Market Overview Sydney, Australia Sophie Mougel, Associate HVS International – Sydney, Australia

HVS INTERNATIONAL SYDNEY Level 1, 5 Elizabeth Street Sydney NSW 2000 Australia Tel: (61) 02 - 9233 1125 Fax: (61) 02 – 9233 1147 Email: [email protected] Web: www.hvsinternational.com

26 May 2004

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Destination Overview

Economic Overview

Being Australia’s leading commercial city and the gateway for most international travellers into the country, in both the business and leisure segments, the demand for hotel room nights in Sydney acts as a barometer for the general performance of the hotel industry across the country. Its positioning as Australia’s business capital means that Sydney is also comparatively more exposed to outside forces, which may impact the tourism industry to a greater extent than in other cities. The NSW economy, and Sydney in particular, is heavily focussed on the white-collar sector. Although this sector suffered a setback in the past few years due to poor a general economic climate, recent economic growth is rapidly generating new CBD jobs. Similarly, new developments have commenced in the office sector, with figures showing that office approvals for 2003 were at the highest level since 1990. Several retail construction projects are in the pipeline, with the redevelopment of Bondi Westfield due for completion later on in 2004 and the expansion of Blacktown Westpoint finishing by mid-2005. State and public/private funding structures are supporting continued growth in the transport sector, with the Federal Government recently approving Sydney Airport’s master plan, which will see more property developments at the Mascot site over the next two decades. As the international gateway to Australia, the tourism industry in Sydney in suffered particularly from SARS and safety related effects on inbound traffic. Thankfully, the 2003 Rugby World Cup, which kicked off on October 10, helped wane some of the dramatic effects those events had on the industry, and the tourism sector is expecting a much more upbeat year for 2004 as demand from international markets returns.

Hotel Market Supply

The Sydney Tourism Region market comprises 107 hotels with a total of 18,631 rooms (as at December 2003) the vast majority of which are in the 4and 3-star category. In addition, there are 67 serviced apartment buildings with a total of 4,899 units. In the inner city, the total room stock amounts to just over 10,000 hotel rooms and serviced apartments. Hotel supply in Sydney received a significant boost in the lead up to the Olympic games, recording average annual growth rates of over 11% in the period 1998 to 2000. From late 2000 until recently no new additions have been recorded, and hotel supply in the wider city area actually declined as some 3,500 rooms have been converted into residential stock, mainly in the CBD fringe area.

Sydney Inner Hotel Supply - By Star Grading 35,000 30,000 25,000 20,000 15,000 10,000 5,000

M

ar -9 9 Ju l-9 No 9 v9 M 9 ar -0 0 Ju l-0 No 0 v0 M 0 ar -0 1 Ju l-0 No 1 v0 M 1 ar -0 2 Ju l-0 No 2 v0 M 2 ar -0 3 Ju l-0 No 3 v03

0

3-star

4-star

5-star

Source: ABS Tourist Accommodation Statistics

The availability of rooms in the 5-star segment is also temporarily reduced, as both the Wentworth and the Hilton have taken a combined 900 rooms off the market for renovations. Both hotels will reopen late 2004, the Hilton repositioning itself as the preferred conference hotel, while the Wentworth will be re-branded as a Sofitel. Hotel Market Demand

About 50% of all visitors to Australia visit Sydney, generating over 35 million visitor nights in 2003. However, although nearly 57% of inbound visitors come to Sydney for a holiday, a large proportion of this demand is related to employment or education, and many stay with friends and family. As a result, only some 16% of international visitors stay in hotels, generating about 5.8 million hotel room nights in 2003. This international demand, which makes up slightly more than half of total hotel room nights in the city, has been growing at a long-term compounded annual growth rate of about 6% between 1989 and 2003. Following a very sharp incidental increase in 2000 with the Olympics, demand over the period 2000-2003 declined by 2.6%, mostly due to the fall in inbound visitation during 2003 as a result of ongoing health and safety issues in the global markets. On a more positive note, the share of international visitors staying in hotels has increased from 15.7% to 16.4%, despite a dramatic reduction (of almost 14%) in international visitor nights spent in the Sydney region.

