Michael Bailey Deputy editor

Michael has been a business journalist for 12 years. He has extensive experience editing magazines covering funds management, commercial property and the travel industry. In 2011 he won a Citi Excellence in Financial Journalism award for a BRW cover story on economic indicators.

View more articles from Michael Bailey

Hotel investment secrets of the rich

Published 07 August 2012 08:16, Updated 09 August 2012 08:20

+font -font print
Hotel investment secrets of the rich

Strategic: Robert Magid says it’s a good time to work on what you have Tamara Voninski

“My wife and I drop in to eat and I’ll know most of the staff – they like to see you, they ask why you don’t come around more often,” he says.

“It’s like a family.”

Hotel investing might as well be fun, because Magid admits it can take a long time to see returns on your money.

“Hotels are long term, unlike apartments where you can make a lot of money in a very short period,” says Magid, and he says it from experience.

During the early-1990s property bust, he convinced his father, legendary Melbourne-based developer Isador Magid, to back the purchase of Esso House on Sydney’s Kent Street for Australia’s first commercial-to-residential conversion. The resulting development, Highgate, was completed in 1995, just as the market for inner-city apartments was turning up.

“We made an enormous return,” Magid says.

However, the very structure of the hotel industry is geared towards patience. Magid reveals that the manager of the Harbour Rocks Hotel, Accor, is on a 12-year contract – and even that is short by historical standards.

“I’ve heard of 40-year contracts for hotel management, where you virtually relinquished control of the asset,” he says.

Magid has made sure that Accor’s management fee is based on revenue and there is also an incentive fee based on profit, so that the interests of owner and manager are in line.

“A lot of people used to own hotels for prestige reasons, getting no income from them – but that’s never been my approach,” he says.

Magid had a definite profit-making strategy in mind when he bought the Harbour Rocks Hotel in 2008, as part of a deal with the Cbus superannuation fund, which also saw him pick up Melbourne’s Lindrum, paying a reported $35 million for the pair.

“The Lindrum is almost entirely a local hotel, with very few inbound [overseas] guests. It’s 50 per cent from NSW and largely corporate,” he says. “The Harbour Rocks was just the opposite when I bought it – 50 to 60 per cent inbound, and zero corporate, despite the fact it’s so close to the financial end of the CBD.”

Magid has just completed a $7 million refurbishment aimed squarely at that corporate market, bringing the hotel up to a four-star standard and turning its restaurant into a marketing device.

“The restaurant used to be internal to the hotel, so we’ve created street access and are promoting it as a stand-alone restaurant,” he says.

“We’ve tripled our trade but just as importantly it’s acted as a window to the rest of the hotel and we’re beginning to get corporate business in.”

The post-GFC refurbishment was done with curtailed corporate travel budgets in mind, Magid says.

“The Park Hyatt [luxury hotel] remains in a class of its on with what they charge. I can’t afford to stay at the Park Hyatt,” he jokes. (Well, given Magid was valued at $330 million on the 2012 BRW Rich 200, we assume he is joking.)

“Then you’ve got the Observatory and a few others – we’re probably in the third tier, comparable to Hilton but for the business person who enjoys a boutique experience rather than a mass hotel.”

Before embarking on the refurbishment, Magid tried to calculate the lift it might give him in daily rates and occupancy levels, and had Accor provide a cash flow projection based on the works. “I guess we’d expect to get the [$7 million refurbishment cost] back over five years but I don’t really look at it that way,” he says.

“If it can lift gross operating profit by 15 per cent of the investment in the first year, that would be good.”

Magid is also adding 30 rooms to the Sebel Pier One, at the northern end where there are views to the Opera House. It chimes with his feeling that now is a “dangerous” time to invest.

“I see no opportunities at all – it’s preservation and improvement of what you’ve got,” he says.

One exception is Rosebery, in Sydney’s formerly industrial inner south, where Magid is about to build the first of eight proposed residential towers. “The bank’s comfortable – they know us and it’s a big land bank for collateral,” he says.

Comments