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Higher funding requirements and tourism recovery present unique investment opportunities.

Tourism related debt makes up 3.4% of all ADI (APRA-regulated bank) lending exposure, equating to about $11.7bn in loans. JLL estimates that, based on typical bank gearing levels and tenor, $2 billion of hotel investment debt is likely to need to roll over in the next 24 months.

Given the significant impact the COVID-19 pandemic has had on tourism and its sub-sectors, we have seen traditional debt providers becoming more cautious about lending in the sector due to current uncertainty and expected trading recovery, particularly in relation to the rolling of construction finance to investment finance upon practical completion.

The good news is that the emergence of the “Staycation” has resulted in the domestic travel sector recovering much faster than anticipated. In its market update yesterday, Qantas said that corporate travel (including the small business segment) is now at 75% of pre-COVID levels, while leisure demand is also growing strongly as deferred international holidays are “converting into multiple domestic trips”. The Qantas group (including Jetstar) is on track to reach 95% of its pre-COVID domestic capacity for the fourth quarter of FY21 and looking further ahead, Qantas and Jetstar expect to average 107% and 120%, respectively, of their pre-COVID domestic capacity in FY22.

This is consistent with our on-site due diligence process inspecting prospective investment opportunities. At this week’s site visits to the Northern Territory, the team was pleasantly surprised at the remarkable recovery in tourism activity. The agriculture team noted a similar rebound in activity at “Beef Week” in Rockhampton earlier this month.

There are over 60 hotels currently under construction nationally, and JLL notes that developers will require more flexible and accommodating debt structures to work through their stabilisation periods, ahead of trading maturity. Unsurprisingly, we are seeing a number of this type of investment opportunities being presented.

The Partners Fund currently has a 10% exposure to the hotel and domestic tourism sector and the underlying assets are experiencing better-than-forecast recoveries in occupancy rates. The Crowne Plaza in Hobart, for example, has seen occupancy increase from ~20% late last year (at loan commencement) to 84% currently.

The potential “gap” in hotel financing is proving opportunities with strong returns, while the improving underlying performance of the sector is supporting valuations and limiting downside risk. Overall, these factors, combined with Merricks Capital’s adaptable investment approach, will enable the Partners Fund to continue participating in a diversified portfolio of attractive, risk-adjusted investment opportunities.

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