Sydney reported an 87 percent occupancy rate in 2014 compared to around 70 percent across the Asia Pacific region.

Australians are well-known for their easy-going hospitality, add to that the country’s sophisticated dining scene, world class natural attractions, and sunny climate and you have a combination to bring tourists in droves.

No surprise then that the hotel business is booming in Australia’s primary international gateway, Sydney. However, visitors looking to avail themselves of the luxury accommodation the city has to offer may be disappointed, as demand often exceeds the supply of quality hotel rooms.

Sydney reported an 87 percent occupancy rate in 2014 compared to around 70 percent across the Asia Pacific region. The same year, the city welcomed nearly 3 million overnight visitors from overseas, up by 6.3 percent on the previous year.

But, according to JLL’s recent report on Asia Pacific hotel destinations, no new hotels opened during 2014 and the scarcity in high quality accommodation continues.

Dearth of available rooms

“Over many weeks of the year it is often difficult to book a five-star hotel room in Sydney between Monday and Thursday. There are no rooms available and the ripple effect this is having across three and four star assets is significant. Sydney is having a golden run and I can’t see this slowing down any time soon,” says Craig Collins, CEO of JLL’s Hotels & Hospitality Group in Australasia.

As Australia’s main business center, the demand for accommodation comes from corporate travelers as well as international and domestic tourists. But aside from Sydney’s business, cultural and leisure draws, there are a number of other factors that are making hotel rooms an increasingly scarce commodity.

For one thing, Australia benefits from being a relatively short hop from many fast-growing Asian economies, meaning that an increasing number of affluent tourists are flocking to its shores. According to Tourism Research Australia, visitors from China were the largest source of hotel room demand in 2014 and there was significant growth from Malaysia, Taiwan and Hong Kong.

“The depreciation of the Australian dollar has also added to its attractiveness as a destination for incoming tourists,” explains Peter Harper, Senior Vice President of Investment Sales at JLL’s Hotels & Hospitality Group Australia. “At the same time, it has meant an increase in the number of Australians staying put for their holidays, as travelling abroad has become a less feasible option.”

To add to the crunch, there is no new stock to absorb the increase in demand. Due to the historically high cost of land and construction in Sydney, new hotels remain few and far between.

Silver lining for investors

But a headache for travelers has turned out to be a boon for investors. Australian hotel real estate has been attracting increasing amounts of foreign money for the past five years, but now there is a surge in offshore interest with the typical capital source markets of South East Asia being complemented by China, Korea and the United Arab Emirates.

This is partly to do with recent policy changes in China relaxing outbound investment regulations, thus allowing the Chinese to compete more in international bidding processes. Meanwhile, the depreciation of the Australian dollar makes Australian real estate look cheap to offshore investors. In fact, Sydney is one of the most active hotel investment markets in the world, with AUD 1.9 billion of major CBD hotel sales in the past 22 months, according to figures from JLL.

“We are seeing unprecedented levels of interest from a range of international investors including high net worth individuals, owner-operators, sovereign wealth funds, institutional investors and private equity,” says Harper. “People speak about Sydney in the same breath as other global gateway cities like New York and London.”

But while investors snap up trophy hotel properties, it doesn’t solve the scarcity problem. With major new infrastructure initiatives underway in Sydney such as the Barangaroo waterfront project and the redevelopment of the International Convention Centre, the need for quality accommodation will only increase.