Brisbane accommodation market battling through lower occupancy

Brisbane accommodation market battling through lower occupancy
Brisbane accommodation market battling through lower occupancy

The Brisbane tourism region continues to be challenged by supply additions outstripping demand growth and occupancy levels falling, according to Colliers’ latest hotel report.

The vast majority of transactions have taken place in the leisure destinations of the Gold Coast, Cairns and the Whitsundays.

The largest transactions have been the $80 million sale of the Hotel Grand Chancellor in Surfers Paradise to Challenger on behalf of an offshore investor and the Surfers Paradise Marriott Resort and Spa for $70 million, also to an offshore investor.

According to STR, the resort markets of the Gold Coast and Cairns/Tropical North Queensland continue to benefit from the lower Australian dollar, which is rebounding after the tough trading conditions experienced following the global financial crisis and the high dollar during the mining boom periods.

These destinations are experiencing renewed growth in both domestic and international travellers.

Cairns, in particular, continues to record high occupancies at 83.3% year to date to August 2016, up 5.4% compared with the same period of 2015.

Occupancy on the Gold Coast is similarly up year to date, by 3.7% to 72.2%. Stronger occupancy levels have allowed hotels to lift room rates, with Cairns demonstrating growth of 7.2% and the Gold Coast 5.2% over the year to date period.

These conditions have allowed both markets to achieve the highest RevPAR growth rates over the period in major markets throughout the country at 13.0% for Cairns and 9.1% for the Gold Coast.

Brisbane, in contrast, continues to be challenged by supply growth outstripping demand, with occupancy levels down 1.9% to 70.8% in the year to date.

Room rates continue to come under pressure falling by 6.6% over the period as the new hotels compete aggressively for customers.

As a result RevPAR levels are down 8.4% for the first eight months of the year compared to the same time last year. Source: STR

Many regional markets which had exposure to the mining, gas and the associated infrastructure boom continue to feel the contraction in demand with occupancy and room rates declining.

The Destination Brisbane Consortium (Echo Entertainment Group, Far East Consortium and Chow Tai Fook Enterprises) continue to progress the Queens Wharf Integrated resort development. This project is proposed to include a new casino, retail, residential apartments and approximately 1,100 hotel rooms.

Demolition works on the state government site are anticipated to commence early next year following the relocation of government office on the site to the new 1 William Street tower which is nearing completion.

On the Gold Coast, preparations for the Commonwealth Games in 2018 are progressing, including the construction of sporting facilities and the athlete’s village. Gold Coast Airport has commenced stage one redevelopment works which includes site works, new aircraft parking stands and terminal redevelopment, which is due to be completed in 2017.

The second stage of the Gold Coast Light Rail will connect the existing light rail system at Southport to the heavy rail at Helensvale, construction commenced in July 2016 and is due for completion in early 2018.

"We are aware of 15 further new hotel developments proposed for Brisbane between late 2016 and 2018 (2,760 rooms), and approximately 1,100 additional rooms in 2021 within the Queens Wharf Development," the report stated.

"Over the period from 2013 to 2018 the Brisbane market is forecast to have an addition to supply of over 6,700 rooms, or an increase of over 50%. With new supply continuing to outstrip demand growth, we expect market occupancy levels to continue to come under pressure before bottoming out in 2018-2019. The vast majority of the new room stock is located in the Brisbane CBD and fringe, which is having a greater impact on specific localities," the report stated.

Meriton recently opened a 208 suite serviced apartment operation within a larger mixed use complex at Southport on the Gold Coast. A further two new hotel projects are also under construction (Jewel 300 rooms and the Jupiter’s Casino 80 suite expansion) which are expected to open by 2018.

Jupiter’s has also released a masterplan for its casino precinct to potentially include a further five hotel and/or apartment buildings, including a 700 room hotel and apartment tower.

A number of other hotels are also being proposed for the Gold Coast as either part of larger mixed use developments or as additions to existing complementary facilities, which could lead to additional room stock in the medium term.

