Hotel market reporting struggles with supply increase and unfavourable conditions: CBRE

Hotel market reporting struggles with supply increase and unfavourable conditions: CBRE
Hotel market reporting struggles with supply increase and unfavourable conditions: CBRE

Performance in 2017 will differ markedly across the major cities throughout Australia as further divergence will occur in the hotel sector, according to CBRE’s latest report.

Some markets struggling to cope with unfavourable trading conditions and increases in supply.

However, the star performers of 2016 – Cairns, the Gold Coast, Hobart – will continue their rise off the back of renewed interest in their locale by both foreign and domestic tourists.

Figure 14 illustrates Sydney’s continued strong revenue per available room (RevPAR) growth off the back of favourable trading conditions in 2015.

Click to enlarge

Hotel market reporting struggles with supply increase and unfavourable conditions: CBRE

In particular attracting a good mix of corporate and leisure tourists that enabled operators to increase room rates.

With the International Convention Centre opening in early 2017 Sydney room rates are expected to continue to climb off the back of increased corporate travel, albeit at a more moderate pace due to increases in supply.

Despite Melbourne’s strong start to the year there are signs that the market is struggling to cope with the increases in supply entering the market.

Melbourne’s strong performance historically has been largely driven by occupancy rather than room rate growth so any sign of occupancy pressure will see rates decline somewhat in 2017 before stabilising in 2018.

The resource markets of Brisbane and Perth continue to lag the rest of the nation; both saw revenue per available room (RevPAR) declines in the double digits.

The downturn in mining coincided with significant increases in supply in Brisbane which exacerbated the decline in performance.

A problem that Perth will have to contend with in the coming years as it nears the peak of the development cycle in 2018-19.

The more leisure-based destinations of Cairns, the Gold Coast and Hobart have been the star performers in the market as they continue to attract large volumes of both domestic and international visitors.

Admittedly these three markets are coming off a low base as a result of tough trading conditions pre and post GFC.

However 2016’s performance has still been impressive and is set to continue in the coming years as all three benefit from limited supply pipelines coupled with renewed tourist interest.

The year ahead will see increases in supply for the majority of key markets including Melbourne, Sydney, Brisbane and Perth.

However, they will all cope in different ways with Perth and Brisbane forecast to see further declines in hotel performance.

Whilst Sydney is expected to cope well with this increased supply, Melbourne will likely see small falls in room rates and occupancy levels.

Cairns and the Gold Coast have limited pipeline with no major new supply coming into the market in 2017.

“However, such is the interest in these regions we can expect to see developers announcing plans to enter the market, particularly the Gold Coast,” the report stated.

What will be of interest is the style of hotels that are announced in 2017 as recent trends reflect a shift towards greater tailoring of guest experiences such as Accor’s Mama Shelter or IHG’s EVEN Hotels.

In order to stand out from the crowd operators are offering unique experiences to pique interest and capture market share, particularly from the millennial generation, so we will see further announcements regarding these lifestyle brands coming to Australia.

The investment market has been dominated by overseas capital in the last three years and 2017 will likely be no different.

The current capital flight from China should continue to unfold and be the dominant source of capital in 2017 as investors seek safe-havens and long-term income generating assets.

Due to the tightly held nature of CBD markets investors will continue to look at fringe-CBD hotels as well as those in more regional locations such as Cairns and the Gold Coast.

Investors keen to move further up the risk curve will start to look at assets in Brisbane and Perth for potential counter-cyclical investment opportunities.

These markets have seen limited transaction activity over the last few years but such is the dearth of quality stock available in Sydney and Melbourne CBDs that investors may start to turn their attention back to these resource states.

Office to residential conversions have been popular with investors and developers alike over the last few years, particularly in Melbourne and Sydney.

But with the residential market showing signs of cooling, the potential for conversions earmarked for residential to change to hotels is increasing.

CBRE Hotel Industry

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