Rebecca Kent (host)
For regional hotels in Australia business has hardly been better. And that’s because border closures to stop the spread of coronavirus are forcing holidaymakers to look for a getaway closer to home.
Jerry Schwartz
That's really the only good news that we have in the hotel industry: that regional hotels and regional Australia are doing so well.
Rebecca Kent
That’s the hotel mogul Jerry Schwartz there, speaking on a JLL webinar about regional hotels.
We’ll hear from Jerry, and other hotel owners and operators about how they’re making the most out of their new customer base.
Plus, could office buildings abandoned by business choosing to work from home, have new life as hotels?
That’s what one investor is considering as it remains optimistic about the outlook for city markets.
We’re exploring all of that in this episode of JLL’s Perspectives Podcast. I’m your host, Rebecca Kent. Thanks for joining me.
Rebecca Kent
So, in Australia’s regional hotels, specifically those that can be accessed easily by car or public transport, something really remarkable is happening.
Border closures and travel restrictions have basically gifted those hotels cohorts of new travellers who may not have otherwise considered holidaying so close to home.
Regional hotels now account for 65 percent of revenue share across the whole sector, compared to 49 percent the previous year.
Here’s Matthew Burke, Pacific Regional Manager of industry analyst STR.
Matthew Burke
What we're seeing is in July 37 percent occupancy for the capitals compared to a 49 percent for the regions. And what that translates to in average rate is an A$18 premium to regions.
I would have been laughed at if I was talking about this last year – that regions would have had an A$18 premium. So it really does illustrate the world that we currently live in and the way that demand is shaping out.
And then the last thing I'll finish on is looking forward. And this is taking on-the-books data that we're collecting from properties around Australia. And you can see that Sydney’s surrounding area is outperforming in almost every month into the next 12 months, and particularly higher in the school holiday windows of October and the December-January period.
So the outlook really is that unless there's a systemic change in the confidence levels of the traditional business that goes into our capital cities that regional hotels will continue to see stronger occupancies than their capital peers.
Rebecca Kent
Simon mentioned there the Sydney drive markets of Hunter Valley and the Blue Mountains. Somewhat fortuitously, they are precisely the two markets that Jerry Schwartz, company director of Schwartz Family Group bought into after the global financial crisis.
Jerry explains to JLL’s Ross Beardsell how a pair of convenience purchases could now come to be the best he’s ever made.
Ross Beardsell
At this point in time I’ll ask the first question to Jerry – and this is a very passionate subject and topic for Jerry. During the GFC for regional hotels, there was a focus for your hotel portfolio. How would you describe your purchasing decisions in the GFC?
Jerry Schwartz
To purchase resort hotels is a luxury. Your colleague Mark Durran has sold me many hotels in Sydney CBD, which at that time, were the ones earning money. During the GFC, the only hotels that came on sale, or were at a good price, were the ones which weren't performing well, which were the regional ones. And I actually remember Mark suggesting to me that the Fairmont Hotel was for sale – this was in 2010. And I tried to impress upon the owners of Lilianfels resort that they should get the Fairmont and then they would have the two best hotels and the Blue Mountains. And they said it was too expensive at A$24m.
All of a sudden it dawned upon me that this is an amazing hotel. I went and had a look at it, and it was absolutely deserted except for Geoff York, who was running it at the time, and it looked like a no-brainer.
Consequently, I purchased that hotel and two years later out of receivership, I purchased another regional hotel, which was Crowne Plaza Hunter Valley. So that was my purchasing during the GFC.
It’s a luxury to buy luxury hotels, and these were a convenience. Ironically, here we are in 2020 talking about a regional hotel market update, and that's really the only good news that we have in the hotel industry: that regional hotels and regional Australia are doing so well.
Rebecca Kent
Few hotels can remain viable accommodating weekend trippers alone. And so in certain regional locations, hotels have invested in creating assets that be set up for corporate travellers through the week, and family groups at the weekend.
With corporate travel now practically non-existent, and leisure travel increasing, those flexible strategies are expected to serve hotel owners well.
Brett Forer, development general manager for Accor’s Pacific hotels, says he is keeping a close eye on the changing demands of the market.
Brett Forer
You do get two very distinctive segments in the regional markets where leisure is often the drive on the weekend, and there are some pretty strong regional corporate locations out there. Particularly through a lot of our franchise assets that we deal with, in locations such as Orange, Bendigo, where we've got a new asset coming in, and Ballarat. In markets like this there is very strong weekend appeal, but there's also extremely strong midweek corporate businesses.
Where our franchisees have been very successful in this space is not trying to overplay their hand, but striving for an 80 to 100-room hotel that drives some level of flexibility there.
So they can set up assets that during the week will cater to more of that corporate, single rooms-style of stay, but then really being able to vary the room offering on the weekends so they can attract family markets and the leisure markets, which tend to have a higher density per room.
More often we're working with our franchisees in that space as we start to examine a lot of these markets and how the changing behaviours of consumers are evolving, and will continue to evolve post COVID in terms of a far greater focus on leisure markets within Australia on the weekend. Those that traditionally might have been stronger in midweek, corporate markets and regional markets, trying to set up these assets to start attracting a good leisure segment in the weekends as well.
Rebecca Kent
As the travel landscape changes, hotel operators are having to think much more creatively about enticing new travellers. For some, this might mean more package holidays, and building more value into the price of a stay.