The renewed construction of high rise residential apartments on the Gold Coast is also likely to lead to new strata title serviced apartment stock.

There is limited new supply entering the Cairns market apart from the expansion of existing properties given the disparity between current values and replacement cost.

The proposed Aquis Great Barrier Reef Integrated Resort Development has been significantly scaled back and no longer includes a casino component. Timing for the revised proposed hotel, villa and apartment development remains unclear.

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 Brisbane accommodation market battling through lower occupancy

Demand for major assets has primarily come from Asian based investors and operators, including Singapore, Hong Kong, China and Malaysia. Domestic demand also exists for select and smaller properties that are appropriately priced.

"Trading conditions have softened in the Brisbane market and future supply increases are expected to reduce market occupancy levels and moderate average room rate prospects for the next two to three years," the report stated. 

"We anticipate that the new hotels will gain their fair market share, which will in turn put pressure on value levels, particularly for older and lower grade stock, and will be more pronounced in certain localities. Capital markets, however, appear to be taking a medium to longer term view to asset performance for better quality stock."

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Brisbane accommodation market battling through lower occupancy

Leisure destinations have typically seen an improvement in demand, trading conditions and value levels.

Hotel pricing on the Gold Coast, particularly at the four star level has seen significant growth over the past two years, with purchasers picking up assets at below replacement cost with a view to future revenue and profitability growth.

Supported by a lower Australian dollar and with minimal supply forecast in the short to medium term, value levels in Cairns are expected to continue to show growth, with some evidence of yield tightening emerging.

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Brisbane accommodation market battling through lower occupancy

Many of the challenged regional markets have experienced a decline in profitability and value levels, with an increasing number of properties being placed on the market under instructions from mortgagees.

This is likely to limit the pricing of property in these markets until the number of distressed assets diminishes or visitor demand improves.

The Brisbane market continues to be reasonably tightly held, with owners taking a wait and see approach to the impact of future supply.

Some owners of lower quality stock, however, may take the opportunity to divest for redevelopment rather than re-invest.

As revenue and profitability continues to be impacted at an individual asset level, some owners may be more motivated to transact if debt servicing becomes an issue.

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Brisbane accommodation market battling through lower occupancy

Similar to last year, the majority of transactional activity has been within leisure markets.

Colliers expect longer term owners will continue to consider potential exit strategies in these markets as conditions provide potential trading upside and new buyers emerge.

However, given the significant number of transactions over the past two years the number of owners in this position is significantly reduced.

Activity within regional markets is expected to continue to where trading conditions are favourable and demand proves sustainable.

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Brisbane accommodation market battling through lower occupancy

The Property Council Office market report recorded a substantial increase in the total vacancy rate in the Brisbane CBD from 14.6% to 16.9% in the first half of 2016. However, this was primarily due to the significant net increase in supply of 104,000 square metres, or 4.8%, outstripping increased total occupied floor space of 2.3%. Significantly, this is the first increase in occupied floor space in the CBD since the first half of 2013.

The market will continue to be impacted by the completion of the 1 William Street development, to be occupied by various state government departments, and the subsequent demolition of a number of government office buildings on the Queens Wharf site.

It is expected that the vacancy rate will remain stable in the short term until absorption and withdrawals lead to a decline in the medium term. Colliers Edge is expecting the vacancy rate to peak around 17.5% in January of 2017.

The increasing vacancy levels in the office market over recent years provide insight into the softening corporate hotel demand over this period.

The lower Australian dollar and forecast continued increase in inbound business is expected to support leisure market trading conditions, and as a result capital values and transaction activity.

The Brisbane trading market is expected to continue to be challenged over the next two to three years by the amount of new supply and the perceived impact by purchasers on trading levels.

Transactional activity is expected to continue to be light, however, some owner’s may test market appetite over this period as the supply cycle draws to a close, or are forced to, due to cash flow issues.

Brisbane Colliers International

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