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Hotel Intelligence Australia2011

Hotel Intelligence Australia provides a comprehensive overview of hotel investment market trends

This report includes a detailed analysis of trading and investment trends across fi ve sub-segments – prime CBD, suburban, resort markets, secondary CBD and mining centres.

Ayers Rock Resort, Northern Territory

Hotel Intelligence Australia • 2011 • 1

Economic Outlook & Tourism 2

Hotel Development 5

Investment Market Trends 8

2010 Transaction Map 12

Summary by Sub-Segment

Prime CBD 14

Suburban 17

Resort 19

Secondary CBD 22

Mining Centres 24

Table of Contents

Jones Lang LaSalle Hotels, the fi rst and leading global hotel investment services fi rm, is uniquely positioned to provide the depth and breadth of advice required by hotel investor and operator clients, through a robust and integrated local network. In 2010, Jones Lang LaSalle Hotels provided sale, purchase and fi nancing advice on $4.1 billion worth of transactions globally. In addition, advisory and valuation services were provided on over 1,000 assignments. The global team comprises over 230 hotel specialists, operating from 39 offi ces in 20 countries. The fi rm’s advice is supported by a dedicated global research team, which produced 70 publications in 2010 in addition to client research. Jones Lang LaSalle Hotels’ services span the hospitality spectrum; from luxury single assets and large portfolios to select service and budget hotels, resorts and pubs. Services include investment sales, mergers and acquisitions, capital raising, valuation and appraisal, asset management, strategic planning, operator selection, management contract negotiation, consulting, industry research and project development services. Jones Lang LaSalle Hotels’ clients have access to the resources of its parent company, Jones Lang LaSalle (NYSE: JLL).

www.joneslanglasallehotels.com

2 • Hotel Intelligence Australia • 2011

Economic Outlook & Tourism

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8.0%

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Policy Interest Rate Unemployment Rate Real GDP Consumer Price Inflation

Perce

ntage

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wth (

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Source: IHS Global Insight May 2011, Jones Lang LaSalle Hotels

Australian Key Economic Indicators2001 to 2015F

IHS Global Insight expects the economy to grow just 2.4% in 2011, as natural disasters occurring in the eastern states during the fi rst quarter are expected to reduce export potential, while compromising the balance sheets of affected households and businesses. Reconstruction activity is expected to recover in the second half of the year, with households and businesses spending their claim payouts to help put their lives and businesses back in order.

Expectations of weaker growth in 2011 are also the result of a moderation in consumer spending. Consumption is projected to be constrained by higher interest rates, but falling unemployment and rising skill shortages should result in rising real incomes.

RBA pauses on interest rates

After raising the leading interest rate an additional 25 basis points in November 2010, the Reserve Bank of Australia (RBA) is expected to hold interest rates until at least mid 2011 allowing time to assess the economy’s adjustment to higher interest rates, the impacts of the natural disasters, and monitoring of infl ation conditions.

Global snapshot

After the signifi cant set backs of the global fi nancial crisis (GFC), 2010 was an important rebound year for the global economy. While still facing a number of challenges for a sustainable recovery, the rate of global economic growth is expected to ease back in 2011 to 3.7%, following growth of 4.1% in 20101. However, the distribution of growth is highly uneven with the Asia Pacifi c, and to a lesser extent American economies, leading the way.

Eastern Europe

Western Europe

Latin America

North America

Asia Pacific

Australia

2012F2011F20102009

GDP Increase-6% -4% -2% 0% 2% 4% 6% 8%

Source: Consensus Economics April 2011, Jones Lang LaSalle Hotels

Global Economic Growth2009 to 2012F

Infl ationary pressures are a particular issue for the emerging Asia Pacifi c markets and are causing increasing unease in some developed economies, including Australia. Most Asia Pacifi c central banks have begun implementing tightening measures to combat infl ation and further policy interventions are likely in the balance of 2011. Higher interest rates are also likely to emerge as a key concern for investors, whereas the rapid growth of emerging economies is also placing upward pressure on primary commodities and asset prices.

Australia – “the Lucky Country”

Ranked 13th in the world in terms of nominal GDP (US$ billions), Australia is projected to enter its 20th consecutive year of economic growth in 2011 having staved off the adverse global headwinds over the past couple of years and the short term impact of recent natural disasters (fl oods/cyclones).

A tight labour market, combined with increases in external demand for commodities, has underpinned strong consumer confi dence from GFC levels, although some weaknesses are emerging in selected tourism sectors and geographies, particularly in light of interest rate rises and the recent strength of the Australian dollar.

“Australia is projected to enter its 20th consecutive year of economic growth in 2011 having staved off the adverse global headwinds over the past couple of years.”Karen WalesSenior Vice President – Research and Consultancy

1 IHS Global Insight, March 2011


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Inbound: Outbound

AUD (TWI - 11mth Iag)

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Source: Tourism Research Australia, Jones Lang LaSalle Hotels

The Currency FactorComparison Tourism Ratio and Trade Weighted Index

Australia’s appeal to international source markets has been fl at with inbound arrivals totalling around 5.5 million each year between 2006 and 2009. In 2010 arrivals increased 5.4% – the highest rate of growth since 2005 – to total 5.9 million. This growth refl ects improvements in the global economic environment but also the easing of infrastructure bottlenecks over the past couple of years, notably aviation capacity. However, growth has slowed during the fi rst quarter of 2011 (-5.1%)

Inbound tourism is forecast to increase over the next few years with growth averaging 4.5%. This compares to an average of 6.8% per annum for outbound travel as the balance of trade between inbound and outbound tourism continues to reverse.

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Index - Long Term Trend

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Note: Australia becomes a net exporter of tourists above 1.0Source: Australian Bureau of Statistics, Tourism Research Australia, Jones Lang LaSalle Hotels

Australia - Net Visitor Chart2000 to 2012F

The allure of Asian and Pacifi c destinations

Outbound travel from Australia has increased at an accelerated rate averaging 11.2% per annum over the past seven years, before reaching a pinnacle in December 2010. Outbound departures from Australia totalled 7.1 million in 2010 compared to 3.4 million in 2003.This is equivalent to one trip being taken each year by a third of the resident population.

