Many tourism asset investors are not suffering as much as they thought they might. In fact, Covid-19 has had a silver lining for owners and investors in hotels and motels.

While the tourism sector as a whole has been smashed around and is still difficult and challenging, the Government has been a sort of saviour for some of the big hotels and hundreds of motels and small hotels, when they were staring into the abyss of no overseas tourists and no income.

The Government has handed out MIQ contracts to more than 30 major hotels, providing them with secure cashflow, and is using small hotels and motels for emergency and transitional housing across New Zealand.

At the end of May, there were 4,271 transitional housing places in motels and small hotels, costing the Government $1 million per day. Another 2,000 places will be opened by the middle of next year.

But for those owners and investors who find themselves in survival mode tourism expert and Colliers International’s hotels director Dean Humphries says the only end in sight is when the world starts travelling again.

Prospering

"Some investors have prospered. For the bigger hotels the individual MIQ Government contracts are a kind of underwrite for their balance sheets. There are not many alternatives for them with overseas tourists off the radar and while the MIQ system needs adjustments, the economic benefits outweigh the costs,” says Humphries.

The use of smaller hotels and motels for emergency and transitional housing is far bigger than MIQ business, he adds.

Attractive Returns

Humphries says the industry is not all doom and gloom as has been painted. Tourism assets have always provided attractive returns but there are also associated risks.

“The risks come with volatile income but investors prepared to take the plunge reap the rewards. Most investors don’t go near tourism assets because they don’t understand them but those who do know how they perform well,” says Humphries. “A motel or small hotel can be bought for $1-$5 million, way less than an average Auckland house in the better suburbs.”

Key performance indicators are steadily improving from last year and occupancy rates for the country’s 330 hotels now sit between 50% and 60% in all major regions with the exception of Queenstown. Hotels’ average room rates have remained firm sitting in a tight band between $160 and $185 a night.

Revenue per room dropped 40% last year from its peak but has rebounded back to be down just 15%. The top performing regions for revenue per room are Rotorua at +47% followed by Christchurch on +41% and Wellington at +35%. “In the provinces where demand for emergency housing in motels and small hotels is surging, revenue per room is up substantially,” says Humphries.

Domestic Tourism

Not all areas of New Zealand have a preponderance of their small hotels and motels used for emergency housing.

Domestic-based tourism and business travel is sustaining plenty of hotels in the Bay of Islands, Rotorua, Tauranga, Nelson, Christchurch and Wellington, says Humphries. “Some of the smaller hotels have a strong trade, particularly in New Plymouth and Palmerston North, where many guests are business people.”

Before Covid-19 hit New Zealand most hotels were making good returns. High occupancy and high-yielding tourists, particularly from the United States and expecting luxury accommodation. Revenue growth and profit margins over the five years till the pandemic struck pushed smaller boutique hotels to the forefront of the global hotel sector.

Boutique Hotels

The growth of the boutique hotel sector was fuelled by travellers seeking alternatives to the traditional big hotel chains offering homogenised accommodation around the world.

Boutique hotels with between 10 and 30, and at a stretch 40, rooms first appeared in the 1980s in cities such as San Francisco, London and New York. They were small but trend-conscious and often luxurious properties.

Many boutique establishments are now highly successful cult hotels, such as Public, on New York’s Lower East Side, and Le Roch Hotel & Spa, a classical 19th-century property in Paris.
In New Zealand boutique hotels are now synonymous with lifestyle, design, cool spaces, individuality and experiences, says Humphries. In recent years owners and investors have had more freedom to innovate, localise and personalise the experience for guests.

CPG, one of the country’s biggest privately-owned hotel groups, has established a collection of 10 premium and boutique hotels across the country under the Fable brand, each with their own character, history and style.

Yields and Development

Before Covid-19 hotels in the main cities and Queenstown were selling for yields as low as 6.5%, rising to 9% in the provinces and secondary areas. Humphries says most hotels are now selling for yields of 5.5% in the main centres and up to 8% in the provinces on the back of low capital costs and return profiles compared with alternative asset classes. “The sweet spot are yields of 6.5- 7.5%, determined on stabilised earnings over the past three to five years.”

Because of the impressive returns there has been little motivation for owners or investors – other than for lifestyle change reasons – to sell up and seek other investment opportunities.

However, development costs make it financially prohibitive for new competition to enter the market. Humphries doubts there will be little new development when 1,600 rooms in Auckland, 302 in Queenstown and 162 in Christchurch under construction before Covid-19 hit are completed.

“The biggest roadblock to any new hotel project is the imbalance between land and construction costs and the return on investment of the development,” says Humphries.

At a minimum cost of $6,000-$6,500 up to $10,000 per m2 for a fully fittedout luxury hotel room, a developer, investor or owner-operator has to have a strong business model and cashflow – encompassing the target market, rates and branding of the property.

A basic motel it a bit cheaper to build at $4,000-$5,000 per m2 but owners and investors are usually competing with residential developers, who often pay a premium, for available land to build on.

Most of the country’s motel stock was built in the 1960s and 1970s and is getting to the end of its economic life, while many have been given a second wind with emergency housing contracts. “Most of the land motels around the country sit on is extremely valuable and good for residential development when the premises come to the end of their useful life,” says Humphries.

Despite encouraging trends, Humphries says the tourism assets sector remains compromised until the country’s borders open to international tourists, a major GDP earner for New Zealand.