Much like the broader economy, the Australian hotel sector is running at two speeds.
The leisure sector is struggling, as the high dollar deters foreign travellers and makes it cheaper for Australians to take their holidays overseas. But the corporate sector is performing strongly, with a shortage of CBD rooms in capital cities driving up room and occupancy rates.
Simon McGrath, chief operating officer at hotel owner and operator Accor, says the corporate sector is doing well off the back of the mining boom, and will pick up even more when the banking and finance sector and conferencing pick up.
“If you think the strength is currently on one leg, when you get the other two legs back it’s going to be firing, and that will happen pretty quickly,” he says.
He says occupancy and room rates are at levels that are starting to make hotel development feasible again. “It’s starting to hit a reasonable spot and over the next few years you’ll see hotels being built in most major cities and conversion of office space into hotels.”
And unlike other cycles when hotel construction has picked up, McGrath doesn’t expect too many developments to flood the market.
“There’s enough caution that there won’t be too much oversupply, but it’s incumbent on the industry to make sure that we drip feed new stock in, that we don’t just have this big glut come into the market.”
Nowhere is the shortage of capital city hotel rooms as acute as it is in Perth. According to a recent Deloitte Access Economics report, room rates in the unofficial headquarters of the mining boom will rise at an average of 14 percent a year over the next three years, more than three times the national average.
No new hotels have been built in the WA capital over the past five years, with the addition of just 223 rooms coming from the expansion of existing hotels.
Daniel Sweet, the director of development at Tourism WA, says there’s been a market failure in new hotel construction because of high construction and land costs. Offices in the Perth CBD offer better returns and there is more capital available for their construction.
The WA government has come up with three incentives that it hopes will tip the balance in favour of hotel construction.
From February next year, hotels will be allowed a floor space ratio 20 percent higher than other developments, with potentially another 20 percent for luxury hotels.
Secondly, the government will consider supplying funds for infrastructure such as power, water and sewage in regional areas where there’s a shortage of hotel accommodation.
Thirdly, government departments will move out of the CBD to make room for hotel developments.
The Fire and Emergency Authority has already moved out of its 7350 sqm site in the Perth CBD and in May the government called for registrations of interest from developers who want to build a mixed-use development with a significant hotel component.
While there are some hotel developments taking place in the suburbs of some capitals, purpose-built hotel development in capital city CBDs is generally constrained because of lack of land, and because office developments still offer better returns, the strength of the corporate hotel market notwithstanding.
Most of the demand for corporate rooms is being met either through the conversion of commercial space to hotels or by upgrading existing hotel stock.
Contractor Built is in the process of converting the adjoining Gowings Building and State Theatre in Sydney into a new luxury 200-room QT hotel.
“At the moment the fundamentals of hotels are quite strong,” says managing director Brett Mason. “Because the value of commercial property is down a little bit, it’s easier to make a hotel stack up now than it was five years ago.”
Mason says a lot of existing capital city hotel stock is “pretty tired”, and there are a lot of upgrades going on.
Bruce van Niekerk, project manager at Gallagher Jeffs Consulting, says hotel upgrades have picked up in the past three to five years.
“As CBD areas are continuing to get busier with commercial travellers we’re starting to see some of the hotels now move out of the leisure space and into having to put facilities in place for these customers,” he says.
Van Niekerk notes the Parkroyal in Sydney’s Darling Harbour is upgrading its rooms, but also the lobby, the restaurant and the meeting and conference rooms, which will make the hotel more attractive to the corporate market.
Refurbishments are also being driven by a pick-up in hotel transactions. Hotels are either upgraded before a sale to boost the price or after the sale to refresh the offering.
The lack of new development is underpinning the price of hotels, says Alastair Bell, head of hotels and leisure at Knight Frank Valuations.
The $352 million sale of Sydney’s Shangri-La Hotel in The Rocks to Hong Kong-listed Shangri-La Asia in June took the market by surprise, he says. So did the $415 million purchase of three Marriott hotels in Sydney, Brisbane and Melbourne by another Asian investor, Malaysia’s Starhill Real Estate Investment Trust.
As with the two above examples, the strength of the corporate hotel sector is being reflected in investor interest, particularly from Asia, says Rob Cross, regional director of CBRE Hotels.
“With the recent prolonged period of global instability, particularly in the Northern Hemisphere, there is a wave of offshore capital focused on investing in Australia and the Pacific. The hotel sector is a major beneficiary of this trend as offshore investors are far more comfortable with variable income assets than the more conservative domestic institutional buyers,” he says.
The investor interest, however, is limited to the corporate market, with prices for leisure assets in areas like North Queensland, the Gold Coast and the Sunshine Coast remaining soft.
The poor performance of the tourism sector means that few properties have had a capital upgrade in recent years, further reducing the attractiveness of the properties for travellers who are already being lured to destinations elsewhere in the world because of the strength of the Australian dollar.
“There are great buying opportunities there if you’ve got cash. If you haven’t got cash then the banks won’t lend because operationally [hotels] are performing poorly, but they’re very much at the bottom of the cycle,” says Cross.
Accor’s Simon McGrath sees one bright spot for the leisure market – “the leisure commuter”. These are people typically in their mid-20s who take interstate weekend breaks several times a year thanks to low-cost carriers.
“The leisure commuter in Australia is actually very strong. It has been for the last five years and you can see that in capital cities and some regional areas where Saturday night is the busiest night of the week,” he says.
Another class of hotels bucking the trend of the weak leisure markets is those with a unique spot at a must-see destination, such as the Park Hyatt Sydney with its view of the Opera House or the Ayers Rock Resort.
“The fact that the Ayers Rock Resort is at the foot of Uluru, which is on the list of the majority of international visitors coming to Australia for the first time, is very helpful for us,” says Koos Klein, the managing director of Voyages Indigenous Tourism.
Visitor numbers at the resort were down just 3 percent in the 2011-12 financial year, a much smaller fall than overall visitors to the Northern Territory, says Klein.
Despite that strong performance, however, the resort is building a new conference centre to capture more of the corporate market. “There is some good money to be made, but you have to give corporates a good reason to come to your resort.”