The leading interest rate has increased 175 basis points since its October 2009 low point, aligning it with what the RBA views as just above the long-run “average” interest rate. The RBA is expected to maintain a slightly tighter-than-neutral policy setting through the fi rst half of 2011, but the policy rate is expected to rise by 50 to 100 basis points by the end of the year.

The Australian dollar climbs above parity

The Australian dollar has hit new post-fl oat highs in early 2011, despite some weakness experienced in January 2011 owing to concerns about the effects of the fl oods on economic growth. This continues the appreciating path evident throughout 2010, supported by further monetary loosening in the United States as well as strong domestic growth and a rebound in the terms of trade to multi-decade highs, owing to stronger commodity prices. The Australian dollar fi rst reached parity with the US dollar in early November and after a brief correction, it ended 2010 at AUD0.977/USD1.000, an appreciation of 12.3% from the end of 2009. On average, the Australian dollar appreciated by 15% versus the US dollar in 2010.

Tourism trends refl ect economic backdrop

The strengh of the Australian dollar has been a major factor for the Australian tourism industry since 2004; driving outbound travel and conversely reducing the competitiveness of domestic tourism. Diffi culty in competing effectively against changing consumer preferences has also become evident.

The impact on the domestic leisure segment has been pronounced as Australia’s solid economic performance has made overseas travel more affordable, whilst conversely underpinning the domestic corporate segment which has resulted in strong trading in Australian city hotel markets over much of the past decade. A preference for short mini-breaks and event travel, boosted by more affordable air travel, is also favouring city destinations. Lacklustre inbound tourism, particuarly leisure travel, has been placing downward pressure on Australia’s resort and some regional markets.

These various travel trends are expected to continue over the short to medium term and may even refl ect a longer term mind-shift for the Australian tourism market.

2 Tourism Research Australia, October 2010


Asian and Pacifi c destinations are leading the charge with strong growth in outbound travel to medium-haul destinations across South East Asia, as well as Fiji, China and Japan. Over the past 18 months, increasingly favourable exchange rates and growth in aviation capacity has also resulted in a surge of Australians visiting the United States.

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e Yea

r 200

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New Zealand

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

South-East Asia

Pacific

North-East/Southern & Central Asia

Europe, North Africa & Middle East

North America

50


Outbound Travel TrendsMajor Destinations for Australian Travellers 2000 to 2010

Outbound travel is projected to continue to grow over the longer term, presenting further challenges for Australia’s leisure markets. The growth of cheap fl ights, tourism demand generators and competitively priced product is adding to the allure of offshore destinations, particularly across Asia. Development in Australia’s key tourist areas has been limited by comparison and likely to be held back by market forces over the medium term. The gap between tourist accommodation offerings will therefore become increasingly evident.

Aviation bottlenecks have eased

The global aviation industry has faced some serious challenges over the past decade, with the most recent economic slowdown resulting in global passenger traffi c falling by 3.5% in 20092. On the contrary, Australia experienced a 5.0% increase in international seat capacity in 2009 and 6.0% in 2010. Increased activity is being dispersed across Australia as city airports seek to attract a higher proportion of international passenger traffi c. Growth was strongest into Perth (14.7%), Melbourne (13.3%), Adelaide (9.4%) and Sydney (7.5%) in CY 2010. However, Sydney still accounts for the lion’s share of inbound traffi c with more than double the number of international passenger movements compared to next-best rival Melbourne.

Growth in international seat capacity is expected to increase further through 2011 by an estimated 7.7%, driven mainly by an increase in direct fl ights from Asia and China in particular (c.40% in 2011). Modest increases in inbound tourism are expected as a result. Over the longer term, international aviation capacity is projected to grow at an average rate of 3.9% between 2009 and 2020 with a similar rate of growth for inbound tourism.

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International Regional Domestic Total Growth

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Australia’s Top Ten Airports Passenger Movements FY1986 to FY2010

Domestic capacity across Australia has also increased with the emergence of low cost carriers (LCCs), increasing competition in the airline industry and opening up travel to a price sensitive market. In the period since the entry of Virgin Blue around a decade ago, best domestic air fares have halved in real terms. While Jetstar and Tiger have taken the lead in recent domestic airfare discounting, Qantas ‘Red e-Deal’ and Virgin Blue’s ‘Go fares’ and ‘Blue Saver’ also offer low prices. This has resulted in strong growth in domestic passenger movements averaging 7.7% per annum between 2003 and 2010.

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Source: BITRE, Jones Lang LaSalle Hotels

Domestic Air Fare Index1992 to 2010

Airline prices are expected to rise throughout 2011 as airlines raise surcharges to compensate for higher fuel prices. Supply constraints of crude oil following unrest in the Middle East and a drop in refi nery production in Japan after the March earthquake and tsunami is driving up prices.


Hotel development slows to a trickle

Australia’s accommodation room supply has remained fairly static over the past thirteen years with the total number of rooms increasing at an average rate of 2.1% per annum (55,000 rooms) between 1997 and 2010. Growth was strongest in the lead up to the Sydney Olympic Games in 2000, but has moderated over the past decade to average just 1.5% per annum (32,000 rooms).

The feasibility of new hotel development remains challenging across Australia as hotel values have not kept pace with the rapid growth in construction and underlying land costs over the last thirteen years – the peak of the last development cycle. The development of hotels is generally considered high risk with few “traditional” styled projects providing an acceptable level of profi t or return on capital. Whilst the level of success would anecdotally appear higher for smaller developments at the lower end of the market, such developments are often underpinned by group operating structures and corporate investment drivers. Many non-strata hotels also continue to be sold at prices below replacement cost and thus there has been little impetus to build.

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1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Motels Hotels Serviced Apartments

Acco

mm

odat

ion R

oom

s

Source: Australian Bureau of Statistics, Jones Lang LaSalle Hotels

Australia’s Accommodation Supply1997 to 2010

Alternatively and more commonly over recent years, hotel developments have leveraged off the strata investment market. This has allowed the development to be sold down on a “retail” basis as individual strata units to private investors rather than on a “wholesale” basis as a larger commercial investment. Increases in serviced apartment room supply have therefore been considerably higher than for the accommodation market overall with rooms increasing at an average rate of 7.7% per annum. This compares to hotels rate of growth of 1.8% per annum and motels 0.3% per annum.

