Ken Smith, Executive Vice President of Jones Lang LaSalle Hotels has been in the industry for 13 years and has participated in countless hotel sales.  His analysis of three recent hotel transactions in Sydney reveals that each represented vastly different investment philosophies, with the potential to create a misunderstanding of the real market situation if not understood and interpreted correctly.  

The hotels in question are The Observatory Hotel, Ritz-Carlton Sydney and the Nikko Hotel.
 

Until recently the market had been appraised on fairly simplistic terms.  Investment advisors needed only concern themselves with the price per room and an initial yield analysis.  However the recent sale of Australia�s largest hotel, the Nikko Hotel in Darling Harbour Sydney to General Property Trust (GPT) signalled the emergence of a significant shift in the investment approach to hotel acquisition by investors not burdened by the capital constraints of the struggling listed hotel sector. GPT�s acquisition at $140 million, based on a lease to Starwood Hotels and Resorts to operate the hotel as part of their expanding Four Points brand, was struck to suit both parties.  The yield suitable to GPT and its shareholders at

FOUR POINTS SYDNEY HOTEL 161 Sussex Street Sydney, Australia NSW 2000

�Ignoring captial requirements and retail income issues, a simplistic assessment of yield expected to pass through the property for 2000 would show 11.5% - a misleading and unsustainable appraisal� interprets Mr Smith. �Analysts� estimate of an equivalent yield of 8.7% over the short to medium term hits the mark as a better interpretation, but is irrelevant going forward with the asset acquistion structure�.

Adding to the confusion, there is the opportunity for Starwood to improve yield to shareholders by realigning the business mix after refurbishment. By fostering a greater attraction to the corporate market, some of the lower yielding inbound market that dominated the earlier business would be displaced.  �The funding arrangements employed by GPT and the structure by which it was acquired, make this transaction unique and dangerous for simplistic interpretation� continued Mr Smith.

While the GPT acquisition heralded a new approach to structuring a hotel deal in Australia, investor motive in the The Observatory Sydney and Ritz-Carlton Sydney sales are undeniably determining factors.  �The acquistion of The Observatory by Orient Express demonstrated a common trend over recent years � that is operators securing their position in a market by acquiring the hotel they manage. 

While yield was obviously a consideration reflected against their own cost of capital, the pure investment yield that an alternate investor would consider became irrelevant� observed Mr Smith.

The motives for C K Ow�s acquistion of the The Ritz-Carlton Sydney were different again. The property was estimated to reflect a yield in the order of 5.9%, unsuitably low by any benchmark.  However, when considering the acquistion it is important to note he now controls both Ritz-Carltons in Australia, having acquired the Double Bay property in 1999 and that there is clear opportunity for profit improvement at the Macquarie Street property.

Mr Smith concluded by saying �These three case studies indicate that a simplistic approach to hotel investment can be dangerous � motive drives the market�.