Four years ago, Australia’s hotel market was struggling as a surging dollar saw the cost competitiveness of our tourism industry relative to overseas peers plummet, weak economic conditions outside of mining impacted both corporate and leisure travel and low levels of investment meant there was little in the way of compelling new or upgraded stock from which to attract travellers.
Indeed, in the two years to March 2014, Australian Bureau of Statistics figures indicate that overall takings from hotels, motels and serviced apartments fell.
Now, things have changed as a weaker dollar has seen overseas visitors flock in and Australian travellers opt for more localised experiences. Over the three years to June 2017, data from Tourism Research Australia (TRA) indicates that international and domestic visitor nights rose by 22 and 14 per cent respectively. As a result, TRA reckons overall travel expenditure will have grown by 21.3 per cent from $107.9 billion to $130.9 billion over the three years to 2018.
Accordingly, hotels are fuller and able to charge more. Over the year to December 2017, rea-estate services firm CBRE says national occupancy rates edged up 0.9 per cent to 76.2 per cent, whilst room rates rose by 1.8 per cent to reach $187.
Going forward, expectations are high. In it most recent forecast, TRA said international visitor nights would increase by an average compound rate of 6.4 per cent over the five years to 2021/22. Domestic travellers, meanwhile, would increase their visitor nights by a modest but respectable average annual rate of 2.3 per cent.
Not surprisingly, development activity is ramping up. At $3.455 billion, the dollar value of short term accommodation buildings approved for construction over the 12 months to November last year was up 10.7 per cent on the year before and by more than a third compared with its level three years ago. At $3.268 billion in the September quarter (ABS data), the pipeline of construction work yet to be done on hotels and other short-term accommodation buildings stood at record levels and was up almost fourfold in four years. Between now and 2022, CBRE expects Perth, Melbourne, Brisbane and Sydney to add 37, 34, 24, and 23 per cent to their stock respectively.
Several factors are driving this. The value of the Australian dollar has increased in recent months but remains below its level several years ago when it was above parity with the US dollar. This makes Australian travel comparatively cheaper to both overseas visitors and locals alike. An improving world economy also bodes well for both international corporate and leisure travel
Beyond that, Carol Giuseppi, chief executive officer at accommodation industry advocacy group Tourism Accommodation Australia, pointed to other factors.
First, Australia has inked several Free Trade Agreements over recent years, thus facilitating greater international trade flows and underpinning higher levels of demand for corporate travel. This includes agreements with our three largest export destinations (China, Japan and South Korea) along with the more recently announced deal between the 11 remaining nations involved with the Trans Pacific Partnership.
Related to that is an expansion of aviation access and capacity into and out of our country. An agreement reached in 2016 between Australia and China – our largest source of international tourists on a nights stayed basis – means Chinese airlines now have unrestricted access into Australia. Last September, meanwhile, US carrier United Airlines unveiled plans for new long-haul flights direct from Houston to Sydney. All this is boosting capacity to bring more travellers in.
A further factor is the continued improvements in creating a seamless, automated experience for travellers (inclusive online visas, multiple entry visas, roll-out of Smart Gates and trials of biometric processing).
For the property and construction sector, this raises two points. First, the volume of work in the pipeline will drive substantial opportunities for builders, designers, project managers and others involved in new development.
Beyond that, interesting questions surround which markets offer opportunities for new accommodation offerings.
Boom time in new construction
As mentioned above, builders and others are set to benefit from elevated levels of construction work in hotels amid a massive pipeline of projects and little apparent sign of a slowdown in new work.
Benefits will be spread across all major markets. With more than 6,000 rooms expected to be delivered between now and 2022 (CBRE forecast) and a Victoria-wide pipeline of work ($630.9 million) which is up fourfold in two years, hotel builders in Melbourne will be kept busy for several years. Likewise in Sydney and Brisbane, which are both expected to add amounts equivalent to about a quarter of their stock (more than 5,000 rooms and 3,000 rooms respectively) and where the pipeline has risen fourfold in four years in the case of New South Wales and by three and a half times over two years in the case of Queensland. Adelaide and Hobart also have decent pipelines.
Perth – and indeed all of Western Australia – is interesting. With almost 3,000 rooms scheduled to come online between now and 2020 and a raft of quality hotels in the pipeline, activity over the near term is likely to remain strong. As noted below, however, a worsening glut of stock may impact the potential for new developments after the current cycle of activity winds up.
New development opportunities?
Beyond this, interesting questions surround new development opportunities.
Stressing that he was not offering advice as to which market to choose, CBRE research manager Ben Martin-Henry offered some market-based observations.
Start with the mining capitals of Brisbane and Perth. Having undergone significant new development during the resource boom, both have experienced subdued conditions following the boom’s passing amid weak demand and a flood of new stock.
