Sydney set for biggest hotel boom since Olympics

Pedestrians walk past the InterContinental Sydney hotel

Fourteen years after the last major hotel opened in Sydney’s center, 42 developers are competing to turn two 100-year-old government office buildings into accommodations as demand soars.
Elsewhere in the city, developers including China’s Greenland Holding Group Co. and Singapore-based M&L Hospitality Trust plan to add more than 5,300 rooms over the next five years. If they are completed, the city’s supply of rooms will rise by about 20 percent by the end of the decade, the most since Australia’s largest city hosted the Olympics in 2000, according to broker CBRE Group Inc.’s hotels division.
Hotel construction is picking up as the number of visitors to Australia grows at the fastest pace in at least nine years, sending occupancies in Sydney to a record and the highest in Asia after Hong Kong and Tokyo. Sydney’s average hotel occupancy is set to reach 88.8 percent by the end of 2016, the highest since at least 2000, according to economics advisory firm Deloitte Access Economics Pty.
“The hotels are all full, so there’s more than enough demand for more rooms,” said Michael Kum, chairman of Singapore-based M&L, which is adding a third tower at its 683- room Four Points by Sheraton, Australia’s biggest hotel, in Sydney. The new developments planned for the city’s center mean “the whole area will be totally transformed,” he said.
Sydney ranks 15th on a list of the most expensive markets for hotel rooms, according to an index compiled by Bloomberg. With an average room cost of USD221 a night, Sydney lagged behind the priciest market, Geneva, at $308, No. 2 Dubai and New York in tenth place, at $233 for a stay.
The last major luxury hotels to open in the city center were the Westin, operated by Starwood, and Minnetonka, Minnesota-based Carlson Inc.’s Radisson Blu Plaza, both in 2000, broker Jones Lang LaSalle Inc. said.
“Sydney has had huge challenges in getting new product into the market in the past,” said Oscar Westerlund, Sydney- based director of strategic solutions at CBRE. “Many of the bigger projects are conversions of existing buildings or new releases of land with government at the base of them, and with things like casinos that add to their viability.”
The largest hotel development going up in the west of Sydney’s center is the 650-room International Convention Center hotel overlooking Darling Harbour. It’s being built by Lend Lease Group, Australia’s biggest developer.
An operator hasn’t been identified for the hotel, set to open in 2017, as the project is still in the planning stage, Iwona Polski, a spokeswoman for Lend Lease, said by e-mail.
Operators of new hotels are usually selected through a competitive process, based on their ability to increase revenue and manage costs, according to Richard Munro, chief executive officer of the Accommodation Association of Australia, which represents the industry. The timing of the process varies based on project and developer, he said.
Sydney-based Lend Lease is also creating the A$6 billion Barangaroo South precinct that will include Sydney’s first six-star hotel with 350 rooms and a high-rollers’ casino, built in partnership with billionaire James Packer’s Crown Resorts Ltd. The state government is managing the redevelopment of Barangaroo, the site of former dockyards and the last available land parcel in the city. It will also include offices, apartments and a waterfront park.
The Australian dollar bought 94 U.S. cents as of Monday. It’s set to fall to 89 cents by the first quarter of 2015, according to analyst estimates. As the currency wanes, Australia is looking attractive again. The number of overseas visitors to Sydney jumped 6 percent to 2.8 million in 2013 from the previous year, the biggest increase since 2005, the earliest year of data available from Tourism Research Australia shows. Travelers from China represented the biggest group with 394,718 arrivals, a 13 percent surge from the previous year. Growth in overseas arrivals will average 4.5 percent a year over the next decade, the government agency forecasts, revised from an earlier forecast of a 4 percent annual increased. The number of Australians visiting Sydney rose 7.2 percent in 2013, the biggest increase since at least 1999, according to the agency.
Outside of Sydney, Wyndham Worldwide Corp. will open its first Australian Tryp hotel in a new property in Brisbane, in Queensland state, this year. Singapore-based SilverNeedle Hospitality Pte is redeveloping an existing building in the same city to open the world’s first Next hotel.
Among global operators, Intercontinental Hotels Group Plc has 26 hotels in Australia, nine of which are in Sydney; Hilton Worldwide Holdings Inc. has one in Sydney and 11 others across the country; and Marriott International Inc. operates three of its six Australian hotels in Sydney.
Occupancy rates in Sydney were at 84.6 percent in the first four months of 2014, compared with 78.7 percent in New York and 77.3 percent in London, according to STR Global. Only Hong Kong and Tokyo were higher, at 86.9 percent and 85.8 percent respectively.
Sydney room rates are set to climb 4 percent a year to A$228 by the end of 2016. Revenue per available room – a hotel industry measure of occupancy and rates –
will increase 4.9 percent a year, a Feb. 27 report by Deloitte Access Economics showed.
Also encouraging development is strong demand from investors for existing hotels. Australia had about $1.9 billion of hotel transactions in 2013, the highest on record, according to figures from Jones Lang LaSalle Hotels. This led to a tightening of capitalization rates –
a measure of investment yield that contracts as prices rise – by 80 basis points in the year ended March 31 to 8 percent, according to real estate researcher IPD.
Among cities in the Asia-Pacific region, investors are most optimistic about trading in Sydney and Melbourne hotels, Jones Lang LaSalle said in its June Hotel Investment Sentiment Survey. Bloomberg

Nichola Saminather