Hotels and Tourism
The recent opening of our new Quest Apartment Hotel in Fremantle was a milestone event for Sirona. It represented the culmination and realisation of our belief in the hotel and tourism sector.
This belief was borne out of deep dive research we conducted more than four years ago.
We selected tourism as an investment theme based on an under-supply in the 4-star market, tired existing hotel stock, a declining $AUD and pent up demand, particularly from the holiday market which had been shut out by the mining boom.
These factors were considered to be even more evident in Fremantle, Western Australia’s most visited tourist destination. In mid-2014, Sirona purchased a heritage warehouse in Pakenham Street and after a protracted planning process, secured approval to develop a new 122 key apartment hotel, leased to Quest for a period of 15 years. The hotel opened to much fanfare in December 2016 and will generate a Year 1 cash yield on equity in excess of 11.0% with a forecast IRR over the term of the investment of 16.5% pa.
Investors often shy away from the hotel asset class. Returns are perceived as more volatile but that is almost never the case, the Quest Fremantle lease being a strong case in point. Hotels compare very favourably to all real estate asset classes on a volatility adjusted returns basis. For example, hotels have significantly outperformed the office sector over the past five years. Further, annual demand for hotels (measured by room nights occupied) has only decreased once in the past 20 years, immediately following the global financial crisis in 2009.
We continue to look for more “non 5 star” hotel opportunities, noting the openings of the new Crown Towers (2016), Westin (2017) and Ritz Carlton (2019) will more than satisfy demand for the 5 star segment.
Tourism numbers have risen significantly in WA, particularly international visits which were up 8% last year and likely to pass one million for the first time this year. The majority of existing 4-star stock in the market is old and tired and generally not easy to refurbish to compete with today’s contemporary hotel standards. We see the “post mining construction boom” business traveller market reversing its decline in 2019, a year in which we anticipate there will be no new 4 star supply.
Sirona has recently entered into a partnership with Rotana, the Middle East’s leading hotel operator, to deliver a new business hotel brand into the Australian market. Rotana operates over 100 hotels and is closely associated with Emirates, Etihad and Qatar Airways. We expect to secure our first development with Rotana this year, having already identified an appropriate site in Perth’s CBD.