Justin Hemmes’ $3b property empire outgrows nightlife roots

The hospitality sector has been knocked around in the past few years. First, it was the COVID-19 pandemic that left venues closed. Now, higher interest rates are sapping consumer sentiment, and many of Merivale’s rivals are finding times tough. Pacific Hunter, the hospitality chain owned by Quadrant Private Equity, posted a $75.7 million loss this year, and auditors warned it may no longer be a going concern. Which makes Hemmes’ expansion plans all the more audacious. Having cornered the pub market in Sydney, Merivale has set its sights on doing the same in Melbourne.

By 26, Justin Hemmes seemed to have it all. He’d been handed the keys to his family’s The Grand in the Sydney CBD, picked up from the Fairfax family several years earlier for $4.4 million. A 1972 Ferrari and a 1961 Corvette sat in his garage, and he spent his days sipping champagne and watching polo.

Then he really hit the big time. Buying the burnt-out George Patterson House on George Street, he opened The Establishment (transferring its licence from the Rennie Hotel, a now-closed pub outside Albury). The Slip Inn had been running for some years, attracting plenty of celebrities from Tom Cruise and Nicole Kidman to Sydney’s social set.

Those two venues have endured, but Merivale has kept growing. Filings for his Hemmes Trading unit obtained by the Financial Review show revenues increased 70 per cent to $580.7 million in the last financial year. The company had $107 million in borrowings and $120 million in unutilised bank loan facilities. “His debt is a healthy number,” a person with knowledge of his business says. “He’d be under 40 per cent [debt to equity] … there would be a lot out there that would be well in excess of 50.”

One reason it is hard to get a full picture of the value is because the assets are owned through a web of private companies and trusts, many of which do not have public reporting obligations. “I don’t really like to discuss the financials,” Hemmes has previously said when asked about finances.

“[Justin] is first and foremost a property guy. This is a guy who was a labourer on [his parents’] CBD hotel, he learnt about property prior to learning about hospitality,” says HTL Property managing director Andrew Jolliffe, who has managed a number of Hemmes real estate transactions, including Hotel CBD which John Hemmes bought in 1993 for $3.1 million. “Property-backed hospitality assets – that’s been his theme ... he’s a long-term player, and owning property is the biggest mitigator to market changes.”

Players such as Merivale have expanded on the back of borrowing against their assets. Jolliffe says larger groups have “better balance sheet capacity to plug in more venues”. Meanwhile, many pub owners are expecting to face tough meetings with banks early next year if rates continue to rise, putting pressure on their debt. “The market has entered a correction this year, the debt landscape [has changed], year-on-year transaction volumes are off,” a senior real estate executive who works with pub groups says.

“It has an impact on overall portfolio gearing levels, affecting people’s ability to continue to purchase frequently.”

Merivale’s long-time banker, Chris Williams, the head of Commonwealth Bank’s major client group, also appears unconcerned about any impact from more volatile economic conditions. He says the bank is continuing to help “well-run businesses” with the financing they need. “While valuations have pulled back marginally, they have been at record highs. And loan-to-value ratios provide generous buffers, typically 40 per cent to 50 per cent, to allow for softening in cap rates, which is off historical highs,” he says.

Things were not always this rosy. Hemmes completed his biggest project, The Ivy precinct not far from Establishment, after the 2008 financial crisis. “When I did Ivy, I put so much on the line and it was such a difficult process. It really put a lot of stress on the business, financially. I just kept getting knocked back and knocked back and knocked back by the council. The costs were building. I got to a point where I said, ‘Dad, I think I’m going to have to pull the pin on this one. I don’t think it’s going to happen,’” he said in 2019.

One person familiar with the process says the family’s $100 million Vaucluse mansion, The Hermitage, was part of the collateral to finance his George Street projects. “Having a well-established and well-respected family and everything, that helps [get financing],” says the former business partner. Hemmes has previously told the Financial Review that his family supported the development of his Establishment precinct, putting “everything, including the house, on the line for it”. “It was very hard to get the finance for it,” he added.

The Ivy precinct had been slated as National Australia Bank’s new Sydney headquarters before the development site, and an adjacent Lowes building, was purchased by Hemmes for a combined $35 million. In hindsight, it was a good price. The central Sydney location would be a prized development site if it ever came back to the market. Not that Hemmes has any intention of doing that. With Lendlease and Mirvac, Merivale is bidding for the right to build a high-rise precinct in the area and has previously floated plans to demolish The Ivy and replace it with a hotel and office complex.

