As Australia’s visitor economy thrives, with occupancy and revenue trending upward year after year, the investment appetite for hotel assets continues to rise.
top performing asset class
Robust accommodation demand growth expectations over the medium term suggest new supply additions will be fully absorbed. This creates a strong investment market for hotel opportunities. Compared to other property types, hotel investments have performed very favourably over the last decade.
The risk-return profile of Australian hotel assets has been superior to that of other asset classes, having similar volatility to industrial and office assets, but considerably outperforming those classes, showing higher returns. Generally, three operation models are common in the sector – lease, hotel management agreement, and management rights.
THE LEASEHOLD MODEL
It was ResortBrokers who actually pioneered accommodation leases in Australia, establishing and selling the nation’s very first motel lease in the 1980s. This was a ground-breaking development in the accommodation sector that vastly expanded the market.
Typically a hotel lease would be struck on a term of 25–30 years. Rent is set according to accepted industry formulae based on projected net profit, with stipulated CPI increases and rent reviews. Rent is generally paid calendar monthly in advance.
ResortBrokers is uniquely placed to ensure the terms of the lease, including defined responsibilities, are structured to achieve the optimal outcome.
Under this model, the operator manages a freehold owner’s property on their behalf, typically for a period of 10–15 years. Terms of the agreement are negotiated, stipulating arrangements between the owner and operator.
The operator’s remuneration is by way of fees, generally made up of a guaranteed base amount, calculated as a percentage of revenue from the hotel business, and a performance incentive element paid if gross operating profit exceeds an agreed threshold.
The owner's obligations to provide working capital or otherwise finance the operation of the hotel (including fitting out the property to the operator’s required brand standards) should be clearly addressed in the agreement.
MANAGEMENT RIGHTS WHERE UNITS ARE STRATA TITLED
Under the Management and Letting Rights (MLR) model, the potential operator purchases two components:
- the exclusive right to operate the hotel letting business and conduct the caretaking;
- the associated real estate assets required to operate the business (e.g. lobby, reception, restaurant, offices).
Management Rights are increasingly accepted, even preferred by hotel operators. The operator enters into a commercial arrangement with individual lot/unit owners to allow room revenue to be generated and distributed, and associated costs to be allocated.