Regional hotels booked for trouble, but CBD hotels have staying power
The two-speed nature of the leisure property sector has been starkly revealed in NAB’s June quarterly survey of the hotel property sector.
While overall conditions for the sector have softened, but remain positive, the outlook for CBD hotels versus those in regional markets could not be more different.
This is reflected in NAB’s All Hotels Index (a measure of sentiment and confidence in the sector), which stands at +54 in June for CBD hotels, compared with -5 for non-CBD hotels.
According to the 300 property market participants who took part in the survey, the capital values of CBD hotels are tipped to rise by a healthy 5.3% over the next 12 months and by 6.2% over the next two years.
In comparison, hotel property values outside of the CBD are expected to stagnate over the next year (declining 0.2%) and to rise by just 1.6% over the next two years.
Growth in CBD hotel values and room rates is being supported by the business travel sector and the absence of new supply in the main capital cities.
The undersupply of CBD hotel rooms is expected to persist, with the booming resources sector driving business demand.
And while demand from international travellers was even weaker across the sector, this was especially felt in non-CBD hotels, where demand from this source was assessed as “poor”.
A July report by research firm STR global found Perth to be leading a nationwide revival in hotel room revenue, with rates rising 9.6% in the first six months of the year, followed by 8.1% in Brisbane and 8.4% in Sydney.
According to Bryon Merzeo, business development manager from STR Global Australia and New Zealand, while international growth has been powerful, domestic consumer stays on Tuesdays, Wednesdays and Thursdays have been “incredible”.
However, non-CBD hotels, which are not able to tap into the corporate traveller market, are facing headwinds from a tourism market suffering from the high Australian dollar and ongoing consumer caution.
According to the NAB survey, demand from business travellers (the key market consumer segment) is rated as only “good” for non-CBD hotels compared to “very good” for CBD hotels.
CBD hotel room rates are also increasing and are forecast to increase at far healthier rate than those outside of metropolitan regions.
CBD room rates increased by 4.4% in the June quarter, with the strongest gains recorded in NSW (5.3%). They are tipped to rise by 5.8% over the next year and 6% over the next two years.
Outside of the CBD, hotel room rates fell by 1.2% in the June quarter (following growth of 1% in the March quarter). Over the next year non-CBD room rates are going nowhere (a rise of 0.2%) and are tipped to increase by a modest 2.3% over the next two years.
On the key measure of revenue generated per available room (RevPar), the biggest increase occurred NSW in the June quarter with takings up 5.1%, outperforming the CBD sector as a whole, which increased by 4.7%.
Non-CBD hotel room revenue lagged far behind growing by just 0.3% over the quarter. Revenue forecasts are modest with increases of 1.6% and 3.4% over the next two years.
Looking ahead, CBD hotels in NSW and Western Australia are expected to see the greatest increase in revenue generated from their available rooms.
Occupancy rates were significantly higher for CDB hotels (77%) compared with non-CBD hotels (68%) in the June quarter with average occupancy rates highest in NSW and WA (75% in both markets) and lowest in Queensland (68%).
The diverging performance of the two hotel markets has already been revealed in the March quarter tourist accommodation figures which revealed rising occupancy rates and per night room takings in all major CBD markets, but declining occupancies and returns in many regional markets.
These trends are expected to remain broadly unchanged over the next year, although respondents are forecasting a moderate pick-up in demand for non-CBD hotel rooms from domestic and international travellers, consistent with higher occupancy.
Offshore investors have also signed several hotel deals this year, signalling confidence in the metro hotel market.
In May LaSalle Investment Management snapped up the 380-room Novotel Melbourne on Collins Street in the CBD for $204 million, and US hospitality property group Host Hotels & Resorts spent about $137 million for a 75% stake in the 396-room Hilton Melbourne South Wharf Hotel.
In January, the 276-room Hilton Melbourne Airport Hotel was sold to Pan Pacific Hotels Group for $109 million in a deal negotiated by CBRE.
CBD hotels listed for sale include the 202-room Rendezvous Adelaide at 55 Waymouth Street being sold by Jones Lang LaSalle agents James Gatland, Aaron Desange and Mark Durran with $60 million plus hopes.
The 278-room Citigate Perth at 707 Wellington Street is up for sale by Desange and Mark Durran from Jones Lang LaSalle with expectations above $65 million.
Overall, conditions for hotel property remain positive but have softened since the March quarter survey as a result of high Australian dollar, interest rate concerns and consumer caution.
