Commercial property investment has been limited in 2023 across most asset classes and regions around the country. The growing cost of finance and uncertainty across some investment classes resulted in listing numbers down and the pool of buyers reduced. However, across the tourism sector, we have seen an inverse response to investment activity during the pandemic period which has continued at an elevated level today.
For the rest of the commercial property market, volumes hit new highs as interest rates fell in 2020 through to 2022, with a range of new investors looking to diversify their portfolios. However, lockdowns, border closures, and a halt to international travel, saw interest in tourism assets fall to long term lows, with annual turnover of $1.4 billion in 2020 and limited sales during the subsequent quarters. Turnover saw a swift increase during 2022 in response to improving tourism data, showing increased air travel, hotel occupancy and growth in average daily room rates. Interest in smaller regional hotels and motels also increased as domestic travel rebounded due to a strong driving market which improved further after restrictions eased regarding interstate movements.
With both domestic and international travel showing these improvements, investment levels in hotel assets across the country has now increased. During 2022/23 volumes reached $4.1billion, a growth of 56.7 per cent on the prior year, highlighting the improved confidence across the tourism industry. Most investment has been in the Sydney market, which continues to show improvement in occupancy and room rates, currently at 77.2 per cent and $245/night respectively (July 2023, STR Global). Gold Coast has been another key investment market capitalising on strong occupancy due to both busy conference and holiday periods growing annual average daily room rate to over $270/night.
The investment profile, however, has seen some significant change. Historically, offshore buyers have been the major purchasers of hotel assets, however, we have seen a reduction this year in activity from this buyer group. Private and institutional buyers are representing the greatest net acquisition in 2023 with foreign investors representing the largest seller group.
Cementing the private investor return to hotel assets is the recent returns data from MSCI which shows the improvement in hotels after the COVID-19 period, which severely affected the hotel and tourism segment due to restricted movements and border lockdowns. Over the last year, returns achieved 5.8 per cent, trending ahead of other traditional commercial assets other than industrial, which has been the standout performer over the last few years. The five year average returns of just 3 per cent highlights the difficulty for this sector during the pandemic era, while assets such as office recorded 6.6 per cent returns. However, over the longer 10 year period, we can see despite these difficulties that returns continued to achieve outstanding levels at 9.2 per cent per annum closely aligned to office at 9.4 per cent and well ahead of the retail sector which only represented a 5.7 per cent annual return.
Looking ahead, the outlook for the hotel sector is strong. While inflationary pressures have been elevated, reducing discretionary spending levels, we continue to see demand for travel high domestically. The current state of the Australian dollar will further enhance the attractiveness of Australia as a destination, improving the demand for accommodation, growing occupancy and returns for this commercial investment class.
