australia hotel market outlook q4

Q42011

Australian Hotel Market Outlook

AuthorRutger SmitsConsultant

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GFC2: good or bad news?Never have the ‘two speeds’ of Australia’s economy been in greater evidence than over the past year. Commodity booms are characterised by strength in exchange and interest rates, and those effects have been further magnified by the ‘recession’ gripping the rich world. In turn, the deadly duo of exchange and interest rate strength has played havoc with the conditions faced by a number of Australian industries, most notably the tourism sector.

Yet now the threat of a renewed global financial crisis is playing out – could that be a sectoral saviour for tourism operators, international education and manufacturing? There is certainly some potential for that. After all, financial markets move very fast, so the potential for some pain to abate is clearly there.

However, it may be a case of ‘be careful what you wish for’. Were a renewed financial crisis to take hold – not our central view, but a possibility – then some of the sectors in the firing line of current conditions could find themselves simply jumping out of the frying pan and into the fire. After all, the first global financial crisis generated the fastest ever recorded collapse in Australian manufacturing output, so a second crisis wouldn’t exactly be all beer and skittles.

The global economy: will Europe blow?The self-inflicted wounds of Europe and the US are hurting global growth, and could drive them back into recession. The earlier US stimulus is subsiding, and the poor US debt deal includes cuts that arrive too early. In Europe, the main threat to the globe, debts in Greece, Ireland and Portugal will never be repaid by anything other than German taxpayers as those nations are stuck in a common currency zone.

They don’t have their own currency or central bank, so markets and policymakers can’t respond through a mix of low interest and exchange rates. As a result, investors fear defaults, and so demand high interest rates. And those rates make default more likely, meaning a vicious cycle is developing – one that will affect banks too, as they hold a lot of government debt. The risks are high: even if German taxpayers pay up there is still a chance the Euro goes kaput.

Luckily, most global growth was coming from emerging economies anyway. That means that, so far, the woes of Europe and the US are something of a blessing in disguise. Yet although emerging economies can boost their consumer and public spending in the event of more rich-world troubles, that’s at best a partial offset. The likes of China and India remain vulnerable to developments in the US and Europe, and their ability to keep growing strongly is limited by their inflation and by the size of their government deficits. The upshot is that global growth peaked in 2010 and, although we don’t expect a ‘financial crisis rerun’, growth may be well below trend in 2011 and 2012.

The Australian economyYou know all about what is going wrong: horror headlines are smashing confidence, fearful families aren’t spending, stimulus spending has done its dash, the housing construction recovery has turned to ashes, and a series of sectors – with manufacturing, tourism and international education heading the list – are increasingly failing to deal with what, until recently, was the relentless rise of the $A.

Mining remains the key driver of business investment in Australia. Indeed, the latest private capex survey released by the Australian Bureau of Statistics suggests that most of the growth and more than half of the level of business investment expected to take place in 2011–12 is mining-related. Unfortunately, resource booms bring with them two side effects: the exchange rate goes up because commodity prices do the same, and interest rates go up as booming export earnings lift national income and demand. That deadly duo of strength in interest and exchange rates hurts the non-resource sectors.

Interest ratesWe still see a possible rate rise – albeit not until 2012. We know that could be wrong and that you don’t think there will be a rate rise. Chances are you agree with markets that times are tough and that rates will fall further. Yet although it’s true that times are tough for many businesses and families, that has more to do with the gaps in Australia’s ‘two speed economy’ than it does with the average experience. We have many sectors doing poorly, but a handful of sectors that are really pumped up, with the business investment agenda in the resources sector jumping out of its skin.

The Deloitte Australian Hotel Market Outlook – Q4 2011 reports on the performance of the Australian hotel industry to September 2011, based on data until the June 2011 quarter as published by the Australian Bureau of Statistics (ABS), and extrapolated through information collected by STR Global.

Based on a correlation of this historic market performance with state-by-state indicators for sectoral performance as reported by Deloitte Access Economics, we also present a forecast for each market until year-end 2014. The economic commentary providing the background for this outlook is derived from the Deloitte Access Economics Business Outlook – September 2011.

Subscribe to Deloitte Access Economics publications online.

http://www.deloitte.com/view/en_AU/au/services/corporatefinance/our-services/public-policy-corporate-strategy/index.htm

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Hotel Market Outlook Q4/2011

What looks likely to hold the miners back is a lack of supply rather than any lack of demand. Indeed, skill shortages will be an ongoing story in the next few years, and those skill shortages always carry inflation risks. Moreover, the trigger for rate rises could be closer than you think in part because our productivity performance has been so pathetic.