Many of the investment drivers which resulted in the growth of strata-titled tourist accommodation product have now changed and development activity has moderated over the past two years with growth averaging only 1.3% per annum. Construction costs are higher, debt is less freely available and retail investors have been de-leveraging. Low or negative returns, particularly in Australia’s leisure markets, and the lack of a secondary market are also weighing heavily on the sector.

Gearing up for the next development cycle

Availability of debt is a key factor in hotel development and investment, affecting the number of buyers in the market and their ability to pay. Investment is rarely purely debt driven, but also dependent on property fundamentals and income expectations.

Banks typically have a lower appetite for specialised property assets, such as hotels, refl ective of their higher risk profi le and the associated degree of business risk. Loan-to-value ratios (LVRs) average around 50% as the generally accepted level of leverage that an established trading asset can sustain during volatile times. Hotel values can also experience a compounding effect during the downward phase of the cycle from both a reduction in income and a softening in initial yields (cap rates).

Hotel Development

“A number of city rejuvenation or expansion projects are planned over the medium term which could provide rare hotel development opportunities in Australia’s prime CBD markets.” Troy CraigManaging Director - Strategic Advisory


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Accommodation Building Approvals Source: Australian Bureau of Statistics, Jones Lang LaSalle Hotels

Australia – Accommodation Building ApprovalsMoving Annual Average 2001 to Jan 2011

While the trading recovery in Australian hotels evident over the past year has surprised on the upside, it has not been suffi cient to warrant more development projects being progressed as development debt is still diffi cult to obtain. Consequently, accommodation building approvals across Australia have slowed through 2010 to their lowest annual level since 2001 with only $678 million of projects approved. This represents just 38.2% of the level recorded in 2007, prior to the global fi nancial crisis, and highlights how the lack of development debt will continue to restrict the fl ow of new accommodation product over the short to medium term.

Government stakeholders may look to step in

While the favourable supply/demand imbalance projected over the next few years is undeniably positive for existing owners, a lack of accommodation development feasibility and aging product may prohibit the growth and evolution of the Australian tourism industry over the long term. Increasingly governments recognise that insuffi cient tourist accommodation can act as a stranglehold on economic growth, however, few effective actions have been taken to date.

Government incentives most favoured by industry stakeholders for stimulating accommodation development include payroll tax reform, conversion of heritage buildings to tourism use, development bonuses or uses and site land release. However many stakeholders also recognise that the use of incentives can result in more rooms being added over and above those warranted from future market conditions as developers move to capitalise on the perceived benefi ts of any such incentives. If market conditions change unexpectedly, this can result in pronounced supply-driven downturns as evident in Sydney in 2001. Hotel markets need time to correct if a self-sustaining industry is to be developed and incentives should therefore only be used on occasion and assessed on a case-by-case basis and not uniformly applied in any given market.

Proposed Barangaroo Development, Sydney


Targeted development is more effective

While more complex for Government, predicating that major infrastructure developments include a tourism component could be a more effective means to ensuring appropriate levels of accommodation development, supported by the creation of activity pockets. In most instances, hotels are not demand generators in themselves, but they service demand. The geographic dispersal of tourism attractions across Australia and in many cities makes it diffi cult to ensure focused and deliberate development. Tourism infrastructure which is appealing to target markets can help to diversify the offering, particularly when done through the creation of destination hubs, for example fi nancial centres, sports, entertainment and cultural activities, as seen in Melbourne. Hotels are best located in these areas or in business parks and near airports on the city fringe.

A number of city rejuvenation or expansion projects are planned over the medium term which could provide rare hotel development opportunities in Australia’s prime CBD markets. These include Barangaroo in Sydney, Brisbane’s RNA Showgrounds, Melbourne’s Victoria Harbour and North Wharf developments, Perth’s Waterfront and Adelaide’s Riverbank.

Similarly, the viability of new accommodation product can be improved through the development of convention infrastructure, whilst also driving additional revenues into the local economy. Expansion or development of convention infrastructure has recently been completed or is underway in Darwin, Melbourne and Brisbane, whereas new facilities are in the various planning stages in Adelaide (expansion), Canberra (Lake Burley Griffi n), Melbourne (Exhibition Centre), Sydney (Redevelopment of Entertainment Centre and White Bay Cruise Terminal) and Perth (Burswood expansion). This is likely to spur new accommodation product in these locations.

Future development – what, where and when?

A long period of sustained economic growth and a safe, stable and transparent investment environment has kept Australia on the radar for domestic and international investors. However with few new hotels being built in most Australian cities, low availability of investment grade product will see prices increase with limited new supply impacting markets and restricted stock available for sale. Coupled with strong growth in trading, this is expected to result in hotel development becoming feasible over the medium term, although higher competing alternate uses will continue to quell the fl ow of new development, particularly in prime CBD markets.

We estimate that on average RevPAR would need to increase by around 40-50% on 2010 levels for accommodation development to be considered viable or at least having a fair chance of success in Australia’s prime CBD markets. Notwithstanding the current development debt constraints, we anticipate that new supply will become evident in most markets from 2015. Our assessment includes a range of variables which are highly subjective and open to interpretation.

Projects may progress, for example, on the basis of assumed lower construction or land costs and/or higher trading expectations, particularly if worked up when hotel trading performance is strong as is anticipated over the next few years. Having regard to the likely quantum and timing of new supply will be critical for existing owners who are looking to exit, if they are to maximise investment returns.

Over the coming cycle, we anticipate that more accommodation development will need to be directed to the budget/midscale segments as Australian room supply is disproportionately weighted to the 4-star segment. The supply of lower graded product as a proportion of the total room supply has declined over the past ten years. Historically budget room supply in Australia has been dominated by the motel segment, but increasingly new branded budget hotel product is being developed by international and domestic operators which should be encouraged.

The dispersal of room supply outside of city centres is also expected to continue in Sydney and Melbourne, whilst becoming evident in Perth and Brisbane. Viability of projects in these suburban locations will have greater regard to individual asset location. This can increase signifi cantly if a property is well located to tourism demand generators and in some instances could even make accommodation product the highest and best use of land. Established suburban accommodation centres such as North Sydney, North Ryde, St Kilda, Parramatta and the airport precincts are expected to continue to expand, whereas new rooms are also likely to be built where demand for accommodation is high.

