Like most other commodity businesses, hotel accommodation is heavily impacted by supply and demand. But unlike other commodity-based property sectors – including office, retail and industrial – the hotel sector is vulnerable to the nation’s Gross Domestic Product (GDP).
Tony Ryan, principal at Ryan Lawyers, says a decrease in GDP will add more pressure to Australia’s lagging tourism market.
“As GDP is tapering off – more in some states than others – there is expected to be a slight slackening in business demand over a period of time. At the moment the effect of that has been masked by the fact that we have little or no new supply,” he says.
“There is a real concern in the industry that we are slipping behind in terms of competitive destinations around the world.”
Besides minor hotel development in the pipeline in Melbourne and the Gold Coast (see table 1), there are no major hotels planned for Australian markets. And, compounding the problem, Ryan says Sydney’s hotel market lost about 3000 rooms to residential conversions between 2003 and 2006.
“Essentially what that means is, with very little supply, and demand ticking over, in the short-term the expectations for room rates and occupancy are high,” he says.
Another competing factor affecting hotel development in Australia is discretionary expenditure. Ryan says the tourism market competes with other leisure commodities including gaming and cars.
“In the longer-term there are some real questions about what the future is for the Australian tourism industry.”
Keeping up with the world
The biggest issue facing Australia’s tourism industry is competition from other countries for holiday-makers and corporate events, according to Ryan.
“The issue we have in the longer-term is to position Australia as a ‘must come to’ destination with new and really interesting, fresh product.”
Australia seems to be delivering on its marketing capabilities with attractive advertising campaigns reaching audiences across the world. But Ryan says this is not enough.
“There is a ‘cargo cult’ mentality that the ad is going to deliver the visitation and that is not the case. You’ve got to find compelling reasons for people to come … So the issue is, are we doing enough to drive that business?”
Victoria is a market leader, according to Ryan, with consistency of product and advertising, as well as commitments from airlines to fly through Melbourne as a major destination. “There’s a whole lot of work that goes on behind the scenes in Victoria and a lot of the other states are only just waking up to it,” he says. “South Australia is a state that has recognised that as well. Tasmania, with its strong tourism product, has a number of research projects going on at the moment on how to best enhance that.”
Development dilemma
So why is it so difficult to develop new hotels? Ryan says it’s about the highest value and best use of a site and hotels are generally “the poor cousin” of the residential and office markets.
Although there has been some new hotel development in other cities, such as Brisbane’s Oaks 212 Margaret and the new Hilton Hotel in Melbourne, Ryan says Sydney has not seen a major new hotel development for almost a decade.
“From a simple benchmark analysis, for an A-Grade site in Sydney, residential would get you three times the return a hotel would get you and office would be two-and-a-half times the return you would get on a hotel.”
One solution is to combine hotel space with other asset classes in mixed-use developments. Ryan says they are the only projects that are really working in terms of capital gain. Examples include the Hilton Surfers Paradise, which combines retail, residential and hotel, and the Sofitel in Melbourne, which incorporates a commercial office building.
“The more usual fit is between hotel and residential, where the residential gets access to the hotel facilities such as concierge services and, as such, is a more compelling selling proposition. I think that’s where the future lies in terms of the hotel sector.”
But as the need for stand-alone hotel buildings in CBDs grows, the only method for attracting development is incentives, according to Ryan.
“The two ways to create incentives is, firstly, floor-to-space ratio (FSR), which means you can have a greater development potential on the site. The FSR control for office is eight, for example, and for a tourism product it might be 10-and-a-half, 11 or 12. And car parking can be an incentive for hotel development because it becomes more efficient rather than just pure office space,” says Ryan.
This method proved to be successful in Sydney during the 1990s, when the Property Council lobbied the government in the Sydney LEP initiative.
“The Property Council really led the charge and at that time I was the chairman of the NSW Tourism Committee and I was also on the National Tourism Committee.
“There was some very active lobbying to, firstly, convince the community that there was a value in securing part of our tourism infrastructure, which is what we needed, and that hotels played an important role,” says Ryan. “As an employment generator, they’re very significant. The other thing is for inbound visitors, we need competitive world product. When you scan the cities of the world you see those cities are defined by their grand hotels.”
Ryan’s second method for development incentives is preferential zoning, to designate sites to be used for hotel development. Ryan says it has been done in the past at Railway Square in Sydney for the Medina Apartments development.
“The industry, including the Property Council and the Transport Tourism Forum, were very involved in the Barangaroo project [in Sydney] by mandating that there be some required tourism. The result is the master-plan requirement is between 25,000 and 50,000sqm of space to be used for tourism uses...”
“Western Australia has a process called Land Bank, where it picks a number of sites that are then made available for hotel use. A lot of work has been done on these sites before they’re made available, and it has proven very successful,” says Ryan.
As Australia’s hotel industry will continue to be a major economic driver in the future, evidenced by its current direct employment figures of 5 percent and indirect employment of 9 percent, according to Ryan, the growth of the industry is paramount to maintaining investment plans for hotel infrastructure.
The upkeep and growth of the hotel sector is crucial to compete on an international scale. Ryan compares the future prospects of the industry to some iconic films.
“It’s whether or not Australia is going to be a Barry McKenzie-type movie with an interesting, quaint, quirky, strange culture, or something on a much grander scale like the movie Australia, with great stories and amazing natural environment – a place where the grand themes are played out rather than some backwater.”
