Things looking up for city hotel rates

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Australian Financial Review, 26 October 2010

A new development cycle will kick off in the Australian hotels sector in the next few years, driven by rapidly improving hotel profit margins.

Professional services group Deloitte, in its “Hospitality 2015: The Australian Perspective” report, noted that Australian hotels performed relatively well during the global financial crisis and room rates were now likely to surge, leading to better profitability in the sector.

“The generally undersupplied city markets are already back to record occupancies, which should lead to rapid increases in average room rate performance,” Deloitte said.

This would in time support a new wave of hotel construction and also boost transaction levels, it said.

Rutger Smits, head of Deloitte’s Australian tourism, hospitality and leisure practice, said the most successful developments were likely to be mixed use, given the high-risk nature of stand-alone hotels.

These would include combinations with residential, commercial and retail space as well as those linked to infrastructure such as convention centres.

However, while business destinations like capital cities were likely to perform well, resort locations were set to struggle, as the stronger Australian dollar made it cheaper for domestic travellers to holiday overseas and more expensive for offshore tourists to come to Australia.

Domestic tourists were also being more conservative in their spending habits as saving became a priority and the cost of living soared, Deloitte said.

Until the situation was reversed, the development of resort assets would remain muted unless they could be supported by a residential component, Mr Smits said.

Lending patterns reflected the relative performance of the markets, with central business district assets preferred to resort properties.

“Debt in particular became constrained in late 2008, resulting in very high lending margins, as spreads reached up to 450 basis points,” Deloitte said.

“This is beginning to ease, but as debt is still scarce, banks are very selective in choosing both their clients and the projects they are willing to lend on . . . with mature CBD properties being much preferred, with strong emphasis on a minimum 2x interest cover ratio.”

Marketing Australia to the domestic market was vital, Deloitte said, since local tourists made up most of the market and this was unlikely to change in the short to medium term.

The tourism industry also needed to recognise – and prepare for – the growing number of Chinese and Indian tourists who were likely to visit Australia.

In its global tourism report, Deloitte suggests these two markets are set to have a profound impact on global tourism, as both a source of tourists and as destinations.

Changing demographics were also important to take note of, with baby boomers retiring and setting out to explore the world at the same time that a technologically savvy younger generation was also taking to travel.

“In 2015 and beyond there will be two key demographic drivers of change in the industry, which will create new patterns of travel and demand in the West, and important new source markets in the East: the ageing baby-boomer population, and the emerging middle classes of China and India,” Deloitte said.

Rutger Smits was the National Leader for Tourism, Hospitality and Leisure at Deloitte until October 2011. He now manages his own hotel consulting business, AHS Advisory

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