Hotels Offer Best Short-Term Property Prospects

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Wednesday, August 6th, 2014
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As the global economy continues to stabilise, a new survey of 280 real estate agents and property developers suggests that tourism and accommodation has emerged as the sector of the commercial property market with the best short and medium term prospects within Australia.

Overall sentiment among 280 real estate agents, property developers, asset managers and property owners and investors who responded to the June Quarter NAB Quarterly Australian Commercial Property survey is mildly subdued, especially in the office market where a situation of over-supply is expected to persist and vacancy rates are expected to remain elevated.

But a combination of improved demand and limited supply is underpinning moderately stronger expectations regarding capital growth in CBD hotels, albeit with increases in room rates expected to remain below two per cent over the next two years.

Nab hote index

In recent years, hotel and accommodation operators have suffered as a ‘perfect storm’ of global instability; a weak domestic economy (outside of resources) and – until around 12 months ago – a relatively strong Australian dollar impacted the tourism market and caused occupancy rates to slide and growth in room rates to stall.

More recently, however, improving international conditions and a settling of the dollar at below parity terms with the US dollar saw overseas short-term arrivals jump by 11.3 per cent in the 12 months to May (ABS statistics), while domestic tourism numbers have started to rebound.

Accordingly, participants in the latest survey ranked both current and expected short-term future demand for rooms as either ‘good’ or ‘very good’ across all classes of traveller, and saw general conditions of undersupply both now and going forward.

Longer term, with Tourism Research Australia tipping average annual growth in foreign tourists of four per cent over the decade to 2023 (albeit with more modest growth of one per cent expected in the larger domestic tourism segment), prospects in the sector appear to be reasonably good.

Over the three years to 2016, for example, Deloitte Access Economics is tipping average annual growth rates of 3.4 per cent and 4.9 per cent in room rates and average revenue per available room respectively, with key growth markets centred around Sydney, Melbourne and Brisbane, Tropical North Queensland and Hobart.

Demand for CBD Hotel Rooms

Outside of hotels, however, sentiment dropped in all other segments of the market.

Survey participants are particularly pessimistic about the office market, where they see current and long term oversupply in practically every city.

NAB Group chief economist Alan Oster said sentiment across most markets had fallen, albeit with forward expectations improving marginally in retail.

“In contrast, office property continues to under-perform the broader market, especially in WA and Queensland, where survey respondents reported relatively large falls in capital values and rents amid elevated vacancy rates and market over-supply,” Oster said.

On the development side, fewer developers were looking to commence new works, with stock availability being a key cause for concern.

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