Tightening of Chinese government restrictions on outbound investment into tourism-related projects or assets is emerging as the newest challenge for Australia’s hotels sector, which in WA is midway through a record phase of development that has had little involvement to date from Chinese investors.
Midway through August, the Chinese government announced outbound direct investment in real estate assets, including hotels, would be restricted unless the spending was aligned with China’s national development, macroeconomic and foreign policies.
That restriction has the potential to slow what has become a torrent of Chinese funds into Australia’s hotels sector, with research by Colliers International showing more than $8 billion of investment has occurred since 2013.
The announcement builds on restrictions on Chinese capital outflow first announced late last year.
Following the August changes, China’s largest hotels conglomerate, Dalian Wanda Group, began preparing to sell off parts of its $2 billion Australian operation, including large-scale development projects in Sydney and on the Gold Coast.
Dalian Wanda also dropped a £470 million ($798 million) plan to buy a strategic development site in London because of the increased pressure to cut back on large offshore acquisitions.
For WA’s hotels sector, the announcement of more investment scrutiny comes after the state largely missed out on a wide range of China-backed investments into Australian hotels.
Colliers said Chinese investors spent more than $1.12 billion on Australian hotels in the 2016-17 financial year, however, none of those acquisitions occurred in Perth.
Like in the residential property market, Sydney was the dominant city for Chinese buyers, alongside key resort markets in Queensland.
It was a similar story for development deals as Chinese groups grew more comfortable with the Australian market, but mostly on the east coast.
Colliers International hotels Asia Pacific director of transaction services Karen Wales told Australia China Business Review there had been considerable Chinese investment in WA in the resources sector, but hotels and resorts had not had the same attraction.
“Historically, WA has just struggled to attract capital or get on the radar from a tourism point of view, because it is such an isolated city,” Ms Wales said.
“The main driver for a lot of hotel development we have seen in the east has been mixed-use developments and selling residential apartments, and in that regard Sydney and Melbourne are more well-known and easier to sell into the Asian market.”
Ms Wales also said Perth’s burgeoning pipeline of hotel development, occurring at the same time average occupancies had fallen from more than 90 per cent to around 75 per cent, had also been a contributing factor to WA not attracting Chinese investment.
In Perth, construction of a development pipeline of more than 4,000 rooms worth more than $3 billion is well under way, highlighted by the ultra-luxury Westin Perth and Ritz-Carlton hotels being built in the centre of the city.
The development boom was generated through a state government-led initiative, with the former Liberal government in 2011 providing incentives to facilitate new hotel projects on state-owned land.
“There was a lot of attraction activity done during the mining boom, and trading has just now fallen, so you will struggle to attract investment other than what’s already in the pipeline, just because it doesn’t make sense necessarily to invest in Perth now,” Ms Wales said.
“There is a strong forward pipeline of rooms and you’ve got a market that’s experienced a shift in the demand floor and the price of rooms as it evolves from being a high-demand corporate market and is now having to reposition itself.
“The capital that’s already committed will come through, but I’m not sure you will see much more, from a development point of view.
“We need to wait for what’s in the pipeline to come out of the ground and start trading, and then go again.”
Research by Australia China Business Review found there were just two existing Perth hotels owned by mainland Chinese companies – Narada Hotel Group’s Pagoda Resort and Spa in Como and Hotel Northbridge, which is owned by the WA-based arm of the Metallurgical Corporation of China.
There is one hotel project in the development pipeline in Perth being planned by a Chinese group, with 3 Oceans Property’s Iconic Scarborough proposal including a 161-room, four-star hotel.
Two Hong Kong-based groups are active in WA, with Far East Consortium developing the $500 million Ritz-Carlton at Elizabeth Quay and a $220 million Dorsett Hotel near Perth Arena, while UNIR has spent $70 million refurbishing and rebranding its CBD hotel as an InterContinental.
Singaporean and Malaysian investment groups are also considerably more active than their Chinese counterparts.
Singaporean giant Fragrance Group has three large-scale mixed-use developments in the planning pipeline in Perth with significant hotel components, collectively estimated to have an end value of more than $1.5 billion.
Malaysian investors’ moves into Perth have been spearheaded by Victor Goh, the developer behind the $500 million Capital Square, which is proposed to include an apartment tower and a luxury hotel next to Woodside Petroleum’s new corporate headquarters.
Mr Goh is also planning two hotel joint ventures with one of Perth’s most prominent developers, Adrian Fini, at Elizabeth Quay, with those projects expected to be collectively worth up to $750 million.
The Perth-based arm of Malaysia’s MB Group, SKS Group, has three DoubleTree by Hilton properties in its portfolio, two of which are under construction at Barrack Square and in Northbridge.
A third DoubleTree property, in Fremantle, remains in the planning phase.
Magenta Capital managing director Monica Chetty, who has spent more than 20 years in both the government and private sectors facilitating international tourism investment, said Perth simply was not a consideration for large mainland Chinese investment groups.
However, Ms Chetty said it would take just one big investor to stimulate further Chinese interest in WA, pointing to Dalian Wanda Group’s $1 billion Jewel development on the Gold Coast as an example of the catalytic effect of investment by one of the world’s largest hotel and resort developers.
“When they went there, others wanted to know why they were there,” Ms Chetty told Australia China Business Review.
“The attraction is still Sydney and Melbourne, and now Gold Coast, because of everything that’s happening.”
Speaking prior to the September state budget, Ms Chetty said the state government needed to adjust its marketing strategy by providing more funding to attract investment groups or stimulate conference travel, rather than continue attempts to lure leisure travellers through campaigns like ‘Just another day in WA’.
Treasurer Ben Wyatt announced in September that the Labor government would commit to a record destination marketing and event tourism spend of $425 million to boost the tourism sector.
However, it was not yet clear how much of this money had been earmarked to attract overseas investment into WA tourism, which Ms Chetty said needed to be a stronger focus.
“We have access to a number of landowners who have land with huge, attractive, trophy-like potential to the right investor, if only they knew it was available,” Ms Chetty said.
“We had the opportunity late last year to do a quorum whereby local governments and businesses could sponsor a small amount of money to meet Sydney-based investors who had already made the leap into Australia.
“We approached many government organisations here in Perth, and a long-story short, most of them were disinterested, and not ready to even provide less than $10,000 to take part.
“This epitomises the issue that we’re not spending. We aren’t going to have people land here tomorrow and say ‘this is a great place, I’m going to invest’.”
Ms Chetty said big opportunity for long-term tourism growth was apparent in regional WA, particularly the South West.
Colliers’ research showed Chinese investors were also willing to take on regional investments, with 24 of the 41 hotel sales to China-linked firms in Australia in FY2017 occurring outside of capital cities.
However, because many potential investors still characterise Perth as an outback resources town, Ms Chetty said, going to the South West of the state was hardly a consideration.
“The potential is in the regions, sites are there, but you need to bring parties to the South West or to the north,” Ms Chetty said.
“You can’t expect you are going to portray it to them via email or a presentation or a teleconference.”