Brett Forer
I think for a long time, a lot of Australians have travelled overseas to a lot of resort destinations and some of the appeal of that has been essentially the all-inclusiveness of certain resorts or the facilities they provide, and also itineraries that you can sort of book in when you're traveling to some of these locations.
I think there's a huge opportunity for Australia over the next 18 to 24 months in terms of how we start to reshape resorts.
I think everyone's been at home for a long time now and tired of cooking for themselves and cleaning for themselves, and really want to go away and not have to worry, and really start generating really unique experiences.
I think that's really what we need to be selling right now, is ‘come stay with us and have something that is completely different and carefree that you're not having at home right now’.
Whether it is fully all-inclusive or partially inclusive, we just need ways to start creatively looking at the way we sell in our resorts, and sell our products a little bit differently.
We've got amazing resorts across the country and in amazing locations that I think Australians are going to start to rediscover over the next 24 months.
And it's really a period of time that we have now where we have a captive audience of Australians that don't have to travel very far. If we give them the experiences that they're usually looking overseas for, it's a really unique opportunity for us to capture them and keep domestic travellers in Australia into the future.
Rebecca Kent
That’s Brett Forer there, from Accor hotels.
We’re going to shift focus to CBDs, and specifically, breathing new life into emptied office buildings by converting them into hotels. It’s an opportunity being explored by Geoff York, the acting chief executive and group director at hospitality company Crystalbrook Collection.
Geoff was also speaking on JLL’s regional hotels webinar when he announced this very interesting strategy.
It’s interesting for a couple of reasons: for one, Crystalbrook mainly owns hotels in Australian regional markets, so this reflects an interesting change in direction for the company, triggered directly by the current economic climate.
Secondly there is plenty of discussion about how the pandemic will change our cities, and this could be just one small way.
Here’s Crystalbrook’s Geoff York who was interviewed by Andrew Langsford, a senior vice president in JLL’s Hotels and Hospitality Group.
Andrew Langsford
I’ll start with you, Geoff York, from Crystalbrook. Thanks for joining us. Noting that the majority of Crystalbrook’s assets are regional, if you had up to A$100 million dollars to spend over the next six to 12 months on a new asset, which locations would you be focusing on?
Geoff York
I'll just start by saying we are a developer, owner and operator of our own hotels. On an investment perspective, looking at what we've acquired and now operating since we came into being only four years ago, we are moving away from regional locations. Particularly those which have got a high reliance on aviation, which somewhere like Cairns does, and we're seeing that impact at the moment, with both international and domestic flights and capacities.
More east coast Australia is on our agenda, including New Zealand, and specifically capital cities. And within those capital cities, it is a city CBD or just on the fringe of that.
We’re looking at the commercial office building market at the moment. There's a lot of talk that there could be reduced demand from that as we've all gotten used to working from home and companies are talking about maybe downsizing their office requirements.
Some of those buildings – probably more B and C-grade commercial office buildings - we're looking at as potential hotel conversions.
We're doing one ourselves at the moment in Newcastle - a building that was previously Newcastle city council chambers. We're in the middle of repurposing that as a hotel. It'll be a 135-room hotel, rooftop bar, restaurant, and with all the bells and whistles. And that's going to open in April next year. That's given us a few learnings and made us think about not just limiting ourselves to looking at hotels in capital cities.
Repurposing into a hotel doesn't suit all commercial office buildings, but we think there’s scope in some.
Rebecca Kent
Equally positive about the comeback of city hotels is Julian Clark, chief executive of boutique hotel operator Lancemore Group.
Though he does suggest that investors angling for good buying opportunities should dissect markets into demand segments and assess how and when those segments are likely to recover to determine the risk.
Because not all regional markets, and not all city markets are being affected in the same way.
International travellers, for example, account for the bulk of stays in Sydney CBD hotels, suggesting the city is getting hit pretty hard at least in the medium term compared to other cities.
On the other hand, hotels located just a drive from major population hubs and cater to leisure travellers are performing exceptionally well, and will probably continue to.
Here’s Lancemore’s Julian Clark.
Julian Clark
I'll start probably with the thesis of, I think that we've got a really strong medium-term story and then a stronger for longer tourism market in the country. I think demand will recover. I also think once this is done - and that's going to be a medium term thing - supply is going to become more muted.
Almost perversely, if you take a medium-term view, I think many of Australia's CBD markets are going to have a better supply-demand mix than pre COVID.
The other thing I'd say is that I think that interest rates are going to be low, and there's going to be plenty of cash around for a period of time - minimum five years, if not longer.
So if you take that there, and you also take that there's going to be some valuation declines as a result of COVID, you look at this and you say this is a buying opportunity of the likes that you don't see all the time.
So in many ways that that explains why I’d spend the money rather than reinvest it.
There is one asset that I would spend a couple of million dollars on. It was scheduled for refurb. It's a drive leisure market asset and we know that this would increase in both valuation and cash flow - both of which we’d be pretty happy to receive in a market like this. And so it would be a small amount on that and the rest would be on new assets.
Rebecca Kent
A desperately difficult time for hotels, yet terribly exciting and full of opportunity all at once.
We hope you enjoyed this episode of JLL’s Perspectives Podcast.
For a more comprehensive understanding of the size, importance, and performance of the regional hotel market, from an incredibly experienced line-up of speakers, you should definitely watch JLLs Regional Hotels Market Update webinar. Jump on over JLL.com.au/perspectives-podcast and find this episode for the link.
I’m Rebecca Kent. Catch you next time.
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