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Serviced Apartments

Motel

Hotel

Accommodation Rooms

5-star 4-star 3-star 2-star


Australia’s Accommodation Supply As at end of 2010

Conversely, serviced apartment development is expected to remain relatively constrained over the next few years, particularly when compared to historic growth rates, given the emerging negative yield spread. We believe that a positive yield spread would have to be evident for at least three years before retail investors were tempted back into the strata-titled serviced apartment investment market to such an extent as to have a material impact on development activity.


Volumes Recover

The four years to 2007 saw record investment in the Australian (and global) hotel property sector as it benefi ted from a surge in investor demand under-pinned by an abundance of both equity and competitively priced debt. An improved outlook for earnings growth due to limited new supply in most markets and strong demand growth also underpinned this unprecedented demand for the sector.

The onset of the US sub-prime credit crunch in the latter part of 2007 and increasing volatility in world debt/equity markets throughout 2008 resulted in rapidly declining market sentiment, and added uncertainty to the outlook. Consequently, transaction volumes declined markedly across the world and reached a low point in Australia during the fi rst half of 2009 with only $100M of assets exchanging hands.

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e ($M

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Source: Jones Lang LaSalle Hotels

Hotel Investment TrendsTransaction Volumes & Price per Key 1993 to 2010

As the green shoots of economic recovery became evident through mid-2009, savvy investors wasted no time proclaiming their re-ignited passion for the hotel sector. Reminiscent of the late 1980s and early 1990s, the state of debt, equity, hotel property and capital markets were such that investors with cash and the ability to move effi ciently were able to capitalise on the changed global environment. Australian hotels were a key target, particularly for Asian investors, boosted initially by a short term currency weakness and 49-year record low interest rates in April 2009.

Transaction volumes surged in the second half of 2009, before there was a clear indication that trading markets had bottomed. As the trading market recovery became evident, 2010 saw the investment upsurge gather pace with volumes reaching an above average $1.4 billion. Activity was largely two-fold featuring both prime assets in major city locations and distressed resort stock. The buyer and seller profi les were similarly distinct with the sell down of assets by the domestic funds and acquisitions by Asian investors and some domestic players.

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Domestic Asian North America Middle East European Other Unknown Global


Australian Buyer Profi leSource of Investment 1993 to 2010

Australian transaction volumes are projected to return to the long-term trend over the next couple of years, with around $1 billion of assets changing hands each year. Investors will continue to focus on the gateway cities and major resort markets which drew most of the acquisition attention in 2010, while watching secondary and emerging markets for attractive values in an improving business climate.

Investment Market Trends

Travelodge Docklands, Melbourne


Return to more traditional buying

While Asian investors have dominated over the past three years, we anticipate the gradual return of more traditional buyer types, such as the domestic investment funds, over the medium term. While having emerged as one of the primary selling groups in 2009 and 2010, many of the fundamentals which attracted them to the sector have not changed. The weight of capital being driven by compulsory superannuation still has more than a decade to build before signifi cant withdrawals are made.

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Property Investment TrendsTransaction Volume by property Type 2001 to 2010

Cross-border investments will continue, with the stronger dollar having limited impact on foreign investment levels to date which refl ects the fact that many Asian currencies have appreciated at similar rates to the AUD.

Capital growth may start to free up more product

On the whole, Australian hotel values are expected to increase through 2011 as market fundamentals continue to improve. This is providing the momentum for increased investment trades, encouraging investors to assume greater risk to achieve intended returns. This competition will introduce more liquidity into the sector as credit markets ease and the lending environment improves as banks successfully refi nance their loans.

Capital values for Sydney 4-star hotels contracted on average by 23.6% between Q407 and Q409 but posted a 14.2% recovery in 2010. Capital values in core cities are projected to rise strongly over the next three years. RevPAR (revenue per available room) contracted by 7.3% over the same period, but increased by 12.6% during 2010, with recent trading surpassing 2008 peak levels. Hotels in Sydney, Melbourne, Brisbane and Perth are expected to record the strongest growth over the next few years.

Initial yields revert to near term trend

Across Australia, long-term hotel initial yields have averaged around 7.6%, but have tightened more recently to average 7.3% since 2000. Similar to other property assets, average initial yields reached a low point in 2007 of 5.8% but have softened over the past three years. In 2010 initial yields averaged 7.6% in line with the long-term trend.

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Australian Property Yields1996 to 2010

Yields are expected to consolidate during 2011, not returning to the 2007 levels. The tightening recorded in 2010 refl ected improved trading expectations and return of supply/demand balance which existed prior to the GFC. Unlike the early 1990s, the absence of signifi cant supply in the current downturn and the advent of on-line distribution channels have allowed operators to switch to alternative sources of demand as corporate customers cut back on travel budgets. Yields are likely to moderate again over the medium term as income gains are realised.

“As Australia’s accommodation market has matured, it has become increasingly diverse and now offers the full gamut of investment opportunities for investors targeting value, growth and yield strategies.”Craig CollinsChief Executive Offi cer – Australasia


Together these fi ve sub-markets have accounted for 90% of transaction activity over the past twenty years and more than 60% of Australia’s total accommodation room supply in 2010.

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Australian Investment TrendsActivity by Sub-Market 1991 to 2010

The dichotomy of accommodation product

As Australia’s accommodation market has matured, it has become increasingly diverse and now offers the full gamut of investment opportunities for investors targeting value, growth and yield strategies. Refl ecting this we have segmented the market into fi ve major sub-categories to allow for more detailed analysis as outlined over the following pages.

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Major Australian Sub-MarketsRevPAR Index 2004 to 2010

Novotel on Collins & Australia on Collins Shopping Centre, Melbourne


Sofi tel Wentworth Sydney

Perth

Darwin


2010 Transaction Map

Kings Hotel Perth, Perth, Jul-10, $40.0M(Price includes hotel, offi ces, restaurant,

two bars and a multi storey carpark)

Ayers Rock Resort*, Yulara, Oct-10, $300.0M, PPR$379.7

*Sold by Jones Lang LaSalle Hotels

Transaction Name, Location, Date, AUD$M Price, AUD$K Price per Room

CDL Hospitality Trust* , Perth & Brisbane (5 assets), Feb-10, $175.0M, PPR$153.6

AdelaideCanberra

Hobart

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Cairns


Swissotel Sydney*, Sydney, Feb-10, $90.0M, PPR$249.3Sofi tel Wentworth Sydney*, Sydney, May-10, $130.0M, PPR$298.2Metro Hotel on Pitt Sydney, Sydney, Jun-10, $24.2M, PPR$210.3Metro Hotel Sydney Central*, Sydney, Jul-10, $39.5M, PPR$179.5Fairmont Resort Blue Mountains*, Sydney, Oct-10, $26.0M, PPR$123.8Courtyard by Marriott Parramatta*, Parramatta, Aug-10, $24.1M, PPR$133.0Peppers Convent Retreat, Hunter Valley, Feb-10, $6.0M, PPR$352.9