The domestic market is equally important, generating 22.4 million visitor nights in 2003 of which some 32% were spent in hotel rooms, representing a total of 7.2 million hotel room nights. Noteworthy, although the number of domestic visitor nights to the Sydney region decreased year on year to December 2003 by 3.7%, the figures show a slight increase in domestic nights spent in hotels (1.4%). The domestic market is not growing as fast as the international market, at a long-term compounded growth rate of 2.5% per annum. This growth rate is also more volatile than the international market, and shifted from 11.4% growth from 1997-2000 to a decline of 6.7% from 2000 to 2003, attributed to various impeding factors including the demise of Ansett as well as the generally weak economic climate in the past few years. Visitor Nights in Sydney Tourism Region Domestic Nights Total Change (%) Domestic Nights Hotels Change (%) International Nights Total Change (%) International Nights Hotel Change (%)

1999 24,543 7,041 29,224 6,103

2000 27,638 12.6% 7,320 4.0% 38,073 30.3% 6,688 9.6%

2001 25,735 -6.9% 7,533 2.9% 40,472 6.3% 6,134 -8.3%

2002 23,295 -9.5% 7,147 -5.1% 40,908 1.1% 6,421 4.7%

2003 22,435 -3.7% 7,249 1.4% 35,210 -13.9% 5,784 -9.9%

Source: National Visitors Survey/ International Visitors Survey

Of interest is the correlation between supply growth and demand growth, which can be clearly established for the domestic market, but is not discernable for international demand. The explanation for this phenomenon is the ability for hotels to actively divert demand from lower priced segments in the domestic market through aggressive price strategies, while the international market does not respond as directly to revised pricing strategies.

Sydney Inner Supply and Demand Trends 4,500,000 4,000,000 3,500,000 3,000,000 2,500,000 2,000,000 1999

2000

2001

Room Nights Available

2002

2003

Room Nights Sold

Source: ABS Tourist Accommodation Statistics

Occupancy and Average Room Rate

While room occupancy is directly correlated to supply and demand, average room rate is not. The influx of a significant number of new hotel rooms prior to the Olympic Games, in particular in the top end of the market, resulted in a direct drop in room occupancy, despite an increase in demand as more room nights were attracted from lower priced market segments. As a result, room occupancies in Sydney Inner dropped from 70% in 2000 to 66% in 2001. Despite a struggling economy and the setbacks of September 11 (2001) and the Bali attacks, 2002 showed a remarkable recovery and occupancy improved to near 70%. Average room rates dropped sharply in 2001 and continued this decline in 2002 despite improving room occupancies. 2003 was a challenging year for the whole industry. Despite a promising start for the first quarter 2003 with occupancy rates five points higher than during the corresponding quarter in 2002, this trend was suddenly interrupted by the SARS outbreak in Asia, which resulted in average rates declining by 10% in the June quarter 2003. Fortunately, recovery soon followed, boosted by the 2003 Rugby World Cup, which helped operators achieved room occupancies of nearly 81% and average room rates of $198 during the last quarter of 2003.

Sydney Inner Hotel Market - Occupancy & Average Room Rate Performance

$200.00

77.0%

$190.00

75.0% 73.0%

$180.00 71.0% $170.00 69.0% $160.00

67.0%

$150.00

65.0% 1999

2000

2001

Average Room Rate

2002

2003

Occupancy %

Source: ABS Tourist Accommodation Statistics

Though not always clearly identifiable, the most likely reason for this continued decline in rate between 2000 and 2002 is a knee-jerk reaction to a succession of setbacks, all of which impacted on short-term demand patterns. While rate reductions can be implemented overnight, literally, and result in direct occupancy growth, this short-term tactic comes at the cost of a long-term impact as operators typically find that rates can only slowly be raised again. Room occupancy will follow its natural cause however, and improve when demand picks up again. The positive turnaround experienced in 2003 may be an indication that hotel operators could benefit from improved average rates and yield in coming months helped by the continued absence of new hotel construction. Sydney Inner Hotel Market Performance (2001-2003) Quarter 1 Quarter 2 Quarter 3 Quarter 4 Full Year 2001 Occ % ADR 2002 Occ % ADR 2003 Occ % ADR

