leading up to the GFC when hotel trading performance and outlook was strong, leases on hotels were gaining popularity as hotel operators were becoming increasingly prepared to consider taking the business risk under the terms of a lease in order to expand their portfolios. This abruptly stopped during the GFC due to weaker trading market conditions and a heightened level of uncertainty,” said Anthony Corbett, Executive Vice President – Strategic Advisory, Jones Lang LaSalle Hotels.
Traditionally most hotels in Australia and New Zealand have been, and continue to be, operated under management agreements where the owner (not the operator) holds the ongoing trading or business risk. Leases differ from management agreements as the operator pays the owner a fixed or nominated rent and has full discretion in the running of the property and keeps any profit generated by the business.
Mr Corbett continued, “While leases are more prevalent for serviced apartments, recently a number of our developer clients have been approached by operators offering to lease new hotels. In the right location this suits hotel operators as new management opportunities continue to be rare with limited new hotel development and very limited opportunities to convert brands on existing assets.” He added, “The benefits of such an arrangement are substantial for the developer as it removes post completion hotel trading risk and increases certainty in obtaining finance.”
“Given the current strong occupancy levels and prospects for room rate growth over the short to medium term we are expecting this trend to continue for some time. Hotel leases will be most prevalent amongst those sites that are considered strategic by operators or where the location is unique in terms of proximity to corporate and leisure demand generators,” concluded Mr Corbett.