A flurry of new, high-end hotels have opened in Auckland over recent months, with IHG’s InterContinental on the CBD waterfront and Abstract Hotel in Upper Queen Street the latest.
They followed the Te Arikinui Pullman Auckland, near the airport, which opened in December.
Nick Thompson, a director from commercial real estate firm JLL's Hotels & Hospitality Group, says there has been a substantial increase in new hotel supply across various markets since 2020.
That is particularly the case in Auckland where there has been a close to 30% increase, which equates to about 3000 rooms over 22 new hotels.
Around the rest of the country, Wellington has nine new hotels, Christchurch has seven, Queenstown has five, and Rotorua has two.
But the supply cycle is in the process of moderating, and the forward pipeline of hotels is a lot less than has been delivered, he says.
“The limited remaining future hotel supply, or projects currently under construction, are all situated in Auckland and Queenstown.”
Just four hotels, all in Auckland, are actually in the construction phase. They are the Horizon by Sky City and SoHo in Mt Roskill, which are opening soon, and the Grand Chancellor and IHG’s Hotel Indigo, which are opening later this year.
In Queenstown, construction started on a Radisson hotel but is now on hold, and a planned Hyde hotel is also on hold.
There are others planned, with Accor announcing plans to open the first New Zealand hotel in its Tribe brand in Auckland by early next year, for example.
And the Chow Brothers’ Stonewood Group recently announced plans for a $100 million redevelopment of 280 Queen Street, with 11 floors to be dedicated to a 322-room flagship Radisson Red hotel. It is expected to open late next year.
Thompson says while the Auckland market has yet to absorb all its new stock, there is room for new hotels in other parts of the country, although the situation varies.
“Some places don’t have sufficient drivers to do it. Some towns have significant motel stock, which is great, but there is vast room for improvement.
“The question is does a town have enough demand for a decent-sized hotel, or should they just go for a few more motels, and up the service?”
A big problem is that hotel development is difficult and expensive, and while that might seem like it would not be an issue for huge, international hotel chains, the reality is different.
That is because most international hotel brands do not usually own, or build the properties that house their hotels. Instead they lease the space from the building owner, and then act like a property management service.
Precinct Properties developed the building that the new InterContinental Auckland hotel is in as part of its Commercial Bay precinct, for example.
Hotel Council Aotearoa strategic director James Doolan says hotel development, whether it is a new build or the conversion of an existing building, is very hard to make stack up.
Unlike an office development, it is not possible to pre-commit hotel revenue to help get construction finance, and not only will a new hotel have to compete with existing hotels, but all hotels are exposed to economic and tourism market risks outside their control, he says.
“Throw in current high interest rates and construction costs, and the fact that hotels are unusual real estate assets which are not easy to sell, and it takes a particular type of investor to finance a hotel build.”
Many overseas markets understand that it is hard to build a hotel, and have policy settings and levers, such as tax abatement and risk-sharing arrangements, to help build hotels, he says.
“The idea is that hotel investment leads to positive downstream effects on the economy, and has long-term benefits for tourism.
“Unfortunately, New Zealand has not developed the toolkit of mechanisms that are commonly used to attract hotel investment, and if you don’t have them, all you can do is upsell on future potential. It means people are more wary of the risk.”
Doolan says this catalogue of problems makes it hard enough to build a hotel in Auckland, but even harder in new destinations, or smaller centres.
There might be more chance of finding a great location, but there will be higher costs, and it is hard to make them stack up against the potential daily rates, he says.
“The reality is the hotels now opening broke ground prior to Covid and were delayed because of it. I can’t think of anything that was started post-Covid, and there is not much in the pipeline.
“We need to be far more sophisticated around how we attract future hotel investment, and the kind of policy settings that are common overseas would help.”
Amending the Overseas Investment Act to make hotel investment more appealing, and looking at issues around depreciation would be a good start, he says.
Wim Ruepert, from accommodation industry consultant Horwath HTL, says the question is whether there is enough supply to meet demand across the sector, and the answer depends on the market.
“Supply is not evenly distributed, so there is a lot of stock in Auckland, and that will meet its market for some years, but in other areas supply does not meet the demand, and it could become an issue.”
He points to Queenstown, Wānaka, Tekapo and Hamilton as areas where demand is huge, but supply is limited.
Development is being held up by high construction costs which impact on the feasibility of hotel projects, particularly in smaller areas, he says.
“There are quite a few towns that are really in need of high quality hotel accommodation, and there is demand for it. But the feasibility of it just does not stack up because of the costs.
“There are no quick answers, but there are some possible solutions. One is modular builds, but they are still in their infancy here, and there is complexity around regulations, so it’s quite difficult to do.
“Another is more conversion of old commercial buildings into hotels, but that sounds easier than it actually is as only a few buildings are suitable for it, and there are seismic issues.”
Wider adoption of mixed-use development models where the hotel is a mix of residential apartments and hotel rooms, like the Safari Group’s La Quinta hotels, or a mix of retail and hotel, like the InterContinental, would also help, he says.
“But the outlook for the sector generally is very positive. New Zealand only gets a small proportion of international travellers globally, but the product is strong and the country is on many people’s bucket lists.
“If we can grow those numbers, and airline connectivity becomes easier, there are good opportunities. We will need new hotels, and good quality hotels as more visitors come.”
JLL’s Thompson agrees, as there is demand from a tourism perspective, and scope for growth in the corporate travel and conference sector.
“With airline recovery going quite well, and if we get tourism right and fully flowing again, there is definitely room for hotel development in the medium-term.”
IHG Australasia & Pacific managing director Matt Tripolone says developing new hotels is not the easiest thing to do, and it is necessary to have a partner like Precinct to pull off a project like the InterContinental.
He is looking forward to the opening of IHG’s Indigo Hotel later this year, and says his company has some exciting new local projects in the planning phase.
“We have some strong partnerships and prospects, and we are very interested in Queenstown as a location, and are actively looking at potential projects there.
“But we don’t have anything concrete to announce. Our planning is very much at the feasibility stage.”
New Zealand’s post-Covid recovery is about nine to twelve months behind Australia and new builds are taking some time to get underway again, he says.
“We are seeing the same pressures here that we have seen in Australia, such as the rising cost of debt, and increasing construction costs, and that has slowed things down a bit.
“There is also not much transactional activity going on, so not many sites selling, or hotels looking to reposition themselves.”
But if New Zealand follows the same trajectory as Australia, he expects 2024 to be a year where a lot more enquiries start coming through, and the cost scenario stablises more.
“Currently, a lot of our owners are focused on existing assets, and refurbishments, and that still gives us opportunities.”
But he is upbeat about the outlook for the hotel sector, and says there are encouraging signs in the tourism space with international visitor levels reasonably strong, and airline capacity increasing.
“Last year was generally a strong year, and we don’t see anything that tells us that will stop or that this year will be a decline. The trajectory is consistent, and we expect a return to 2019 levels of trade pretty soon.”
Miriam Bell
