Australia hotel performance peaks, supply lags
02 APRIL 2015 7:36 AM
Hotel performance in Australia holds strong, but the lack of supply could be a concern for the country moving forward.
REPORT FROM AUSTRALIA—The Australian hotel industry shows no signs of slowing down, with record occupancies in 2014. But there’s a hitch with seriously undernourished room supply now and in the near future, according to sources.
“Despite occupancies charting higher and higher, especially in Sydney and Melbourne, the number of new projects on the cards remains modest relative to the demand outlook,” said Lachlan Smirl, partner of Deloitte Access Economics Australia.
“While both markets posted solid growth in (average daily rate) in 2014, the fact that growth was firmly within the range of its long-term average belied the record high occupancies and did little to boost hotel investment,” Smirl said.
According to Deloitte’s “Tourism and hotel market outlook 2015,” demand for hotel rooms stands to grow at double the pace of supply over the next three years, as overall room count for new projects slides.
“As hotel markets push further into record territory, demand growth (will) continue outpacing supply,” Smirl said. “Critically, the number of rooms in the three-year pipeline is 15% lower than this time last year.”
Industry is resilient
The potentially critical room shortfall belies the hotel industry buoyancy. The Deloitte report showed 2014 as a bumper year in Australia with peak night occupancy regularly exceeding 90% in Sydney and Melbourne and gaining strong ground in Hobart, Adelaide and on the Gold Coast.
As of February, occupancy in Australia was up 2.1% to 79.3%, according to HNN sister company STR Global. Meanwhile, ADR was up 6.4% to 195.17 Australian dollars ($140.36). Revenue per available room was up 8.7% to AU$154.81 ($111.33).
The hotel industry is experiencing buoyancy unmatched since before the global financial crisis, Smirl said.
“National gains over the past five years are now double that lost during the (global financial crisis) with both occupancies and room rates at levels never previously recorded. Occupancy rates in Sydney and Melbourne in particular pushed well into the mid-90% on peak nights. Hotels in Darwin matched the average daily rates of the Gold Coast as Australia’s fastest growing,” he said.
The future looks even rosier in terms of demand. Fueled by sharp falls in the Australian dollar and oil prices, both international and domestic tourism are growing at their fastest pace in more than a decade—and hotel occupancies with them, according to Deloitte.
Looking ahead to 2017, key forecast points are:
- Strong growth in international visitors to Sydney and Melbourne will nudge both markets to 90% average occupancy.
- Room rates and RevPAR are forecast to grow 3.5% and 4.9%, respectively.
- With a modest room pipeline, national occupancy rates will grow 2.5% to reach 70.8%.
- RevPAR in capital city markets will range from marginal declines to 5.4% annual growth.
- Strong development pipelines in Perth and Canberra will mature.
But while the development pipeline remains healthy, with 75 properties on the books for the next three years, up from 71 six months ago, “the number of additional rooms in expectation has declined 15% to 8,400 over the three years to the end of 2017,” the report found. “As a share of current stock, this translates to average supply growth of 1.2% (per annum) over the next three years—that is, less than half the pace of demand. Consequently, nationwide occupancies are forecast to pass 71% by December 2017.”
There is light on the horizon, however. With Sydney’s occupancies rating the highest in Asia after Hong Kong and Tokyo, the hotel supply is set to soar by more than 2,000 rooms by 2019, according to CBRE real estate services in Sydney. Though most of the new beds are upgrades and refurbishments, or conversions of existing buildings.
In October, the Singapore-based M&L Hospitality won government approval to add a third tower of about 230 rooms to Starwood Hotels & Resorts Worldwide’s Four Points by Sheraton Sydney Darling Harbour. The country’s biggest hotel has 648 rooms.
M&L Executive Chairman Michael Kum said the development will spearhead the Darling Harbour revamp and “the whole area will be totally transformed.”
Kum said there is a big demand for more rooms in Sydney with all hotels at bursting point.
According to Carol Giuseppi from Tourism Accommodation Australia, the Darling Harbour developments (which also includes a Sofitel rebranded from the Convention Centre Hotel) combined with those in the opposite Sydney central business district waterfront precinct of Barangaroo represent two-thirds of what the association puts at some 2,600 rooms in the pipeline.
The red tape
The Deloitte findings coincide with government statements that Australia needs boosted investment for up to 20,000 upscale hotel rooms—the equivalent of 16 hotels a year by 2020—in order to meet soaring demand from inbound tourists.
The news follows the release of a tourism industry report by the government’s chief independent research and advisory body, the Productivity Commission. The Australia’s International Tourism Industry paper points to a crucial need for investment in high-quality tourism infrastructure, particularly hotel accommodation, as well as other investment obstacles.
It recommends the further freeing up of Australian gateway city airports to international carriers, especially Brisbane, Melbourne and Perth.
“The report underscores the importance of further liberalizing air services agreements to remove constraints in key markets, such as the recent tripling of air capacity between Australia and China secured in January,” tourism minister Andrew Robb said in a statement.
Giuseppi said the government is addressing barriers to investment, but “excessive red tape” remains a big problem. While some hoteliers, she said, believe the market is best suited to 4-star hotels, the government feels the industry needs to start with high-end investors which will have a domino effect.
“They could then look to developing hotels in other market segments,” she said.
The City of Sydney conversely feels there needs to be more mid-range hotels targeting Asian visitors. Based on research by Jones Lang La Salle, it predicts 5,800 new hotel rooms will open by 2022, about half of which are already in the development pipeline.
Accor Pacific COO Simon McGrath believes recent hotel development in Sydney and Brisbane has shown considerable diversity.
“The new supply covers everything from economy to 5-star, traditional (central business district)-style to boutique designer brands such as our MGallery hotels, and a number of major new hotels in commercial areas, such as the Pullman hotels under construction at Sydney and Brisbane airports. This will ensure that the new developments are relevant to growth in markets,” McGrath said.
In Perth, where Deloitte said hotels are feeling the pinch of the deflating mining boom with a 4% drop in occupancies, there are signs of improvement with some analysts predicting RevPAR growth between 2.6% and 7.4% in 2015. The forecasts, revealed in West Australian tourism’s latest hotel performance update also shows that of 1,900 rooms hoped for by 2020 the scales tip heavily toward upscale developments.
“The majority of the committed pipeline supply rooms are in the top end of pipeline (luxury segment) indicating the need for additional rooms in the lower end of the segments in order to ensure that all types of demand are provided for,” according to the report.
The need for more beds nationally, particularly in the major hubs, is only going to grow along with international tourism numbers, according to Deloitte. Its 2015 outlook forecasts the hotel market will continue to feed off tourism growth, bolstered by the favorable exchange rate, with no let-up in the growth of visitor numbers from Asia.