August 1, 2025
Room for Yield: Capital Opportunities in Hotels
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- This week, Melbourne Place Hotel was awarded Development of the Year – Hotels & Accommodation by The Urban Developer. It’s a deserved recognition of the asset and the team behind it.
- For us, it reinforces our broader message: financing quality assets, executed well, delivers strong investment outcomes through cycles.
- On most occasions, the investment outcome generates high returns for the senior lender’s investors, but in the case of Melbourne Place, it was the unique capability to step into a distressed situation and develop, run and sell an award-winning asset that safeguarded investors’ interests.
- With over $700m deployed to financing hotels across Australia and New Zealand, this asset class has generated returns of 10% or more (net of fees and costs) to the Firm’s portfolio of loans over the past decade.
The Melbourne Place lending thesis, like all our hard-asset lending, was grounded in a structural demand and supply outlook. We began funding in mid-2022 when Melbourne tourism was still muted. The 191-room, 14-storey independent hotel, with three hospitality venues and a rooftop bar, presented a delivery challenge when the original equity sponsor failed to meet its contractual contributions. By stepping in and preserving the ADCO build contract, Merricks Capital ensured investors benefited from the project economics that related to the 2021 fixed-price build contract, rather than a repricing post 25-30% cost escalation (estimate) on a +$100m build.
ADCO also deserves credit for delivering through arguably the toughest building conditions we have seen in recent times, which caused subcontractor defaults and extensive delays. We believe that the outcome is a unique piece of real estate that cannot be replicated in today’s market and viable for the developer. The skill set of a lender to assess the builder and step into the shoes of a developer continues to be the most important line of defence when providing construction finance.
This outcome also highlights the rationale behind Regal Partners’ recent acquisition of a 50% stake in Ark Capital, a specialist hotel investment and asset manager. The combination of Regal Partners, Merricks Capital and Ark Capital brings together capital, origination and operating expertise in a sector where we’ve deployed over $700m of senior debt over the past decade and generated +10% returns (net of fees and costs).
Today’s market conditions favour having both debt and equity capability, allowing us to tailor capital solutions to the asset and opportunity. In particular, we see:
- Dislocation is in capital, not fundamentals. National hotel occupancy has recovered to roughly 71%, with RevPAR up 3.8% year-on-year across most major cities (CBRE).
- In Adelaide, we’ve recently provided the senior debt facility for the A$405m Market Square mixed-use development, which includes the Treehouse Hotel operated by Starwood, and through Regal, providing Ark the equity for the acquisition of the Mayfair Hotel.
- Location and sponsor quality matter. Adelaide hotel occupancy is 76% with RevPAR 27% above 2019 levels – and momentum is building, which we believe will be sustained. In 2024, overnight visitors reached 3.9m with total spend of A$5.8bn (+29% vs pre-COVID), pushing forward booked occupancy near 90% (South Australia Tourism Commission).
Pairing asset selection with institutional-grade sponsors and Tier-1 execution (ICD Property and Multiplex at Market Square) gives us high conviction in downside protection on asset delivery.
The Melbourne Place outcome and the Regal-Ark alignment reinforce our ongoing commitment to expanding our platform, sourcing edge and execution capability to monetise the current dislocation for investors but also defend the downside if things don’t go to plan.