Nevertheless, Martin-Henry sees a divergence going forward. With Brisbane, he says the market is stabilising and much of the slated new stock is either on the market or will be over the coming months. The city has also seen a shift away from leisure travel and toward corporate travel, where customers tend to have deeper wallets.
Certainly, with the overall number of domestic visitor nights up 8.1 per cent (2016/17) and that of international visitor nights up 6.2 per cent in the same year, demand for rooms is running hot. Moreover, TRA reckon international visitor nights into the capital will grow at 6.8 per cent year on year for the next five years.
Perth is a different story. Despite improving demand from international tourists (international visitor nights rose by 6.4 per cent in 2016/17 and are expected by to increase by 8.7 per cent and 5.6 per cent over the next two years), Martin-Henry says the splurge of development has yet to run its course and around 3,500 new rooms (around 37 per cent of current stock) are expected to come online between now and 2020.
This is in an environment where current conditions are difficult. Revenue per available room (RevPAR) dropped 11.3 per cent last calendar year (CBRE data) as vacancies (75 per cent) dropped 4.5 per cent and room rates plummeted 7.1 per cent.
Another city with supply issues is Melbourne, which will need to absorb more an amount equivalent to more than one third of its current stock over the next five years, including substantial new stock at South Wharf (MECC Novatel) (317 rooms), iBIS Melbourne Little Lonsdale (270 rooms) and Novatel Melbourne in Little Lonsdale (213 rooms) this year. Courtesy of this, Martin-Henry feels the market will be challenged notwithstanding buoyant demand conditions.
This is especially true as the new additions come on top of large stock increases over recent years – the upshot of which for operators has been a stagnation of room rates despite healthy occupancy rates (83.1 per cent).
Nevertheless, Martin-Henry says Melbourne is a deeper and more mature market compared with either Brisbane or Perth and should not be as badly impacted as either of the mining capitals.
One more promising market is Sydney. Australia’s largest city does have a development pipeline (to 2022) equivalent to around a quarter of existing stock. Nevertheless, with existing stock already 86 per cent full (and growing) and room rates having risen 4.4 per cent over the last year, it looks to be in good shape to absorb this. Moreover, with average annual growth in international visitor nights of 6.6 per cent over the next five years anticipated on the back of strong tourism and respectable levels of corporate travel, demand looks to be holding up well.
Sydney, Martin-Henry point out, is a dynamic market which caters for corporate travellers during the week and leisure travellers on weekends. Thus far, he said, new development was not impacting rates. Besides, he adds, the new hotels coming online such as Sofitel and later the Ritz-Carlton (opening in 2020/21) will help to generate a compelling offering to attract classes of clientele such as discerning corporate travellers from China.
He cautions, however, that finding sites to develop is tricky.
Another area to look out for is Cairns, which has not seen any new hotels in the past 20 years and which has an occupancy rate of 84.4 per cent as well as healthy growth in room rates.
To be sure, Cairns like other destinations is starting to see growth in supply. Two significant new builds including the Abbott Street Hotel (220 keys) and a new development on the Bellview site are set to hit the market over the course of 2018/19, as is a redevelopment of the Rydges Tradewinds. Development applications, CBRE says, have been lodged for more than 400 rooms. Further, the remote nature of its location make Cairns tricker and costlier from a viewpoint of construction compared with other markets.
Nevertheless, Martin-Henry says new supply will be easily absorbed in a market where demand is running hot on the back of strong tourism growth.
Takeovers, funky hotels and Airbnb
Beyond market conditions, there are other interesting developments.
One is the proposed $1.2 billion takeover of Mantra Group by French outfit Accor – one of the largest hotel operators in the world (subject to regulatory approval). Should this proceed, the nation’s two largest hotel chains will join forces.
Second, the growth in millennials might precipitate a shift in hotel design toward brighter and funkier offerings. Millennials, Martin-Henry said, are more drawn to ‘active’ experiences to which bolder designs might be more conducive. Whilst hotels in Australia were yet to dabble in this area, he says the market is waiting for someone to ‘take a punt.’
Finally, there is Airbnb and the proliferation of ‘quasi hotel’ commercial operators leasing or buying up apartment stock for offering on the short-term market to travellers. This concerns licenced accommodation providers who operate in commercial zones, pay commercial rather than residential rates and must abide by regulation in respect of safety and public/consumer protection.
Whilst stopping short of saying what impact this was having upon development decisions, Giuseppi says the effect of short-term letting by international visitors to Australia was significant.
Whilst the accommodation sector has no issue with people letting out spare rooms in their own homes, she says there are concerns about commercial entities operating on a non-level playing field.
“Home sharing has its place in the market for new types of accommodation, everyone accepts that,” Giuseppi said.
“It’s commercial short-term operators who operate quasi hotels without any controls and who are not bound by any regulations (which are the concern).”
Australia’s hotel industry is experiencing strong conditions.
For builders and developers alike, this presents significant opportunities.