Holiday Inn on Flinders Melbourne, Melbourne, Mar-10, $44.0M, PPR$220.0The Crossley by Mercure, Melbourne, Aug-10, $16.6M, PPR$188.6Hilton Melbourne Airport*, Melbourne, Dec-10, $108.9M, PPR$394.5

Paradise Resort, Surfers Paradise, Jun-10, $33.1M, PPR$92.7Courtyard by Marriott Surfers Paradise*, Surfers Paradise, Jul-10, $47.0M, PPR$116.3Sheraton Mirage Gold Coast, Surfers Paradise, Mar-10, $62.5M, PPR$213.3

Sheraton Mirage Port Douglas*, Port Douglas, Mar-10, $35.0M, PPR$120.3

Fitzroy Island*, Cairns, Feb-10, $7.9M, PPR$167.0Cairns Plaza Hotel*, Cairns, Aug-10, $5.9M, PPR$98.3

Brampton Island*, Brampton Island, Jan-10, $5.9M, PPR$54.4

Avica Resort & Spa, Merrimac, Mar-10, $11.5M, PPR$425.9

Noosa Sanctuary Resort, Noosa, Nov-10, $60.0M, PPR$397.4

Platinum International Hotel, Harristown, Oct-10, $8.2M, PPR$215.8

Bentley Motor Inn, Bentley, Jun-10, $5.3M, PPR$115.2

Sofi tel Mansion Hotel & Spa and Shadowfax Winery*, Werribee, Mar-10, $6.8M, PPR$74.2

Koala Backpackers & Whitsunday Wanderers Resort*, Airlie Beach, Mar-10, $13.8M, PPR$90.2


We have broadly defi ned Australia’s prime CBD markets as City Local Government Areas (LGA) with more than 4,000 accommodation rooms. In order of magnitude, this includes Sydney (19,866 rooms), Melbourne (17,475 rooms), Brisbane (9,107 rooms), Perth (5,802 rooms), Canberra (4,899 rooms) and Adelaide (4,498 rooms). Together these six markets account for 27.1% of Australia’s total accommodation room supply.

Recent Trading Performance

Australia’s prime CBD markets have recorded strong RevPAR growth over the past ten years averaging 5.9% per annum. Limited new supply (1.7% per annum or 7,281 new accommodation rooms) has been outpaced by modest demand growth averaging 2.8% per annum and occupancy levels have increased from 69.4% in 2000 to 80.8% in 2010. Over this same period, ADR growth has been modest (pulled back by the impact of the GFC) increasing at an average rate of 3.1% per annum over the ten year period, largely in line with the rate of infl ation.

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Average Daily Rate RevPAR Occupancy Source: Australian Bureau of Statistics, Jones Lang LaSalle Hotels

Prime CBD Cumulative Hotel TradingKey Trading Performance Indicators 2000 to 2010

Nominal RevPAR in these markets has now fully recovered to pre-GFC levels and markets are expected to record strong growth over the medium term. With occupancy levels at record highs, growth will be driven by higher ADRs which should see strong profi t growth and increases in value over the coming years.

Comparison of the six markets highlights Brisbane, Perth and Canberra as the primary growth engines, whereas performance in Australia’s two largest accommodation markets, Sydney and Melbourne, has lagged by comparison. The meteoritic rise of Brisbane and Perth is in line with the commodities and related services boom, coupled with the relatively small size of these accommodation markets and with new development held back by market forces.

Growth is expected to continue to drive strong performance in these markets for some time to come, but both markets face a degree of downside risk from new supply emerging over the medium term. Sydney and Melbourne, on the other hand, offer the opportunity for strong and stable returns. These markets are both suffi ciently sized that the risk from new supply is considerably reduced, although demand is increasingly dispersed across the wider metropolis with the growth of satellite accommodation centres in suburban markets.

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Prime CBD Market ComparisonRevPAR Index 2000 to 2010

Demand Profi le

According to Tourism Research Australia, domestic and international business demand accounts for around 40% of all visitor nights spent in Australia’s prime CBD markets each year. We estimate that the proportion of room night demand is closer to 60% given the lower room density among corporate travellers. Total room density in prime CBD markets is around 1.4 persons. This compares to 2.0 persons across Australia.

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Domestic Leisure Domestic Business International Holiday International Business


Prime CBD Visitor Night Demand IndexLuxury Segment (4-star & above) 2005 to 2010

Prime CBD Markets


Corporate demand is highest in luxury product (rated 4-star and above) at around 50% compared to standard product (rated 3-star and below) at 35%. Having recorded a sharp decline in 2009, the business segment has been the primary driver of the trading recovery in Australia’s prime CBD markets, particularly for luxury product, although the level of corporate visitor night demand still remains below that evident in 2007 and 2008, prior to the global fi nancial crisis. On the contrary, the trading recovery in the standard segment (3-star and below) is being driven by the domestic leisure and interestingly international business segments with both markets having surged in 2010.

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Prime CBD Visitor Night Demand IndexStandard Segment (3-star & below) 2005 to 2010

Investment Sales and Pricing

The six prime CBD markets have dominated Australia’s hotel investment landscape over the past twenty years, accounting for around 60% of transaction volume with an average of $500 million of assets exchanging hands each year. More recently volumes have been higher, averaging in excess of $600 million each year, but representing a slightly lower proportion (around 55%) of total investment activity as investors have put Australia’s second tier and resort markets on their investment radars.

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Prime CBD Investment TrendsTransaction Volume & Average RevPAR 2000 to 2010

With trading performance in these six markets expected to record strong growth over the next few years, investment product is likely to remain scarce and assets which are brought to market will be hotly contested. Few additions to accommodation supply in these markets over the past ten years has heightened this disconnect and an element of pent-up investor demand for quality assets in these locations persists.

