Australia’s hotels challenged by new supply, wildfires

REPORT FROM EUROPE—Australian hotels are experiencing their first revenue slumps in a decade as a supply boom has driven hoteliers to cut rates, according to sources.

Meanwhile continuing bushfires in eastern Australia have caused evacuations of residents and travelers, and BBC reported the country annually sees bushfires but this season they have been particularly devastating with forests catching fire in addition to bushland. Guardian Australia reported the country’s average temperature in 2019 broke all records.

Before the fires spread, Australia’s major markets began noticing hotel performance declines. According to data from STR, Hotel News Now’s parent company, year-to-date occupancy through October 2019 declined 1.3% year over year to 73.8%, average daily rate dipped 1.1% to $183.37 and revenue per available room decreased 2.4% to $185.44. Supply growth (+2.2%) outpaced demand growth (+0.9%).

Over the same span, Melbourne’s 4.6% supply growth led to a 2.7% occupancy decline, 0.4% ADR dip and a 3.1% RevPAR decrease. In Sydney, 2% supply growth drove occupancy down 1.6% while ADR fell 2.9% and RevPAR dropped 4.5%.

But Sydney remains the top performer nationally in terms of absolute RevPAR (216.58 Australian dollars ($150.69)) and is already showing signs of recovery, according to Dransfield’s Hotel Futures 2019 report published by the Australian Trade and Investment Commission and Tourism Australia.

Graham Perry, managing director of Australasia at Best Western Hotels & Resorts, said he’s convinced that Melbourne and Sydney have stabilized.

“They have both come off really strong growth over a long period of time, so the slump has come as quite a shock, but we feel quite confident that once that supply is absorbed, ADR and RevPAR will recover, and do well. … Overall the market for RevPAR is down about 2.9% Australia-wide,” he said.

Perry added Best Western’s regional numbers have seen RevPAR grow by approximately 3.3% portfoliowide.

Dean Dransfield, founder of hotel consultancy Dransfield Hotels & Resorts also feels confident about the hotel industry on the continent.

“The sky is not falling in,” he said. “What’s happening in lots of these markets, particularly Sydney and Melbourne, is that occupancies were in the (low) 80s, so supply may be 1% to 2% in front of demand in the year it’s delivered. That’s creating a little downward pressure, but it is taking us only from very high occupancies to still high occupancies, with just a little leveling or reductions in rates.”

The impact of hotel supply in Melbourne and Sydney will be felt differently, Perry said.

“We are already tracking predictions for a rebound,” he said. “It has been particularly flat in Melbourne and Sydney, but Melbourne risks being hit harder in the medium term because the supply in Sydney is primarily at a luxury lifestyle hotel level, so the market can absorb it better. It is not impacted by supply as much as Melbourne.”

Dransfield said the current supply-performance predicament is being exaggerated by those who are casting “a short-term only perspective,” unlike real estate investors “who typically have a 10-year perspective.”

“Some people are turning a 5% reduction in revenue into a suicidal drop, but there is no volatility at all, just a tiny change,” he said. “Sure, because supply is being delivered, that will take the heat out of rates, and occupancies as hoteliers inevitably have to offer a discount to tease people to try a product—and that means some of existing supply responds in kind by matching prices. … So for a short period there is limited rate growth.”

Dransfield said there’s still room to grow supply incrementally.

“That’s being delivered over four to five years, so you’re actually talking about a 4% to 5% hike a year in most metro city markets, which typically have organic growth of around 4% annually, so it will be easily absorbed, with international tourism growing up to 7% and domestic 2% to 3%,” he said. “The long-term average over the next few years won’t be anything like that slump in supply, so the recovery period is quite short—as demand growth will continue—and the supply gets absorbed very quickly.”

STR reported a fresh surge of openings in November pushed Australia’s inventory to more than 300,000 rooms, the fourth-highest room count in the Asia/Pacific region.

_{Fire and Rescue personal run to move their truck as a bushfire burns next to a major road and homes on the outskirts of the town of Bilpin, New South Wales, on 19 December 2019. (Photo: Shutterstock)}

No need for fear

Matthew Burke, regional manager of STR, said Australia’s occupancy and ADR have been steady for the past five years at approximately 75% and AU$185 ($128.66), respectively.

The latest STR data showed 94 new hotels (18,294 rooms) are in construction in the country, with 216 projects (36,005 rooms) in the two planning phases. The Upscale sector shows the highest supply with 10,931 rooms opened since 2015.

“The construction peak will most likely come in 2020, and we don’t expect a substantial slowing in development anytime over the next several years,” Burke said. “Melbourne, Hobart and Adelaide are projected to see the largest increase in supply, while a third of the new rooms in the pipeline sit in the upscale (24.2%) and midscale (23.6%) segments.

“All of this new supply has put some pressure on occupancy levels, and subsequently, hotelier pricing confidence.”

Despite forecasting a growth in demand nationwide in almost all markets across the coming months, continuing injections in supply will have a fallout, Burke said, “with occupancy declines in the short-term.”

Burke said he expects room rates will continue to be undermined by stiffening competition.

“That is unlikely to become a long-term trend, though, as many Australian markets trade at high absolute occupancy levels with the ability to absorb new supply,” he said.

Developer Jerry Schwartz, whose portfolio of 14 hotels includes Sydney’s Sofitel Darling Harbour and Four Points by Sheraton, Central Park, is resisting rate cuts, he said.

“Maintain rates,” he urged hoteliers.

Schwartz said revenue was down approximately 11% from last year.

“Predominantly because the rates have come down, due to a lack of confidence and need for competition,” he said. “People want their hotels to feel better, so they drop their rates. It’s not individual owners that dictate that, but revenue management of hotels and hotel companies.”

With demand high in the larger markets, Schwartz said there shouldn’t be a race to the bottom to cut ADR.

“It just surprises me that in a city such as Sydney where there’s 90% occupancy, hotels cut prices. … This is usually when we see rates go up,” he said. “But people sell their shares. There’s fear in the hotel industry, so in order to get the business you undercut the next person. A loss of confidence in the economy in general is reflected by the fact that interest rates keep dropping.”

For Dransfield, the lull in ADR and supply’s impact on occupancy and rate confidence won’t last forever.

“I think rates will definitely increase in the long-term,” he added.

Source:website-hotelnewsnow

Author:Tamara Thiessen