Exclusive: Stephen Hamilton explains trends in New Zealand’s hotel market

 

 

 

 

 

 

Y: How do you assess the current state of New Zealand’s hotel market?

S：Hotel demand is growing rapidly, and occupancy has risen substantially.

 

In fact, occupancy is at record highs not only in Auckland but in many popular New Zealand destinations, with almost all recording levels between 85% and 90%.

 

This relates both to product quality and to seasonal demand.

 

Although demand has grown strongly in recent years, its growth may slow in the short term.

2021 is an important year. The America’s Cup and APEC meetings will both have some positive impact on New Zealand’s hotel industry.

 

As I understand it, Auckland will add 5200 rooms between 2021 and 2025. However, we also need to consider the balance of sales between peak and off-peak seasons, taking account of average annual turnover and occupancy.

Y: New Zealand currently has relatively few well-known high-end hotels. How do you see this developing?

 S：New Zealand has a limited number of international hotels. More high-end and luxury hotels will enter the market over the next five years, but there may be an imbalance between the market prices consumers are willing to pay and prices that make sense for investors.

 

This is because Australia and domestic travellers still account for a large part of our market. In fact, domestic demand and demand from Australian visitors may represent 65% of total room demand, and their demand for high-end hotels is not particularly strong.

 

That makes the rapidly growing Chinese market extremely important to us. Compared with visitors from other countries, a higher proportion of Chinese tourists place considerable importance on accommodation quality and value, and are more willing to pay for the quality services and products offered by high-end hotels.

S：In terms of return on capital, the most profitable hotels are generally mid-range rather than luxury hotels.

 

There are many reasons, including construction costs, labour costs and expectations of service standards.

 

When we talk about luxury hotels, consumers are generally prepared to pay more, but there is a pressure point when they decide whether they will actually do so.

 

When demand exceeds supply, hotels hold the upper hand. That is why five-star room rates are now soaring and profitability is strong.

 

But when the balance between demand and supply changes, their profits will also decline.

Relatively high land prices lead some investors to aim for luxury hotel pricing and standards in their developments to generate higher revenue. However, that is often not the most efficient investment approach.

 

By comparison, because land value accounts for the main development cost of mid-range hotels, costs and revenue can be managed more effectively. Room rates in that market are also relatively stable, producing more predictable investment returns.

Many five-star hotel investors also understand that this is a volatile market, but they generally take a longer-term view and accept fluctuations in returns.

 

We believe hotels with 200 rooms generally offer optimal profitability.

 

If a professional hotel operator is to manage the property, it generally needs to offer at least 60 rooms.

 

Y: What should potential hotel investors consider when making decisions?

S：Return on investment is important to a hotel’s success, and occupancy and room rates are key factors to consider. Then there are exchange-rate differences, which relate to where the money comes from.

New Zealand’s hotel industry has always relied on growth in inbound visitors.

 

Total arrivals will be constrained by factors beyond our control and by New Zealand’s capacity to accommodate visitors. This means tourism growth may slow.

 

I think many buildings currently under construction are based on investors’ expectations of the future, but those expectations of continued growth may be unrealistic.

Long-standing observers of New Zealand’s economy consider it a relatively safe country worth investing in.

 

In fact, the most successful developers in any asset class tend to be strategic investors who invest on the basis of long-term growth figures.

 

But many developers, or speculators, are driven by the current wave.

I have an old saying: in property investment, never worry about the ups and downs at the time you invest. Consider the city’s long-term development opportunities.

 

Y: What advice would you give overseas investors?

S：Cultural differences can increase investment risk. Overseas investors should do everything possible to avoid information being lost in translation.

 

Thorough due diligence should be undertaken as early as possible. Whether the languages are Chinese and English or German and English, differences in language increase risk;

 

differences in business culture and historical background between countries also increase risk at that level.

 

Both those providing advice and consultancy services and those receiving them should take care to avoid misunderstandings and information loss caused by inaccurate or incomplete translation, and the resulting misalignment between investors’ goals and those of their advisers and consultants.

The key criteria for hotel investment are the same for everyone.

 

A distinctive location is the most important factor. A hotel in a very good location will always be able to outperform the market average.

 

But such opportunities are scarce and rarely appear openly on the market. When they do arise, competition is fierce. Spending another 30 days on due diligence could mean missing the opportunity.

 

That makes advance due diligence crucial.

Stephen Hamilton
Managing director, Horwath HTL New Zealand

 

He has 30 years of consulting experience in New Zealand’s tourism industry and has also undertaken consulting work in Australia, Fiji and the Cook Islands.

 

Stephen’s enthusiasm for and deep understanding of New Zealand’s tourism industry bring value to clients. He offers a balanced, sound approach to their specific needs and helps them obtain high-quality information for decisions and strategy, supporting their business development.

 

Stephen helps public- and private-sector lenders, investors, financial sponsors and purchasers, and developers quickly identify which financial and market analyses or research will be most useful.

 

Stephen’s services include market demand analysis, financial feasibility analysis, market research, economic impact analysis and strategy development.