Sydney’s hotel drought to worsen

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 The Australian, 6 December 2012

BUSINESS executives and holidaymakers are in for further room-rate hikes in Sydney next year, as developers continue to buy city hotels for residential or commercial conversion.

The sale of the Mercure Potts Point in Kings Cross to Iris Capital is likely to see the 227-room hotel converted to residential use and it is also probable the Brookfield-owned 260-room The Menzies in the CBD will meet the same fate.

“It is worrying to see that in a time when Sydney needs more hotel rooms we are still seeing the conversion of existing stock into residential,” said Rutger Smits, director of AHS Advisory Hospitality and Real Estate Consulting.  “This market is crying out for more hotel rooms, (but) we are still seeing the potential conversion of existing hotels into residential. I don’t know what will happen with . . . The Menzies hotel . . . we could lose that too.”

However, there are bright spots on the horizon. In Sydney, the opening of the 200-room QT in the CBD will ease occupancy rates slightly next year, before increasing to 87.7 per cent in the year to June 2015.  But, in bad news for travellers, revenue per available room — the standard industry measure — is expected to increase 4.5 per cent over the next three years in Sydney, from $162 to $185 a night for the year to June 2015.  However, there could be an improvement in room availability if the $1 billion Darling Harbour Convention Centre conversion — expected to be announced in the next 10 days — includes plans for a new 1000-room hotel.

“It would take a couple of years to get developed, but it will help sell the convention centre. (However), it would not ease the pressure on existing occupancy levels and room rates at the moment,” Mr Smits said.  Mr Smits said it was worrying that even though Sydney had high occupancy levels hoteliers still discounted rooms heavily.  “My expectations are that room rates will continue to grow over the next 3-4 years. But the new rooms that might be added will by no means be sufficient to alleviate current occupancy pressure.”  The biggest issue, he said, was pricing. “We are not going to see new hotels being developed unless the financial fundamentals improve, they have to become more profitable.  “The only way to do that is raise room rates or reduce costs. We can’t raise occupancies because they are already high,” said Mr Smits, who added that some Sydney hoteliers had experienced energy hikes of up 25 per cent this year.

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Director, AHS Advisory

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