The path of interest rates from here is almost entirely Europe driven. If Europe stumbles badly, the Reserve Bank has shown that it is willing to respond rapidly and could cut rates further. If not, then it may not be too long before rate rises are back on the agenda. The drum of underlying price pressures is still beating, and while it is clear that the Reserve Bank is watching global developments with eagle eyes, they may still end up having to have to raise rates at some stage.

Exchange ratesAt their simplest, exchange rates may be thought of as relative prices across nations. Australia’s relative price is well above historic norms because so too are (1) prices for the things we sell, especially industrial inputs to Asia such as coal and iron ore, and (2) the ‘price’ (interest rates) paid on Australian markets versus the interest rates available in the hard hit economies of the rich world.

The clouds over Europe and the globe are big and black, but the $A will continue to ride high while commodity prices and local interest rates do the same. And although there is no certainty about the direction of the next move in Australian rates, they don’t look likely to move much.

That said, the $A won’t touch the sky forever. In the short term, global developments will be the determinant. Looking a little longer term, interest rates will rise more abroad than here, while commodity prices will ease as global mineral supply starts to narrow the gap with galloping demand. Subject to those global caveats, these forecasts see the $A maintain some strength in the coming year, before then gradually shedding some of the excess pounds it has put on in recent years.

OutlookFor now, our central view may be summarised as ‘China’s strength dominates the bad news out of Europe and the US’, meaning that the sectoral landscape should basically show more of the same – great growth potential in engineering construction and in mining, with spillover strength to business services, but worrying news in most other industries. Such an industrial landscape – with its big winners and many losers – may remain the dominant one for the moment.

Key sectorsThose hardest hit by current conditions are Australian retailers, with their bricks and mortar offerings being increasingly shunned since the $A touched stratospheric highs and that strength has combined with advances in online technology to provide punters with cheap and cheerful online alternatives compared to their spending patterns of the past.

Yet, interestingly, overall growth rates in consumer spending are currently close to their longer term average. However, more of that is leaking to foreign internet sales, and is also getting chewed up in things that the retailers don’t see, such as consumer spending by Australians on higher rents and higher utilities charges, as well as on the increased consumption on a range of services such as health.

Consumers have also been spooked by what is happening in the headlines – nations in Europe seemingly on the brink of bankruptcy, US politicians who can’t agree on the time of day, and the highly charged political debate here at home. So there is a risk that families will save more in the next little while because they’re scared rather than because higher interest rates will make them save more.

At the same time, changed regulations pulled the rug out from underneath foreign student numbers. Education earnings were down 13% through the course of last financial year as a result and – despite the useful response to the new Knight report – they remain under pressure given that the average length of course (the ‘product cycle’ in education) is something like three years. That means the falls in student starts are showing up gradually in overall education export earnings, implying that there’s more bad news ahead.

That said, there are some responses underway, including to the Knight report – which provides a review of the Student Visa Program. For example, the Government is reducing the amount of money students must have in the bank before coming to Australia, and will also allow students to stay for work experience once they have completed their studies. That should help the outlook.

Economic impacts for the Tourism, Hospitality & Leisure sectorHotels – particularly in the nation’s CBDs – have been doing pretty well of late. That is because business travel demand is up, and the gains on that front have been sufficiently strong to encourage operators to edge up their room rates. Yet that is one of the few points of light amid an otherwise distressed landscape for the tourism sector.

The high flying $A has seen Australia take flight in its wake, with the number of outbound Australian travellers doubling in the past seven years. Across the same period, inbound travel is also up – but not by much, and the lingering weakness in tourist flows has led to the tourism sector not investing too much in new rooms, facilities and better attractions.

The latest TTF-MasterCard Tourism Industry Sentiment Survey reveals a continued downward trend in tourism industry sentiment, with the mood of operators approaching the lows of the global financial crisis.

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Tourism operators are bracing for continued challenges, with the exchange rate being an all-round threat, whilst many regional centres in particular are experiencing a drain of labour from tourism and hospitality to the mining sector. For many, the strength of the $A has impacted the appeal of Australia as a tourism destination and reinforces the need for effective marketing, support for major events and new tourism product development.

