Hotel values could fall as much as 30 per cent across the Asia Pacific region, including in Australia, because of the impact of COVID-19, warns JLL Hotels boss Mike Batchelor.
Mr Batchelor, a 25-year hotel transaction veteran who was recently appointed to head up JLL Hotel & Hospitality Group’s Asia Pacific business, said investment in the sector had frozen as investors await a correction in prices and a better idea of where values might settle.
“I expect there will be a 10-30 per cent decrease in hotel values across the region,” he told The Australian Financial Review.
“Core CBD markets like Sydney, Melbourne and Brisbane will be at the lower end of that scale as hotels in those markets don’t trade that often. But hotels in tier two and leisure destinations will be at the upper end of the scale.”
Driving the reduced valuations will be lower cash flows and earnings.
Most industry experts including JLL, analysts Dransfield and major hotel operators, expect a long, slow road to recovery rather than a V-shaped rebound after average occupancy rates fell below 20 per cent at the height of the crisis.
“There’s a lot of stress out there. You can’t cut an industry off at the knees and not have stress,” Mr Batchelor said.
“When JobSeeker is removed and you start to see banks looking for debt repayment moratoriums to end then that stress will turn to distress in a number of markets.”
Mr Batchelor expected that yields would soften in line with falling values.
“There was tremendous institutional investment in hotels in the last decade with yields coming very close to those for CBD offices.
“Given what COVID-19 has done to cash flows, I think it will impact yields, though it’s too early to say what that impact will be.”
Troy Craig, regional director of hotel valuations at CBRE, said that based on valuations he was undertaking, capital city hotel valuations were down 10-15 per cent from pre-COVID levels.
“All value drop offs are income-related,” he said. “The CBD hotel market is holding up reasonably well and investor interest is proving quite resilient all things considered.”
Mr Craig said there was still appetite from both Asian and local investors, but they remained “guarded and cautious” while they got their heads around what income will look like in the future.
“There is long-term confidence the sector will come back once we are through the current uncertainty,” he said.
Unlike the GFC, when high gearing was an issue driving distressed sales, Mr Craig said hotel owners with the support of their bankers could sit tight for now and have no real compulsion to sell.
Christopher Milou, head of hotel valuations at Colliers International, said the likely impact of COVID-19 on hotel values in Australia was between 5 and 20 per cent, depending on the particular asset.
“We would disagree with the blanket statement that leisure destinations will be impacted more than CBD destinations … some CBD hotels that are more reliant on international tourism or hotels that are heavily reliant on MICE (meetings, incentives, conferencing and exhibitions) may be impacted to a greater extent,” he said.
“This is because international tourism and MICE business is likely to take a longer time to recover than the domestic travel business.”