Boutique hotels make good returns so few for sale

9:10 PM Friday June 21, 2019 True Commercial

The five-star, 100-room Te Waonui Forest Retreat at Franz Josef is a boutique offering. Photo / Supplied

Strong operating revenues are motivating owner-operators of New Zealand’s boutique hotels to hang onto their businesses, says Paul Dixon, director of tourism, leisure, hospitality and business sales at Bayleys.

Dixon says boutique accommodation providers have been making good returns and there are few for sale.

Cap rates for hotels in the main cities and Queenstown are typically up to 6 per cent, rising to double figures in the provinces and secondary areas.

“With that sort of return on investment, there has been little motivation for owner-operators — other than for lifestyle change reasons — to sell up and seek other investment opportunities,” Dixon says.

“The impressive returns sustaining those already within the industry, coming purely from occupancy levels and nightly room rates, have been further enhanced by new development costs making it financially prohibitive for new competition to enter the market, with many new boutique commercial accommodation projects simply not stacking up on the bottom line.

“The biggest roadblock to any new hotel project is the imbalance between construction costs and the return on investment of the development.

“At a cost of $5500 to $6000 per sq m for a fully fitted-out hotel room, a developer-owner-operator has to have a very strong business model and cashflow going forward — encompassing target market, rates and branding of the property — which is a major issue for boutique hotel operators who tend to function outside of global chain brands.”

Boutique hotels first appeared in the 1980s in cities such as San Francisco, London and New York. They were small but trend-conscious and often luxurious properties with between 10 and 100 rooms. 

Many boutique establishments are now highly successful cult hotels, such as Public, on New York’s Lower East Side, and Le Roch Hotel & Spa,  a classical 19th-century property in Paris.

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Capstone Hotels manages 18 properties in provincial New Zealand, including this Chateau Marlborough in Blenheim. Photo / Supplied

Globally, the average boutique hotel room size has been about 27sq m. In recent years, this has halved to around 13sq m in hotels, such as the Breakfree in Christchurch.

Dixon says marketing speak often confuses boutique hotels with high-end luxury lodges, such as Huka Lodge, Cape Kidnappers, Blanket Bay and Matakauri. 

“Most in the accommodation sector define a New Zealand boutique hotel as sustaining fewer than 80 rooms, although many boutique hoteliers further refine that figure to under 20 rooms,” he says.

Dixon says there had been talk of boutique hotel developers in New Zealand linking with micro-breweries, following Scottish brewer BrewDog last year opening a beer-themed hotel in the US. The 32-room DogHouse Hotel in Columbus, Ohio, features beer taps in rooms and a spa using beer-infused products.

Under this type of dynamic, says Dixon, larger bedrooms will not necessarily be required. Instead, “cool” public spaces will better fit such a themed hotel’s purpose.

While finding land for boutique hotels is often not a challenge for developers, says Dixon, establishing a marketing theme for the property is.

“That’s where the developer/operator’s creative thinking comes in. Whether it’s the property’s theme, location, the building's history, it’s essential for a boutique hotel to offer something different to the homogenised product found at competing hotels.”

Boutique hotels are a rising star of the global accommodation sector. US data shows the number of boutique hotels grew by 11.5 per cent in 2017, compared with a rise of just 1.8 per cent for all American hotels. Between 2015 and 2017, bookings at US boutique hotels rose 43 per cent, and in 2015 they generated room revenues of US$13.7 billion.

Boutique hotels now make up 10 per cent of all new hotel rooms in Australia, up from below 3 per cent six years ago.

New Zealand is following international trends, says Dixon, though as yet there is little data about its boutique segment.

However, visitor spend in the luxury lodge market grew 42 per cent in the year to March 2017, and was up 141 per cent over five years, according to data from Luxury Lodges of New Zealand. Waikato and Otago accounted for nearly half of spending by luxury lodge visitors.

“When the cost/return on investment dilemma can be resolved, more boutique hotels will be built in New Zealand,” says Dixon. “Generally, by operating outside the realms of globally branded chains such as Accor, Hyatt, Hilton, Choice, Marriott and Wyndham, the boutique properties within New Zealand — as they do abroad — have more freedom to innovate, localise and personalise their guest experiences.”

That freedom has attracted New Zealand-owned and operated Scenic Hotel Group to the boutique market segment. With around 20 property locations from the Bay of Islands to Southland and the South Pacific in Niue, it markets the five-star, 100-room Te Waonui Forest Retreat at Franz Josef as a boutique offering. The company is spending $22m refurbishing the Scenic Hotel on Auckland’s Queen Street into a boutique hotel.

The programme includes keeping the same number of rooms, bringing in a new concept, extensive renovations to the exterior while keeping the art deco façade intact, removal of the kitchens in the original apartments and major bathroom upgrades.

Fellow boutique accommodation operator Capstone Hotels manages 18 properties in provincial New Zealand, including Chateau Marlborough in Blenheim, the St James in Hanmer, the Grosvenor Hotel in Timaru, the Awaroa Lodge in Abel Tasman National Park, and Castaways Resort on the west coast south of Auckland.

Capstone Hotels managing director Clare Davies agrees with Dixon.

“It is notoriously difficult to make a hotel development stack up, and refurbishment is also expensive … but it’s needed to stay relevant in the boutique hotel market,” Davies says.