“He understands scale and creating a precinct, and has the flexibility to take on whatever shape,” HTL’s Jolliffe says.

That would be some way from the family’s Merivale Cafe in Potts Point, where Hemmes started life as a waiter. But it has been a family affair from the beginning. His sister and mother are listed as directors and shareholders of various Merivale entities, and the Financial Review Rich List put the family’s wealth at $1.39 billion this year, a 25 per cent increase on an estimation 12 months earlier. People familiar with the business say, however, Hemmes is very much in charge. “He has the only say,” one of those people says. “He runs the family fortune.”

In 2004, before his election to parliament, Malcolm Turnbull and former Liberal politician Michael Yabsley hatched a plan to enlist celebrity business figures as Liberal Party “ambassadors”, in part to raise political donations. On the list – unbeknown to many of them – were Chris Corrigan, Ken Coles, Deborah Hutton and Justin Hemmes. Turnbull denied at the time being responsible for the names that ultimately appeared on the list.

Hemmes has remained connected in political circles since then. When former prime minister John Howard’s son Tim married a bikini model, Hemmes went along to the bucks party in Macau with Ryan Stokes. He is a friend of Josh Frydenberg, and along with Stokes and James Symond, attended his first parliamentary speech in 2010 and flew to Canberra to watch the then-treasurer hand down multiple budgets.

And he is close to Michael Photios, the Liberal Party powerbroker whose latest recruit, influential Labor figure Graham Richardson, has been lobbying the NSW government for Hemmes.

Hemmes’ private life is also often in the spotlight – and, in a way, offers free publicity for his venues. Sydney’s tabloids have for years kept readers abreast of his prolific dating roster, linking him to stars from Natalie Imbruglia to Lara Bingle. He is now dating model Madeline Holtznagel. He has two children, Alexa and Saachi, with his former partner, Kate Fowler.

That, and a stream of celebrities at his venues, have helped Merivale. And Hemmes has worked hard to create an exclusive image for some of his most expensive bars – The Ivy penthouse, a Rolls-Royce to chauffeur around diners who spend big at Mr Wong or Fred’s, a team of VIP hostesses. The instinct harks back to his mother, Merivale, whose clothing brand’s clients included Cher, Liza Minnelli and Mick Jagger.

“Menus and aesthetics alone doesn’t guarantee success,” Cat Picker, head of high-end concierge service Third Door and a former head of VIP at Merivale, says in response to written questions. “It’s about curating an immersive experience tailored to the distinct preferences of your clientele.”

Hemmes’ next challenge is to develop big in Sydney while expanding in Melbourne. Apart from The Ivy precinct proposal, Merivale last year snapped up a 2000-square-metre development site known as Kings Green next to the Hotel CBD for about $200 million. In Victoria, he is planning new restaurants and negotiating with developers for even more space.

One danger on the horizon, however, is a looming legal case that could force his Merivale empire to back pay workers as much as $129 million. The case is continuing, but a similar pay dispute at the hospitality group owned by celebrity chef George Calombaris ended in a $7.8 million payment. Case management proceedings are scheduled to take place on December 15.

But those who have worked with Hemmes praise his ability to control staffing costs. Once, demonstrating to a reporter how he watched his employees, the publican took out his phone and flipped to CCTV footage of his venues. “I can see all the venues … I watch all the cameras from here,” he told the Sydney Morning Herald in 2015.

In another instance, he described how closely he was monitoring staff. “You might have one girl that sells $5000, and another that sells $1500 in a shift. And either it’s because they’re no good, or they’re stealing, or they’re sick, and they weren’t in a good mood. But you’ll pick up on that and address it with the managers.”

Perhaps Hemmes’ biggest success, however, is convincing those who sneer at his expansions to not only try his venues, but to also grudgingly admit they are good. In Narooma, some locals “freaked out” thinking Hemmes wanted to transform the town into the next Byron Bay. “That was the Narooma rumour,” says Horizon Holiday Apartments manager Narelle Jackson.

But most of the venues have not been radically changed. “From the locals here that’s a good result because they were so worried,” she says.