On the bright side, the Federal Government has been busily trying to extend Australia’s bilateral aviation agreements – including most recently one with China. That may yet help with inflows of visitors. So too (over time) will the rise of incomes in China and elsewhere among emerging economies. There will eventually be a major market among our neighbours. In the meantime, however, this is a sector which is clearly on the wrong side of the high interest and exchange rates of recent times, and we don’t expect that its modest recovery of late will generate more momentum in the near future. Although there is a brighter longer term future ahead, and although the European crisis offers hope of an early fall from grace of the $A, chances are many parts of recreation have to crawl through the charnel house of currency strength for a while longer yet.

Visitor flowWhether you are in Disneyland or Dubai, Aussie accents are increasingly common as the pumped up $A allows Australians to venture forth from Down Under to foreign fields. We are doing so at a very rapid rate, and one that shows no sign of slowing growth. But that impact on imports has its flipside on exports. Although traveller numbers arriving into Australia have edged up of late, they remain little different to where they were five years ago. There will be big long term gains to Australia’s tourism sector from rising incomes in Asia, but the early impact of that same phenomenon – the rise of Asia – has been a matching rise in the $A which, despite a recent loss of altitude, has been keeping the world away from our doorstep.

Whilst international tourism globally grew by 4.5% in the first half of this year, international arrivals to Australia improved by only 0.8% in the first six months, equivalent to an additional 22,000 travellers. An additional 330,000 Australians left for foreign shores however, reflective of an increase in departures of 10.5% over the same period.

The Tourism Forecasting Committee (TFC) has recently released the 2011 Forecast Issue. Finally recognising that reality is not quite following their predictions, the outlook has now been substantially downgraded from the last forecast, with expectations for international arrivals curtailed for this year and next.

• Overalltourismconsumptionisforecasttodecline by 0.3 per cent in 2011 (had been expected to grow 0.4 per cent)

• Internationalvisitorarrivalsarenowforecasttogrowjust 0.4 per cent in 2011 (a downward revision from 3.1 per cent in previous forecast), with stronger growth from Asia (+3.2 per cent) offsetting declines from markets outside Asia (–1.6 per cent)

• Domesticvisitornightsareexpectedtodecline 0.3 per cent in 2011 (in line with previous forecast)

• Outbounddepartureswillremainstrongwith 9.2 per cent growth (slightly lower than previous 10.1 per cent growth).

The tourist deficit is now expected to reach almost 1.9 million by the end of the year (up from 700,000 just two years ago) and will surpass 2 million in 2012.

Australia

Both our occupancy outlook as well as our average room rate projections for the last two years of the forecast period improved marginally, against a slightly more optimistic longer term economic outlook, and partly because of further delays in several new hotel projects. However, whilst the overall future performance of the Australian market may appear strong in comparison to historic results, it still hides a pronounced performance dichotomy between core CBD markets and regional hotel and resort properties.

Overall, our RevPAR forecast for 2011 remains positive with 6% growth over 2010 to $94. We have further increased our occupancy outlook from 64.3% to 64.6%, along with a modest room rate improvement over our latest forecast, growing at 4.5% over 2010 to finish at $145 for the year.

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Residents Departing Tourists Arriving Net Tourist Exchange

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Room Occ% trend (LHS) Room Rate trend (RHS) RevPAR trend (RHS)Room Occ% trend (LHS) Room Rate trend (RHS) RevPAR trend (RHS)

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Our RevPAR forecast for 2012 is also revised upwards, back to $101 from a previous downgrade to $99 in our last forecast, driven by a slight improvement in room occupancy to 65.2% and an extra $1,50 in the room rate, to $154.

Sydney

Sydney continues to demonstrate strong demand for hotel rooms with room occupancies at record levels. We have revised our projections downward somewhat, however, as there are still some soft patches where occupancies are not quite as high as anticipated. Unfortunately, hoteliers still interpret this as a weakness in demand and there is still some evidence of, in our view unnecessary, discounting in the market.

The long-awaited opening of the 171-room The Darling at The Star in Darling Harbour added some spectacular and much needed new inventory to the market. Meriton added a further 247 rooms in their new Haymarket property. The next major addition of rooms will be the new 196-room QT project by Amalgamated Holdings, expected in Q4 2012.

Our current projections see room occupancy for 2011 finishing at 86% with an average room rate of $190, up by $14 or 8% on 2010. The resultant RevPAR of $163 is down by $2 on our previous forecast, but still 8.7% up on last year.

