Analysis of the rampant growth of Auckland’s hotel industry

Analysis of the rampant growth of Auckland’s hotel industry

(The above is an indicative map of Auckland, showing the recent hotel developments in and around the CBD.)

2017 was easily the busiest for New Zealand hotel industry, with the occupancy rate touching 70 percent. This rate is used by Statistics New Zealand to understand how difficult it is to book a room in the country. But with the America’s Cup scheduled for 2021, there is a growing concern of hotel rooms shortage hitting Auckland very soon, as pointed in a recent report by the global commercial property research institute CBRC. Though, it adds, this shortfall can be compensated by other commercial accommodations such as bed and breakfasts, serviced apartments, and motels.

Chinese investors are in the game
Realising the above, and backed by their capital reserves, Chinese investors have increased their investments in bed and breakfast like Airbnb and hotels in the hope of filling this gap in Auckland. 

In fact, an anonymous commercial property sales manager told Yiju New Zealand that there are many more Chinese investors seeking opportunities to invest in New Zealand hotels. 

The popularity of hotel investment is better reflected by the increased number of newly built hotels in Auckland. 

To add to it, many Chinese developers are also altering their projects, originally designed for office building and apartments, to hotels now. An example is the Shanghai Shundi Group, which switched one of its projects at Auckland downtown from an office building to a hotel. 

Some other residential developers have turn to building hotels, after running into obstacles in developing apartments.

According to Statistics New Zealand, building consents for new hotels in 2017, were worth $457,353,811, in the country. Hotels in Auckland, Wellington, Christchurch, and the Queenstown-Lakes district have contributed to this increase.

But importantly, the rampant growth in hotel development does not mean we can ignore the fragility of capital chain, the loss of control of development process, and inconsideration of risks.

One anonymous interviewee, who is in close contact with hotel investors, told Yiju New Zealand that some primary developers intend to re-sell the land once they obtain the consent for hotels. 

And unfortunately, the developers taking over the deal then, will not have the relevant experience and funds to build a new hotel, putting the entire project at risk. 

In recent years, Chinese investors facing constraints of foreign exchange control, have abandoned some projects that were almost finished. Yiju New Zealand learnt that the schematic design of a hotel around the airport was done in 2015, yet it was abandoned due to insufficient fund. 

Hotel development is complex
OZAC Architects, an architectural practice, has eight design projects related to tourism property. Tom Jing, Managing Director of OZAC Architects and registered architect, told Yiju New Zealand that Chinese developers have increasingly shown interest in tourism properties in terms of business volume. Since the launch of the Auckland Unitary Plan, there are numerous projects under planning or construction. The most iconic one is Park Hyatt - the five-star hotel built by Chinese developer Fuwah Group, located at the heart of Auckland. 

Developers with abundant capital and extensive experience also face unexpected challenges in New Zealand, including over-expenditures, construction delays, and constraints of recruiting tradespeople overseas.

Yiju New Zealand has learnt from a mortgage manager that the application of commercial loan for the operation of a hotel was declined since the construction phase was way over budget.

Jing also pointed out that the development of tourism property is different from residential development, and can easily get out of control for inexperienced developers; especially for Chinese developers lacking comprehension of local sectors. For instance, they are unable to effectively coordinate with consulting firms in the design phase, losing control over budget and progress in the construction phase, and not getting expected return in the operational phase.

Jing suggested that it would be best for the investors, who have long-term plans to operate hotels, to let the hotel management company guide the architectural design. “Different hotel management companies have different requirement for architectural composition, and their operation management styles and profit models are different as well.”

Construction output has direct impact on profit margins, about which developers care the most. Taking hotel as an example, the number of rooms on the same size of land will determine profit of the terminal value of the project. “Unlike China, there is no concept of plot ratio in the building code in New Zealand. Instead, it put limit on the total number of rooms that can be built through the concept of floor area ratio, solar angle, height restriction etc. Thus, there is much flexibility here,” Jing noted.

Aside from output, the key to enhance the value of the project lies in the architectural drawing. Taking Queenstown as example, landscape is its most valuable resource. One of the most important factors whether a project will be successful or not is to maximise the value of the land without increasing building cost through architectural composition and utilization of landforms. 

Jing suggested that a project with 1/4 of lake-view houses can be improved to 1/3 through architects’ sophisticated design, which will play significant impact on both the sales revenue and operating income in the future.

The above key points of hotel development, is something OZAC claims to specialise in. Unlike traditional architectural practice in New Zealand, OZAC not only specialise in architectural design itself, but also integrate services including location selection, cost estimation, analysis of return on investment, risk control, and project management.

Recently, OZAC assisted a Chinese investor in purchasing a piece of land in downtown Queenstown that could be developed for hotel. Prior to the auction, OZAC conducted an in-depth study, and determined the guide price of the land based on architectural design and return on investment. It facilitated the investor to have a clear idea of costs from the beginning, and mitigate the development risk from high land cost.

Ensure cash flow in later stages
But building a fine hotel is only the first step; operation and sustainable development are the essential and most important later stages. In reality, it is not easy for Chinese developers to handle the pressures of heavy investment in the early stage, and moderate returns in the later stage.

Jing adds, “That’s why many developers prefer the more flexible development pattern such as serviced apartments.”

Serviced apartment is a unique investment category. It can be considered as hotel in terms of usage and operation. Nevertheless, its property right is apartment, and its design and construction have to comply with the building code for apartment.

Tom advised that the developer can go with serviced apartment if they have a high need for capital return. They can sell the property right of some apartments for the quick return on capital. The remaining property right can be held for long term for stable cash flow and real estate appreciation, or be put down as collateral to obtain loan from the banks for the development of the next project. Developers can decide the proportion of selling or holding the property right based on their situations.

In addition, developers need to consider the situation of operating the hotel as a whole in the early stage, and sell by floor or by room in the later stage. If the developer has a clear investment strategy from the very beginning, architects will be able to consider the layout of facilities like pipes and electrical circuit, for the later stage when property rights are sold separately, in their preliminary design.

Taking cash flow into account, construction companies can eventually lease the hotel property right they hold to a hotel management company. On their part, hotel management companies prefer newly built hotels rather than older ones. Lu Zheng, President of Orient Construction, told Yiju New Zealand that hotel management companies care more about the quality of the building when choosing a property, especially that leaking is a major concern for older buildings in Auckland.

- by Xiuyue Chen, first published in the Chinese property magazine Yiju New Zealand

Disclosure - Yiju New Zealand is owned by Pauline Gao, who also sits on the Advisory Board of Multicultural Times.

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