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Park Hyatt Sydney


Prime CBD Pricing TrendsAverage Price per Room (PPR) 2000 to 2010

Park Hyatt, Sydney


Over the past twenty years pricing for prime CBD accommodation assets has averaged around $196K per room, however this has increased 19.0% to $233K since 2000. Notwithstanding, there still exists a high degree of variability in asset pricing with transactions ranging between $35K and $1.275 million (per room) during this period. At the upper end of the range is the Park Hyatt Sydney, which has achieved a record price per room each time it has sold. This asset has also achieved a sales price over and above that of the wider luxury market where sales have been more in the order of $500K per key. This refl ects the unparalleled location and iconic status afforded to this luxury hotel by the global investment market.

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Prime CBD Average Initial Yield Ranges 2000 to 2010

Long-term initial yields for prime CBD accommodation assets have tightened over the past decade. As markets have matured and strong trading has crystallised the high degree of variability in initial yields which existed prior to 2003 has narrowed with initial yields coming in between +/- 240 basis points of the average. Yields for prime CBD assets reached a low point in 2007 before softening somewhat in 2009. Over the course of 2010 yields returned to the long term trend.

Adelaide Convention Centre & Intercontinental Hotel


Australia’s major CBD markets have expanded over the past twenty years and fringe accommodation markets have emerged. We have broadly defi ned suburban markets as the Tourism Region less the City LGA (as specifi ed by the ABS) with more than 5,000 rooms. While most notable in Sydney and Melbourne, emerging markets are also evident in Perth and to a lesser extent Brisbane. Together these four markets account for 13.2% of Australia’s total accommodation room supply.


Australia’s key suburban markets have recorded slight RevPAR growth over the past ten years averaging 2.7% per annum. Modest new supply (2.4% per annum or 5,598 new accommodation rooms) has been outpaced by modest demand growth of 3.2% per annum and occupancy levels have increased from 62.6% in 2000 to 67.3% in 2010. ADR growth has been soft (pulled back by the impact of the GFC) increasing at an average rate of 2.0% per annum over this ten year period.

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Suburban Cumulative Hotel TradingKey Trading Performance Indicators 2000 to 2010

Cumulatively, suburban accommodation markets recorded a higher rate of RevPAR decline in 2009 (-9.4%) than prime CBD markets (-7.3%). This refl ects the reduced ability for accommodation product in these markets to stimulate additional demand through marketing and promotions as visitors do not regard these locations as destinations. Demand is therefore somewhat fi nite.

Suburban markets recorded only a small reduction in ADR in 2009 (-2.0%) but occupancy levels fell for two consecutive years (-5.9 points). This compares to a 4.8% reduction in ADR in prime CBD markets but with occupancy levels falling by only 3.2 points over the same two year period.

Similarly to the prime CBD markets, Brisbane and Perth suburban centres are the primary growth markets. Overall, nominal RevPAR in these periphery markets is still slightly below the 2008 high, but markets are expected to record modest growth over the medium term as corporate demand recovers and lower yielding business is increasingly pushed out from CBD hotels. We therefore expect these markets to see a more moderate level of ADR growth than their CBD counterparts, but with greater capacity for occupancy gains.

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Suburban Market ComparisonRevPAR Index 2000 to 2010

Demand Profi le

According to Tourism Research Australia, domestic and international business demand accounts for around 40% of all visitor nights spent in suburban accommodation markets each year and with a similar proportion for both luxury and standard product. Domestic visitor nights outweigh international nights by around 2.8:1.

Having recorded a sharp decline in 2009, the business segment has been the primary driver of the trading recovery in Australia’s suburban markets. Growth has been strongest in product rated 4-star and above with current demand at record levels. Offsetting this has been a reduction in corporate demand in the lower tier segments which spiked in 2009 as consumers traded down to lower grades of accommodation product during the GFC.

Suburban Markets


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Suburban Investment TrendsTransaction Volume & Average RevPAR 2000 to 2010

Over the past twenty years, pricing for suburban accommodation assets has averaged around $155K per room, however, this has increased by 14.3% to $177K since 2000. Assets sold for residential conversion have been omitted from pricing calculations as the transacted price does not refl ect the ongoing hotel cashfl ow.

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Suburban Pricing TrendsAverage Price per Room (PPR) 2000 to 2010

Long-term initial yields for suburban accommodation assets have also tightened over the past decade, highlighting the narrowing yield differential to prime CBD accommodation assets since 2000.

This trend has reversed over the past two years with the yield differential compared to prime CBD assets increasing to 100 basis points compared to 40 basis points over the past decade. On the whole, we do not expect the yield differential to narrow to such an extent over the next few years. Investors are expected to continue to place a stronger weighting on hotel trading fundamentals and non-prime assets will be priced accordingly.

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Suburban Visitor Night Demand IndexAll Accommodation Product 2005 to 2010


Transaction activity in the four suburban markets has accounted for around 15% of Australia’s total transaction volume over the past twenty years with an average of around $130 million of assets exchanging hands each year. This has recorded little change over the past decade. A key driver of activity during this period has been the sale of many city fringe assets for conversion to higher alternate use, notably residential.

Suburban accommodation markets are expected to remain attractive to investors over the coming years, particularly as CBD product becomes scarce, but with activity directed towards key locations and assets located within close proximity to strong demand generators, for example business parks.

Norwest Business Park, Sydney


Comparison of the six markets highlights the Sunshine Coast, Gold Coast and Great Barrier Reef as the primary growth markets, whereas performance in the Whitsundays, Cairns and Port Douglas has lagged by comparison. Indeed, indexed RevPAR for accommodation product in Port Douglas and Cairns has recorded little change when compared to the 2000 base year and highlights the challenging trading environment in Australia’s tropical north over the past decade.

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Resort Market ComparisonRevPAR Index 2000 to 2010

Demand Profi le

According to Tourism Research Australia, domestic and international leisure demand accounts for more than 80% of all visitor nights spent in Australia’s resort markets each year and with a similar proportion for both luxury and standard product. Domestic visitor nights outweigh international nights by around 2.2:1, although this proportion is higher for hotels rated 4-star and above at 2.5:1.

We have broadly defi ned Australia’s resort markets as those with more than 2,000 rooms and where the primary demand driver is leisure tourism. Currently all of these are in Queensland, highlighting the importance of this segment to the State economy. In order of magnitude, markets include Gold Coast (13,114 rooms), Cairns (7,516 rooms), Sunshine Coast (5,684 rooms), Whitsundays (2,887 rooms) Port Douglas (2,655 rooms) and Great Barrier Reef (2,560 rooms). Together these six markets account for 15.1% of Australia’s total accommodation room supply.