Our further projections have softened somewhat as well, although room occupancies in the high 80’s are by no means soft, and should provide ample opportunity for aggressive room rate growth, projected at 10.5% for 2012 and well above that for further years.

Melbourne

Whilst Melbourne has seen more supply being added right through the GFC than any other city, it remains a remarkably resilient market.

Occupancy performance remains on track to achieve 80% for 2011 with the year-end average room rate projected at $181. This is a slightly softer rate than in our previous forecast, but still 4.2% ahead of last year’s result of $173. We believe more growth is yet to come and our projection for 2012 is for room rates to reach close to $195, with room occupancy creeping further up to 81.3%. This should see overall RevPAR growth getting close to 10% for 2012.

Significant additions to new supply are not expected until 2013, and even these should not dampen further growth in both room occupancy and average room rate in subsequent years.

Brisbane

Brisbane has always been ahead of the cycle in comparison to other cities, and yet again seems the first to announce a bevy of new hotel projects.

Meriton is currently marketing some 150 one-bedroom units in its new Riverside Soleil project for short stays, with the Infinity building on Herschel St expected to do the same when it opens in 2013. The new Emporium project in Southbank is gathering pace, whilst a long awaited 368-room project on Elizabeth St should also be announced soon, both expected to be completed by late 2013. A new 216-room project on Mary St ‘Felicity’ could also open as soon as 2013. The proposed 5-star Tabcorp hotel over the State Library would add a further 400 luxury rooms to the market, however, this would not likely be until 2015 at the earliest. Several other projects are in early planning stages.

Whilst the Brisbane market is currently performing very well, against this flurry of activity our room occupancy outlook has been revised downwards, though future performance is by no means considered weak. Whilst we have also softened our rate outlook, we still expect healthy RevPAR growth, at 6.5% for 2011 and peaking in 2012 at 10.7% on the back of solid rate growth. From 2013 RevPAR increases are less pronounced as new supply enters the market, resulting in slightly lower room occupancy and less aggressive room rate increases.

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Perth

As the main beneficiary of Australia’s resources boom, Perth hotels are yet again experiencing record room occupancies and a significant opportunity to boost room rates.

Our room occupancy forecast for 2011 remains on track with an expected 84.5% at year-end, along with some 11% growth in room rate to $174. This makes Perth the fastest growing market in the country, with an expected year-end RevPAR improvement of almost 14% over 2010.

Provided that Perth hoteliers will again push room rates as they did in the initial pre-GFT boom, this growth is expected to be exceeded in 2012 with anticipated RevPAR growth of 18.6%, driven almost exclusively by 17% room rate growth to $204 by year-end 2012, which would exceed Melbourne rates and be close to average room rates achieved in Sydney by then ($210).

Whilst occupancies are at record levels, development of new accommodation facilities remains difficult in Perth, though recently announced government incentives may see the initiation of some much needed new hotel rooms being constructed.

Adelaide

It remains surprising that Australia’s smallest and arguably least performing city market continues to attract new development proposals. Whilst the proposed new airport hotel would potentially benefit from a significant uplift in travel once the Olympic Dam project gains approval, further additions to supply in the Adelaide CBD are likely to result in lower room occupancy levels and hold back growth in average room rates.

Whilst not all projects may eventuate, we have included four proposed projects in our forecasts: the conversion of the CML building by Adabco Pty Ltd and a proposed Medina Grand near the Treasury building, both in late 2013, as well as the proposed airport hotel; and a new hotel by the Hines Group, in Grenfell St, in 2014.

As a result of the above additions, room occupancies in Adelaide, which already show a declining trend, are likely to drop further towards the latter part of our forecast period. We expect 2011 to finish at 73%, dropping to 72% in 2012 and below 70% beyond 2012 as new supply enters the market. Average room rates should not decline, but will only show very modest growth, 1.6% in 2011 to $144 in 2011, growing to $148 in 2012 before potentially stagnating thereafter. We should caution, however, that an approval on the Olympic Dam project could significantly alter this outlook.

Canberra

The newly opened Burbury added some 100 rooms to the market in Canberra, with a further 130 new rooms slated for completion early in 2012 when the East Hotel in Kingston opens its doors.

The outlook for Canberra keeps softening, however, with our projection for 2011 now revised to an occupancy of 71.6% albeit at a slightly higher room rate than in our previous forecast, at $157. 2012 is looking somewhat softer as well, with room occupancy dropping below 70%. Based on past performance however, there is still scope for good rate growth, projected at 5.6% in 2012 to $166.

