Sofitel captures investor imagination

By Chris Hutching

Friday 2nd April 2004

Auckland-based developer Perron's launch of the first Sofitel-branded hotel in Queenstown's has proved a hit, with investors prepared to pay above prevailing prices for a managed suite.

The attraction for buyers is the way the deal has been packaged, with operator Accor lined up to manage the 82-room hotel and an offer of 5% returns for the first three years, although the investment statement notes that the obligation of the seller to "guaranteed" returns is not secured. The company has sale contracts on more than 70% of the apartments from buyers in the US, the UK and Australia, Perron director Mark Perriam said. About 40% of the investment sales were taken up by New Zealand investors, he said.

"With this level of sales, construction proper of the hotel will start in June with an opening scheduled for mid 2005. Ground works for the hotel started in February, reflecting the developer's confidence that the project would attract significant investment interest," Mr Perriam said.

Buyers must pay an initial deposit of $2500, rising to 15% of the full price within 30 days and the balance at settlement date (within 36 months of the prospectus launch or money will be refunded).

Prices for the new managed apartments had raised eyebrows in Queenstown where some real estate agents had requests from buyers prepared to commit sight unseen. Prices range between $400,000 to $1.2 million.

The Sofitel investment is unique in some respects and not directly comparable to other products on the market. Even so, the high-priced Sofitel apartments ($509,000) equate to about $12,339/sq m while the low-priced ones ($399,000) equate to about $9600/sq m. Other apartments in Queenstown (including managed and non-managed units) equate more commonly to between $5000/sq m and $7500/sq m. For example, the Beacon apartments by Wensley Developments, a managed development, has just four of 70 units still for sale. Prices are between $5500/sq m and $6600/sq m.

Investors will no doubt make their own judgments about whether other apartment products in Queenstown will compete with the luxury attraction of the Sofitel. About 1000 new apartments are due on the market in coming months, local valuers say.

Mr Perriam emphasised the new hotel would set new standards for the New Zealand hotel industry. For example, a suite fitout budget was about four times higher than for a suite in a four-star hotel. All suites would average more than 53sq m and be equipped with technologies that gave finger-tip control of room environment and entertainment options; from plasma screen television and high speed internet through to spa operation and even the cappuccino maker.

Other aspects of the Sofitel investment break new ground buyers are in an income pooling scheme, which constitutes the offer of a security and the offeror, Perron, had been required to produce a costly income statement and prospectus to buyers.

Such schemes were more common in some Auckland strata title hotels where most investors had moved to income pooling at the expiry of guarantee return periods such as the Heritage Hotel, Quay West, and Ascott Metropolis. Income pooling allowed the manager greater flexibility without having to worry about the effect on particular units. A key issue for developers considering income pooling was the cost of preparing a prospectus.

The Sofitel investment statement contains forecast projections based on room rates of $260 a night. A significant variable is the cost of the ground lease, (the units are sold on a strata title with a leasing arrangement) which comes up for renewal after seven years and would depend on the performance of the currently hot market at Queenstown.

The investment statement also provides information from consultancy Horwath Asia Pacific, which provides information about supply and demand of hotel suites in Queenstown and anticipated tourist numbers.

However, for a more critical appraisal of unit titled managed apartments investors might like to research another recent Horwath Asia Pacific publication on the hotel, tourism and leisure market outlook for New Zealand.

The Horwath Asia Pacific outlook publication notes that in many instances, once the period of so-called "guaranteed" returns expires, investor returns drop to 2-5% on the original purchase price. (Last year there were instances of Taradale Developments-built apartments where guarantees failed because of shortfalls in income.)

Queenstown's Sofitel: Building will start in June with an opening scheduled for mid 2005

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