With the hotels sector looking to rebound following a challenging period due to Covid-19, Dean Humphries, National Director of Hotels at Colliers, looks at what is in store for the industry in the second half of the year.
The New Zealand hotel and tourism market underwent an unprecedented period of growth between 2013 to 2019, underpinned by strong international inbound visitation numbers, which reached a record 3.9 million in 2019.
This bumper period of international tourism represented a compounded annual growth rate of 6.2 per cent per annum, but the global impact of Covid-19 significantly dampened demand in 2020 and 2021.
However, a recent report published by the International Monetary Fund acknowledged New Zealand’s sound management of the Covid-19 crisis – highlighted by decisive fiscal and monetary responses – was instrumental in cushioning the wider economic impact. This included the Government contracting 34 major hotels for mandatory isolation purposes, known as MIQ hotels, which provided underlying financial assistance to the sector, while ongoing domestic leisure and corporate demand also remained in play for much of this period.
With international borders progressively reopening, the Tourism Export Council of New Zealand estimates international demand will return to pre-Covid levels within approximately four years. This is supported by a recent release by the International Air Transport Association who anticipate traveller numbers in the Asia-Pacific region will reach 2019’s pre-Covid levels by 2025.
New Zealand will also see a record 58 hotels, circa 8,230 rooms, completed between 2018 to 2024, adding a wide range of quality new hotel options for overseas visitors as they return to our shores.
As border restrictions ease, a robust recovery is anticipated over the next 18 months with the medium to long-term prospects of the hotel sector remaining very positive.
Strong investment demand
Following a record year of hotel sales in New Zealand in 2021, the industry is set to take another step forward in 2022.
More than $400 million of hotel deals were settled in 2021, representing a staggering 33 per cent increase on the previous highs of 2010 and 2015 that saw $300 million of sales recorded each year. The record result is nearly three times the 10-year average of $150 million per annum.
The sales included high-profile assets such as the five-star Sofitel Queenstown, 280-room Rydges Wellington, and the recently completed luxury lifestyle hotel QT Auckland.
Factors contributing to the increase in activity vary but the pandemic was one of the main drivers of activity in the market. Whilst there have been very few distressed sales, some owners have been more motivated to sell, especially if a buyer presents a fair, non-distressed offer.
Over 80 per cent of hotel transactions were to domestic purchasers, due largely to the inability of international investors to enter New Zealand due to border closures. In the five years preceding Covid-19, international buyers made up 50 per cent of all transactions.
Existing hotel investors were the most active in the market, looking to grow existing portfolios both geographically and by segmentation.
One of the big players to emerge in the past three years is NZ Hotel Holdings, a strategic partnership between the $60 billion NZ Super Fund, The Russell Property Group, and Lockwood Property Group.
This entity remained the most active investor in 2021, purchasing three strategic assets worth over $250 million. Since the commencement of the partnership in 2019, the portfolio has amassed a total of seven hotels comprising close to 1,400 rooms and is now the fourth largest hotel investor in the country by room count.
However, in 2022, we expect to see international investors re-enter and dominate the market after a two-year hiatus. A large amount of offshore capital is keen to invest in the New Zealand hotel sector as the country continues to be a highly attractive investment destination due to its transparent legal system, safe geopolitical status, and strong relationships with leading global economies. This has always helped drive strong investment demand in the property sector, including hotel and tourism assets.
Furthermore, investment demand remains highly fuelled by the limited availably of quality hotel assets available for sale and a wide range of private and institutional demand from domestic and offshore parties who are looking to secure a position in the country.
In almost all cases, these investors predict tourism will rebound strongly post Covid-19 and so will investment returns. Hotel yields also remain above other key asset classes offering attractive post-Covid-19 stabilised returns of 6 to 8 per cent.
This article originally appeared in the REINZ Real Estate Magazine winter 2022 issue.