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Hotel development set to slow in 2019

New hotel development in Australia is set to slow as the country’s struggling apartment market contributes to a decrease in residential-led mixed use projects.

Experts believe 2019 will mark a distinct slow-down in the current hotel development cycle which has added a raft of new accommodation to Australia’s key markets over the past five years.

“There are strong signals that suggest that if a project is not currently under construction or shovel ready then the probability of it proceeding has diminished over the past twelve months,” says Troy Craig, JLL Managing Director, Strategic Advisory – Australasia.

The sector’s tapering has been accelerated by the downturn in the residential sector as many new hotel projects form part of mixed use developments and have been pushed along by the historically stronger development profit margins of residential.

Regulation-driven curbs on development lending and increasing construction and land costs, especially in Sydney and Melbourne, are also factors contributing to the direction of the market and the tightening development outlook.

Adjusting to new conditions

As the end of the hotel development cycle looms, investors with development plans should be extra vigilant warns Craig.

“Those considering new hotel developments really need to ensure their borrowing plans are firmly locked in and that their feasibility analysis is up to date and independently prepared in order to satisfy the inevitable questions from their lender.”

Planning approvals also require meticulous attention “as even a relatively minor change in the hotel plans can trigger the requirement for an amended planning permit which could easily delay construction by a few months,” he says.

Despite a slow start to 2018, sales volumes picked up over the second half of the year to record a total of around A$1.8 billion across 35 transactions.

This supply wave has gone a long way to addressing concerns that tourism in Australia was being held back by an ageing fleet of hotels, particularly when compared to the standard of hotels across Asia.

Early in the cycle, investors saw opportunities in the mining booms in Brisbane and Perth between 2007-2012; strong inbound tourism growth (especially from China and Asia) as well as improving domestic demand; banks’ willingness to lend following the recession of the early 1990s; and improving hotel values in Sydney and Melbourne.

“Though there is still a shortage of modern luxury hotels in some markets to cater to the growing cohort of wealthy Asian tourists, investors will broadly welcome this slow-down in the current development cycle,” says Craig.

Hotels built over the past five years, in the current development cycle, include The Westin Perth, Mayfair Hotel Adelaide, Sofitel Sydney Darling Harbour, The Calile Hotel Brisbane, Macq 01 Hotel in Hobart and Sheraton Melbourne Hotel.

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