Suite Success – Hotel investment update and outlook

Suite Success: Hotel investment update and outlook

With 7% of the Merricks Capital Partners Fund invested in three senior secured hotel projects, including one operational and two opening this year, we take a look at the sector’s current dynamics.

Rebounded but rooms for improvement:

• Hotel operators anticipate 2024 trading to return to pre-COVID levels, supported by international visitors returning for business, sporting and cultural events.
• Normalised trading aligns with our original investment thesis for funding hotel projects during COVID, and we expect the supply-demand gap to widen further in key capital cities over the next 3-5 years.

Tight new supply:

• Many approved developments are on hold due to post-COVID construction and financing costs, with developers wary of commencing new projects. This is particularly evident in Melbourne, with only 2,055 rooms under construction compared to 31,427 under development  (Source: STR).
• We’re seeing developers amend DAs to pivot projects to mixed-use, including a luxury residential apartment component which benefits from added hotel amenities to target a premium price point.

Location disparities:

• Suburban hotels are struggling to increase occupancy (suburban occupancy is near 50% in Melbourne compared to the CBD occupancy of 70% and Sydney CBD occupancy of 80% – STR). The main driver for lower demand in the suburbs is that many businesses that previously ran meetings and events have not returned post-COVID and international business visitation is still down. Many suburban hotels will struggle to be profitable without compression in the CBD markets (>85% occupancy).
• Location within each CBD is also proving to be critical for hotel demand, as it is with office demand. The greatest disparity can be seen in Melbourne where hotels in the Eastern quarter are trading at 80%+ occupancy versus the Western precinct at 60% (based on trading metrics provided by a Melbourne hotel operator).

Melbourne Place Hotel update:

• The Melbourne Place Hotel construction is progressing well, with the structural top-out expected at the end of January and practical completion during July 2024. On the current timeline, the hotel will open in August 2024.
• The highly experienced team managing project delivery and operations, led by Peter Crinis, former CEO of Crown Sydney and Crown Hotels, has signed two renowned chefs for the hotel’s restaurant and bars and hotel food and beverage offering.
• With a strong brand identity and clear path to opening, Merricks Capital is beginning a process to sell the hotel out of the debt funds to the appropriate long term equity fund.
• One of the core pillars of our risk management is the ability to manage the rare occasions that we have to step in and take control of loans that are non-performing. In the case of Melbourne Place, the ability to finish the development and open an iconic hotel will preserve capital and potentially capture upside for our investors.

 Source: STR

Source: BITRE