70.3% $174.48

62.0% $163.60

65.8% $170.36

65.5% $163.88

65.9% $168.08

70.6% $165.81

65.6% $168.25

65.2% $151.42

76.7% $160.70

69.5% $161.54

76.5% $163.52

65.5% $151.57

75.7% $157.36

80.9% $198.05

74.7% $167.63

Source: ABS Tourism Accommodation Statistics

Hotel Market Outlook

Sydney’s market performance currently moves in cycles of approximately ten years duration, driven directly by supply growth and its impact on room occupancies. With the last supply influx completed by 2000, in concert with the hosting of the Sydney Olympics, no new supply growth is anticipated for the foreseeable future and hotel performance is anticipated to improve rapidly as demand growth continues. In response to the new supply and taking advantage of slowing market demand during 2001 and 2002, several hotels have commenced significant refurbishment programs. The Wentworth and Hilton will reopen some 900 rooms through 2004, which will no doubt put pressure on a recovering room rate. While further residential conversions may take more older room stock in the CBD fringe off the market, this should have little impact on the performance of the CBD market. Average room rates are anticipated to continue improving, as the next round of rate contracts are expected to reflect occupancy increases and hoteliers reportedly will be seeking aggressive rate increases to claw back lost ground from the past few years. Overall, the outlook for the Sydney market is optimistic, with anticipated strong improvement in both occupancy and rate performance.

Recent Transactions

The Sydney market has always been eyed closely, especially those who do not have a presence in the Australian. The high barriers to entry into Australia’s premier destination make it virtually impossible to get a foothold other than through acquisition of a hotel with vacant possession. As a result of this situation, the number of prospective buyers for recent transactions was considerable, in particular for the former ANA Hotel, which sold in August 2002 and provided an opportunity for a new operator to take over the management rights. GIC proved a worthy opponent and secured this prized asset, and then staged a successful operator selection process, which ultimately resulted in Shangri-La making its long awaited entry into the Australian markets. The recent sale of the Park Hyatt set a record for the price per room paid in the Australian market, driven by the iconic location and quality of the hotel. The buyer, Challenger, will reportedly offer the property to investors in a new syndicate under a stapled structure, with Hyatt retaining the management rights under a long-term contract. Despite expectations that the Rushcutters Harbourside would fall prey to the spate of residential conversions in the Darlinghurst area, the property was snapped up by the Toga Group, owners of the serviced apartments operator Medina, who announced that they will operate the property under their new Vibe hotel brand.

Sydney Hotel Transactions

Date Hotel Name Mar-03 Mercure Sydney Airport Hotel Manly Pacific Sydney, Mar-03 Managed by Novotel May-03 Pentura Hotel on Pitt Jun-03 Chifley on City View Jun-03 Park Hyatt Sydney Oct-03 Vibe Ruschcutters Dec-03 The Kirketon Hotel

No of Rooms 266

Star Rating 4

150 119 118 158 245 40

4 4 4.5 5 4.5 5

Price ($AUD milllions) Seller $21.20 Golden Wheel Properties (CK Ma) $56.50 $16.50 $15.50 $137.50 $42.75 $9.00

Eric Yeung and Joseph Wong Topland Properties Grand Hotel Group Maritz, Wolff and Co United Well Investments Terry and Robert Schwamberg

Buyer Winten Property Group / Lyon Group Laundy Hotels Hudson Hotel Group Marsin and McDonalds Industries Challenger International RHS Hotel Investments Undisclosed Local Investor

Source: HVS International Research 2004

HVS International is a hospitality services firm providing industry skill and knowledge worldwide. The organisation and its specialists possess a wide range of expertise and offer market feasibility studies, valuations, strategic analyses, development planning, and litigation support. Additionally, HVS International supplies unique knowledge in the areas of executive search, investment banking, environmental sustainability, timeshare consulting, food and beverage operations, interior design, gaming, technology strategies, organizational assessments, operational management, strategy development, convention facilities consulting, marketing communications, property tax appeals and investment consulting. Since 1980, HVS International has provided hospitality services to more than 10,000 hotels throughout the world. Principals and associates of the firm have authored textbooks and thousands of articles regarding all aspects of the hospitality industry. HVS International – Sydney Level 1, 5 Elizabeth Street Sydney NSW 2000

[email protected] 02 – 9233 1125 TEL 02 – 9233 1147 FAX www.hvsinternational.com