Australia’s resort markets have recorded modest RevPAR growth over the past ten years averaging 4.8% per annum. Limited new supply (1.0% per annum or 3,311 new accommodation rooms) has been matched by lacklustre demand with growth averaging 1.0% per annum. Accordingly occupancy levels have remained static over the ten year period. Notwithstanding, ADR growth has been modest increasing at an average rate of 4.8% per annum.

Australia’s resort markets recorded strong RevPAR growth up to 2007 averaging 8.1% per annum, but performance has declined over the past three years. The surging Australian dollar has resulted in lacklustre inbound tourism arrivals and strong growth in outbound travel which is having a magnifi ed impact on Australia’s resort markets.

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Resort Markets Cumulative Hotel TradingKey Trading Performance Indicators 2000 to 2010

Domestic and international leisure visitor night demand have both trended downwards over the past fi ve years and there has been little sign of a trading recovery over the past year as economic conditions have stabilised. The downward trend is apparent across all key source markets, except for China. However this market only accounted for 3.8% of total visitor night demand (domestic and international) in paid accommodation in Australia’s resort markets in 2010, up from 2.0% in 2005

Resort Markets

Great Barrier Reef, Queensland


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Resort Markets Visitor Night Demand IndexAll Accommodation Product 2005 to 2010

Being so highly dependent on leisure tourism, accommodation operators in Australia’s resort markets have few opportunities to diversify their offering to attract alternative sources of business. Markets which have been more successful at doing so include the Gold Coast and Sunshine Coast which are more easily accessible, and have been able to attract a higher proportion of MICE business. Anecdotally we understand that this segment has been slow to recover over the past year, but we expect modest growth over the medium term.


Australia’s resort markets have been a major contributor to hotel investment activity over the past twenty years. Transaction volumes have averaged around $149 million each year since 1991 and increasing to $231 million over the past decade. This represents around 20% of the total transaction volume and is largely a result of high levels of activity in 2004 and 2005 with the sell down of assets by Asian investors, particularly the Japanese. Notable transactions in excess of $75 million included Hayman Island, ANA Surfers Paradise, Cairns International and Gold Coast Sheraton Mirage.

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Resort Markets Investment TrendsTransaction Volume & Average RevPAR 2000 to 2010

Lizard Island, Queensland


With trading in Australia’s leisure markets expected to remain challenging over the coming year, we expect to see more disposal activity, particularly as lenders look to move on underperforming assets. Instances of distress are likely to be greatest among strata-titled serviced apartment product.

Australia’s leisure markets have the highest level of serviced apartment product of all the sub-markets at around 41% of total accommodation rooms. This compares to 24.2% in Australia’s prime CBD and suburban markets. Serviced apartment supply is highest in the Gold Coast, Sunshine Coast and Tropical North Queensland.

Over the past decade, strata-titled serviced apartment product in these locations has often been developed without suffi cient regard to tourism demand fundamentals. Markets are being squeezed by higher unemployment, following the downturn in tourism demand, and increasing levels of tourism apartment stock being withdrawn from letting pools and sold by stressed individual owners, placing downward pressure on house and apartment prices.

The secondary market for strata-titled tourism product is very thin, particularly where the guaranteed return period has expired. While this is likely to result in apartment stock being sold at a discount over the next few years, it should also result in a reduction in tourism supply over the medium term as more apartments are converted to residential use. Moving forward, planning controls should be tightened to better defi ne the purpose of use and to give investors greater confi dence that accommodation markets will not become engorged by second-rate poorly operated apartment product.

Over the past twenty years pricing for Australia’s resort market assets have averaged around $120K per room, however this has increased 28.2% to $155K since 2000. This is the highest growth for any sub-market and is thought to refl ect the composition of asset sales over the past decade rather than any signifi cant uplift in pricing.

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Resort Markets Pricing TrendsAverage Price per Room (PPR) 2000 to 2010

Long-term average initial yields for resort accommodation markets have recorded no material change over the past ten years. Contrary to prime and suburban markets, the degree of variability among initial yields has increased over this period, highlighting the volatility of the sector and the premium investors place on individual asset quality.

Gold Coast, Queensland


Australia’s secondary CBD markets are defi ned as city accommodation markets with between 2,000 and 4,000 rooms. In order of magnitude, this includes Darwin (3,519 rooms), Townsville (2,575 rooms), Hobart (2,312 rooms) and Mackay (2,196 rooms). Together these four markets account for 4.6% of Australia’s total accommodation room supply.


Australia’s secondary CBD markets have recorded strong RevPAR growth over the past ten years averaging 6.3% per annum. Modest new supply (3.4% per annum or 2,967 new accommodation rooms) has been outpaced by demand growth of 4.4% per annum and occupancy levels have increased from 63.4% in 2000 to 69.8% in 2010. ADR growth has been strong increasing at an average rate of 5.3% per annum over this ten year period.

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Secondary Cumulative CBD Hotel Trading Key Trading Performance Indicators 2000 to 2010

Cumulatively, occupancy levels in Australia’s secondary CBDs peaked in 2008 at 74.8% before declining over the next two years as signifi cant increases in accommodation room supply came on line. Supply increases in these markets between 2007 and 2009 averaged 7.3% per annum. However, ADR did not decline even when signifi cant supply increases coincided with the downturn in overall tourism demand, highlighting the strength of these emerging centres.

Growth has been strongest in Mackay and Darwin with both markets benefi ting from the mining and resources boom. Nominal RevPAR in these secondary CBDs is still 5.4% below the 2008 high but markets are expected to record modest growth over the medium term as corporate demand recovers and new supply additions are absorbed.

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Secondary CBD Market ComparisonRevPAR Index 2000 to 2010

Demand Profi le

According to Tourism Research Australia, domestic and international business demand accounts for around 40% of all visitor nights spent in accommodation product in secondary CBD locations each year.

Domestic business demand considerably outweighs international demand by around 6:1 although this was closer to 15:1 at the market peak in 2007. While domestic business visitor nights increased by 13.8% in 2010, they are still more than 30% below the level recorded in 2007. If only a proportion of this demand recovers, the resultant positive impact on accommodation trading in these centres will be considerable.