Darwin

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7


Darwin room occupancies continue to climb, though the last quarter was weaker than anticipated. Our 2011 forecast sees room occupancies finishing at 72%, up from 70.6% last year. This upward trend should continue through the forecast period, with only limited supply additions in sight, being 36 resort rooms in the Sky City project adjacent to the casino in late 2012, and 96 rooms in the Soho project, aiming for completion in early 2013.

This should provide ample opportunity for healthy room rate growth, forecast at 6% in 2011 to $149, and a further 8% in 2012 to top $160. Barring further supply additions, prospects for the following years are even better.

Gold Coast

Despite, or perhaps because of, the opening of three new 5-star hotels within a relatively short period of time, the outlook for the Gold Coast remains troubled. Whilst the 450-unit Hilton has been on the blocks for years, the staged opening of a 250-unit Peppers apartment hotel in the Oracle development, as well as the inclusion of a 120-apartment Sea Temple in the Soul tower was unforeseen.

Whilst the quality of these new operations is a welcome boost to the Gold Coast that could help lift the overall room rate performance, the volume of new units will add pressure to room occupancy performance and may force lower quality operations to drop room rates in order to remain competitive.

Overall, against a backdrop of continued weak demand and low consumer confidence, the outlook for 2011 weakened further, to an expected occupancy of 65.9% representing a 2.3% drop over 2010. The expected year-end room rate slipped another $2 from our last forecast as well, to $133 which is just $1 above the 2010 result.

We remain confident that 2012 will see some improvement, but have scaled back our growth expectations to 66.7% room occupancy at an average rate of $136, representing a modest 3.4% RevPAR growth. Longer term we see some room occupancy recovery towards the 70% mark, along with 4–6% growth in rate.

Tropical North Queensland

Despite tough economic times, TNQ is seeing modest occupancy improvements, helped by an absence of new supply and possibly also by troubled operations being forced to close their doors, resulting in a (small) net reduction of available rooms in the market.

We have strengthened our occupancy outlook for 2011 to 57.3% at a slightly softer rate of $117, just $2 below the 2010 result. For 2012 we expect continued occupancy recovery to reach just over 60%, although room rates are not expected to see much growth until 2013.

Deloitte is recognised as one of the leading global advisors to the Tourism, Hospitality and Leisure industry, with a practice of more than 2000 professionals. In Australia, our multidisciplinary group of industry experts have a deep knowledge of the market issues and business challenges faced within the THL industry, both domestically and internationally.

Your industry, our expertise Our dedicated practice provides a wide range of services to financiers, property owners, investment fund managers, private investors, developers, operators, and associated stakeholders, including architects, government departments, professional and business lobby groups, and tourism intermediaries.

For a full copy of the Deloitte Tourism, Hospitality & Leisure Hotel Market Outlook – Q4 2011 or more information about the Deloitte Access Economics Business Outlook – September 2011 please visit www.deloitte.com.au

HMO Q3 Slides.xlsx

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http://www.deloitte.com/view/en_AU/au/index.htm

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this publication, rendering professional advice or services.

Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

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© 2011 Deloitte Touche Tohmatsu.

AM_Mel_11/11_046033

Contact us

For further information on how we can support your business needs, please contact one of our Tourism, Hospitality & Leisure specialists:

www.deloitte.com.au

Australia/NSWIan Breedon+61 (0) 2 9322 [email protected] Northern TerritoryMark Rowberry+61 (0) 8 8980 [email protected] QueenslandMartin Leech+61 (0) 7 3308 [email protected]

South AustraliaAlyson Trottman+61 (0) 8 8407 [email protected]

VictoriaAndrew Bethune+61 (0) 3 9671 [email protected]

Western AustraliaGary Doran+61 (0) 8 9365 [email protected]

Assurance & AdvisoryStephen Holdstock+61 (0) 2 9322 [email protected]

ConsultingSteve Hussenet+61 (0) 8 8407 [email protected]

Corporate FinanceAndrew Jones+61 (0) 2 9322 [email protected] Corporate ReorganisationJohn Greig+61 (0) 7 3308 [email protected]

Deloitte Access EconomicsLachlan Smirl+61 (0) 2 6175 [email protected]

Deloitte PrivateWeng Ching+61 (0) 2 9322 [email protected]

TaxMax Persson+61 (0) 2 9322 [email protected] SustainabilityShauna Coffey+61 (0) 2 9322 [email protected]

australia hotel market outlook q4

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