Hotels and accommodation facilities have emerged as one of the most promising areas of the construction sector over the next five years as a rebound in tourism and occupancy rates drives an upturn of investment in new development activity.

Throughout much of the country, conditions within the tourism and accommodation sector are on the rise. Internationally, almost 41,000 short-term visitors landed at our airports and on our shores in the first seven months of the year – up by almost a fifth compared with the same period two years earlier. Domestic travel nights, meanwhile, were up 8.5 per cent on the previous year in the March quarter, according to research from consultancy outfit Deloitte Access Economics.

Business travel market conditions are more subdued, but overall levels of spending by conference delegates continues to grow, albeit at a modest rate. Because of this, national occupancy rates stand at record highs of around 68 per cent and are not far off 90 per cent in Sydney and Melbourne.

Driving all this is the reduction in value of the Australian dollar, which has seen the effective cost of travelling to Australia from overseas reduced by around a third since the currency peak two years ago. Expanding wallets in middle-class China, too, have helped – over the past five years, inbound tourism from the world’s second biggest economy has risen by nearly a quarter.

Going forward, conditions are expected to strengthen further. Over the three years to 2017, Deloitte expects international tourism numbers to grow by an annual average rate of 5.2 per cent and growth in domestic tourism to slow but still remain above average at 2.7 per cent per annum.

Accordingly, the consultancy outfit expects the rate of growth in demand for accommodation nights (2.5 per cent) to outstrip that of room supply (1.3 per cent) by almost two to one and vacancy rates to rise to just over 70 per cent.

Because of this, many commentators are optimistic about the outlook for development activity. BIS Shrapnel senior economist Frank Gelber said hotels are the next area of construction growth amid a need to refurbish existing properties and then build new ones. By 2018/19, the Australian Construction Industry Forum expects the dollar value of work done on accommodation related buildings to reach $2.123 billion – more than double the $1.040 billion done in 2013/14.

Deloitte partner Lachlan Smirl says that until recently, business case scenarios for investment in new development had not been overly compelling in the accommodation sector relative to other classes of property assets – a situation he says is now changing across a number of markets.

“We know that for a period of time, hotels have not been the highest performing asset class,” Smirl said. “The relative business case for hotels has not stood up so well and as a result, there have not been significant levels of commitments in most markets across Australia.

“[Now, however,] we are in a period where conditions in this market continue to strengthen and occupancy levels with the exception of Perth and Brisbane have strengthened. Therefore, I think it is right to say that there would be an increased in levels of investor interest and certainly anecdotally, that is the case. In terms of the numbers of projects, that hasn’t shifted significantly [yet] and I think it would be quite right to believe that would shift at some point.”

Smirl says there is a fair bit of activity in five star luxury hotels in Sydney and Melbourne catering to the corporate travel market, while serviced apartment-type accommodation from companies such as Mantra and Quest were growing in popularity. With tourism on the rebound, meanwhile, interest is picking up for the various types of accommodation on the Queensland beaches.

hotel construction activity

Market by Market (major markets only)

Throughout major markets, according to information supplied by ACIF (construction forecasts) and Deloitte (demand/supply/occupancy outlook):

As international tourists flock in, the Gold Coast and Tropical North Queensland markets are the hotbed for significant dollar value developments in the pipeline, including the massive $4.2 billion Acquis Great Barrier Reef Resort in Cairns as well as the $900 million Jewel Mixed Use Development at Surfers Paradise, the $600 million Capricorn Integrated Resort development in Yeppon near Rockhampton, the $600 billion Linderman Island resort redevelopment on Linderman Island in the Whitsundays and the revitalisation of the Great Keppel Island resort off the coast near Rockhampton.

These markets are also experiencing the highest percentage level of gains in occupancy out of any nation-wide. Accordingly, ACIF expects the dollar value of work done across Queensland excluding Brisbane to surge by more than two and a half times from $123 billion in 2013/14 to a peak of almost $300 billion in 2017/18. Deloitte expects the Gold Coast to have the biggest occupancy gains out of any market.

Amid a decent pipeline of projects including commercial and mixed use developments at 80 Collins Street and Freshwater Place, work in Melbourne is expected to almost triple over the three-year period spanning 2013/14 to 2016/17. With average occupancy of 90 per cent in sight, growth in demand is expected to outstrip that in supply notwithstanding a good number of projects coming onto the market – a situation which is conducive to ongoing enthusiasm for new developments.

A similar situation regarding supply/demand and occupancy rates is anticipated for Sydney, where the value of work is expected to have more than doubled in the two years to 2014/15 and is expected to remain at elevated levels going forward.

Despite slowing occupancy and high levels of supply growth, activity in Brisbane is expected to grow strongly before peaking in 2017/18.

Likewise, the Perth market is expected to grow despite a slowdown in occupancy rates, largely because government policies encouraged the development of short-term accommodation options to capitalise on the recent mining boom. Over time, however, an increasing volume of supply along with lower levels of demand may well see the business-case scenario for further development deteriorate.