Investors in New Zealand’s hotel sector are enjoying rising capital values, supported by strong cash flow, steadily increasing occupancy and a well-established investment market.
Most private hotel investors are classified as long-term or intergenerational investors. They rarely sell and indicate that they intend to expand rather than reduce their portfolios.
Although these factors ultimately mean there are few new entry opportunities under the current hotel investment market model, global commercial real estate services and investment firm CBRE New Zealand outlines the sector’s current market conditions, challenges and opportunities in this article, and explains how overseas investors can enter it.
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The market
Tourism is a major contributor to New Zealand’s gross domestic product.
Total tourism expenditure in New Zealand over the past year was NZ$39,100,000,000, up 7.7% on the previous year.
Tourism will therefore continue to generate substantial and growing export revenue for New Zealand.
CBRE New Zealand’s latest research report, Hotel Marketview H1 2019, highlights how growth in domestic visitor numbers is offsetting a slight decline in international visitors and supporting occupancy and average daily rates (ADR) across New Zealand.
Peter Hamilton, director of hotels and leisure at CBRE New Zealand, says international visitor numbers to New Zealand have increased almost every year since the 80s of the 20th century.
“This has been driven by a combination of increased international airline capacity, greater market share and improving economic conditions.
Holidays and visits to relatives and friends are the main reasons for visiting.
However, as economic conditions have improved, business and conference-related visits have also shown sustained growth in recent years,” he says.
Warren Hutt, senior director of capital markets at CBRE New Zealand, adds: “Tourism growth will continue to encourage investment in infrastructure and related areas.
For example, Auckland Airport is investing NZ$5,000,000,000 in ongoing upgrades as part of its 30-year vision for the airport of the future. This includes developing and investing in two additional hotels within the airport precinct.”
Investment across New Zealand
The hotel investment market comprises international and domestic investors. International investors focus mainly on Auckland and Queenstown, while domestic investors also consider Wellington, Christchurch, Rotorua and other regions.
Rob Cross, national director of hotels for CBRE Australia and New Zealand, says: “We have been dealing with Asian and Chinese hotel investors for 25 years, and major international buyers traditionally had the same wish list: what investment opportunities do you have in Sydney and Melbourne?
Rob Cross, national director of hotels for CBRE Australia and New Zealand, says: “We have been dealing with Asian and Chinese hotel investors for 25 years, and major international buyers traditionally had the same wish list: what investment opportunities do you have in Sydney and Melbourne?
Every other location, including New Zealand, was a secondary investment choice.
In recent years, that wish list has expanded to include Queenstown and Auckland, which now have the same appeal as Sydney and Melbourne.”
Overseas investors see New Zealand as a clean, environmentally conscious and safe investment destination with a highly transparent market.
The government offers investors a range of significant monetary and tax advantages, including those relating to stamp duty, land tax and capital gains tax. Buying and selling costs are more favourable than for investment in Australia.
In general, yields on New Zealand hotel assets are more attractive than those in Australia’s major cities, providing a strong catalyst for inbound capital.
Rob Cross concludes: “These factors are changing demand. Today, New Zealand is also gaining greater international recognition, and astute investors understand that investing in New Zealand hotels offers more attractive returns than investing in Australia.”
Auckland
Although Auckland’s occupancy has begun to decline slowly, 1900 rooms are currently under construction and due for completion by the end of 2022.
Peter Hamilton says the America’s Cup and APEC, both due to take place in Auckland in 2021, together with the opening of the New Zealand International Convention Centre in Auckland’s CBD, will substantially boost visitor demand for hotels.
He therefore expects demand to continue outstripping supply and positive investment momentum to continue.
“With the development pipeline in place, there may be a risk of hotel oversupply after 2021, which could create opportunities for owners looking for a time to sell.
If that happens, offshore investors should act quickly to seize opportunities to enter the sector.”
Wellington
Wellington is a stable hotel investment market, where new supply will not alter occupancy or room rates.
Supported by strong government and corporate markets, and boosted by major events and festivals, Wellington has become a popular domestic leisure destination.
Queenstown
Queenstown has recorded average annual growth of 16% over the past five years. Although occupancy is stable, demand remains strong.
Queenstown has a substantial potential development pipeline, but construction costs and shortages of skilled workers are seen as the main challenges.
Christchurch
Hotel occupancy in Christchurch has remained unchanged, while guest demand has grown by an annual average of 10% over the past three years.
The opening of the new convention centre is expected to increase accommodation demand and encourage further room supply.
Establishing a local presence to overcome challenges
The main barrier to entering New Zealand’s hotel market is the large number of high-net-worth offshore investors competing for limited opportunities.
The market is far more mature than it was 15 years ago, and scarce opportunities are often secured through off-market transactions involving well-known vendors.
Warren Hutt says: “To secure opportunities, interested offshore investors should establish a business presence in New Zealand early, so they are ready to act on any opportunity that arises.
This includes building relationships with commercial property teams and appointing accountants, advisers, engineers and a qualified legal team experienced in dealing with Overseas Investment Office scrutiny.
Being 100% prepared gives you the ability to access and understand market demand.”
Finding opportunities
Peter Hamilton believes investment opportunities may emerge in underdeveloped areas that attract large numbers of tourists but offer very little accommodation.
“One such area is Lake Tekapo, which lies within the world’s largest dark sky reserve. Ngāi Tahu Tourism has also opened a new ‘Dark Sky Project’, attracting large numbers of visitors every day, yet accommodation options in the area are limited.
Developments of this kind must meet very specific requirements, particularly regarding artificial lighting, but an opportunity still exists to develop a five-star hotel with an investment of NZ$70,000,000 to NZ$80,000,000.”
Warren Hutt concludes: “Building relationships with business experts is crucial and is the first step towards achieving your goals.
The long-term outlook is positive, and New Zealand will continue developing as a premium tourism destination;
in the short term, overseas investors who prepare thoroughly will also be well placed to seize opportunities.”