Secondary CBD

Medina Grand & Vibe Waterfront, Darwin


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Secondary CBD Visitor Night Demand IndexAll Accommodation Product 2005 to 2010


Transaction activity in the four secondary CBD markets has accounted for around 2% of Australia’s total transaction volume over the past twenty years with around $20 million of assets changing hands each year. This has recorded little change over the past decade with higher levels of activity held back by the low level of investment grade stock. Darwin and Townsville accommodation assets have traded most frequently with room night demand in both centres underpinned by a high level of Government demand.

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Secondary CBD Investment TrendsTransaction Volume & Average RevPAR 2000 to 2010

Secondary CBD locations are expected to remain attractive to investors over the coming years as they offer signifi cant buying opportunities for investors looking for a strong yield play. The price per room has increased over the past ten years to average $75K, up 25.6% compared to the twenty years since 1991.

Other major secondary CBD locations worthy of consideration include Rockhampton (1,861 rooms), Coffs Harbour (1,481 rooms), Alice Springs (1,423 rooms), Newcastle (1,381 rooms), Albury (1,279 rooms), Gosford (1,208 rooms), Toowoomba (1,215 rooms), Wollongong (1,207 rooms) and Launceston (1,103 rooms).

Constitution Dock, Hobart


With mining and related services underpinning Australia’s recent strong economic growth, we thought it appropriate to review the impact this is having on local accommodation markets. Our review focusses on recent trading trends as investment activity in these markets has been limited, refl ecting the low levels of investment grade stock.

Our analysis comprises four markets which in order of magnitude include the North West of Western Australia excluding Broome (2,328 rooms), Kalgoorlie/Boulder (879 rooms) and Gladstone (692 rooms) and Mount Isa (375 rooms) in Queensland. Together these four markets account for 1.9% of Australia’s total accommodation room supply.


Australia’s mining centres have recorded strong RevPAR growth over the past six years averaging 10.0% per annum. Few additions to supply (1.2% per annum or 213 new accommodation rooms) have been outpaced by modest demand growth averaging 2.8% per annum and occupancy levels have increased from 55.7% in 2004 to 61.1% in 2010. The relatively low average annual occupancy level refl ects the seasonal nature of these markets and the daily demand patterns of corporate travellers, many of whom fl y in and out of these centres each week. Despite these apparent impediments, ADR growth has been exceptionally strong increasing at an average rate of 8.3% per annum over this period and having recorded no years of decline.

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Mining Centres Cumulative Hotel Trading Key Trading Performance Indicators 2004 to 2010

Cumulatively, occupancy levels in Australia’s mining centres peaked in 2007 at 66.9% before declining over the next two years. The reduction was most evident in 2009 when occupancy levels reduced by 10.0%. Demand remains lacklustre in 2010 with occupancy gains coming from a reduction in room supply.

Strong ADR gains have been achieved in spite of this with RevPAR growth in these four centres outpacing all other sub-markets. Nominal RevPAR in Australia’s mining centres is now 6.8% higher than the 2008 peak.

We expect these markets to continue to record strong growth over the medium term in line with resurgent commodities markets and with new accommodation room supply held back by the cost versus value gap which is heightened in these remote locations.

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Mount Isa North West WA Kalgoorlie/Boulder Gladstone


Mining Centres Market Comparison RevPAR Index 2004 to 2010

Demand Profi le

According to Tourism Research Australia, domestic and international business demand accounts for around 35% of all visitor nights spent in accommodation product in these mining centres each year (including Broome). Domestic business demand considerably outweighs international demand by around 6:1 although this was closer to 15:1 at the market peak in 2007. While domestic business visitor nights increased by 13.8% in 2010, they are still more than 30% below the level recorded in 2007. If only a proportion of this demand recovers, the resultant positive impact on accommodation trading in these centres will be considerable.

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Mining Centres Visitor Night Demand IndexAll Accommodation Product 2005 to 2010

Mining Centres


Contributors

Craig CollinsChief Executive Offi cer – Australasia

Craig Collins is the Chief Executive Offi cer for Australasia and has worked for Jones Lang LaSalle Hotels for over 17 years. Craig heads a team of 30 hotel specialists across Australia and New Zealand. Craig’s knowledge and experience of the complex markets across Asia Pacifi c has assisted our Australasian team in maintaining our market leading position.

Over the past three years, Craig has personally facilitated four of Australia’s largest tourism real estate transactions as well as overseeing numerous other hotel and resort sales undertaken by Jones Lang LaSalle Hotels. Prior to that he spent seven years in Asia and has well-established relationships with both long established and emerging investors.

Craig holds a Bachelor of Business (Land Economics) degree from the University of Western Sydney.

Troy CraigManaging Director – Strategic Advisory

Troy assumed leadership of Jones Lang LaSalle Hotels’ Australasian Strategic Advisory business in 2002, a team comprising 12 professionals. Since then, he has carried out numerous valuation, consultancy and feasibility studies. Prior to that, Troy spent four years based in our Singapore offi ce carrying out various valuations and consultancy assignments all across Asia.

Over the past fi ve years, Troy has valued many of Australia’s leading CBD hotels and suburban pubs for some of Australia’s major fi nancial institutions. Major hotels valued include Hamilton Island, Four Seasons Sydney, Sydney and Melbourne Marriotts, the Thakral, Rydges, Medina, Accor/TAHL and Travelodge portfolios, as well as numerous smaller properties.

Troy holds a Bachelor of Business – Land Economics from the University of Western Sydney and is a Fellow of the Australian Property Institute. He is a Registered Valuer in NSW, WA and QLD and permitted to value in all other states and territories.

Karen WalesSenior Vice President – Research & Consultancy Asia Pacifi c

Karen is responsible for the fi rm’s hotel investment research in the Asia Pacifi c region and has been involved in several major global research assignments and the provision of strategic advisory services including market and demand studies, fi nancial feasibilities and consultancy in the hotel and tourism sector.

Karen has an in-depth understanding of the hotel and tourism industry, with previous experience in advisory and asset management, as well as strong operational experience.

Karen possesses a Bachelor of Arts (majoring in history, politics and economics) from University of Newcastle-upon-Tyne as well as a Masters of Business Administration (MBA) from AGSM, University of New South Wales.

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