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Q3                   2011Australian HotelMarket Outlook
Out of the six largest advanced economies, only the        The Deloitte Tourism, Hospitality & Leisure                US a...
Hotel Market Outlook Q3/2011In turn, the pressure from high exchange and interestrates is making life extremely uncomforta...
Whilst Australia recorded some 1.5 million more                                                                           ...
Australia Hotel Market Outlook Q3 2011
Australia Hotel Market Outlook Q3 2011
Australia Hotel Market Outlook Q3 2011
Australia Hotel Market Outlook Q3 2011
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Australia Hotel Market Outlook Q3 2011

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Australia Hotel Market Outlook Q3 2011

  1. 1. Q3 2011Australian HotelMarket Outlook
  2. 2. Out of the six largest advanced economies, only the The Deloitte Tourism, Hospitality & Leisure US and Germany are bigger today than three years (THL) Market Outlook - Q3 2011 reports on the ago, while government spending cuts and tax hikes performance of the Australian hotel industry to are cutting a swathe through prospects for Europe’s June 2011, based on data until the March 2011 drowning periphery, slowing down growth everywhere quarter as published by the Australian Bureau from the UK to Italy, Portugal and Greece. of Statistics (ABS), and extrapolated through That said, current fears are overblown, and recovery information collected by STR Global. is continuing. Elsewhere, China and India are starting Based on a correlation of historic market to cool. But that slowdown – like the associated lift in performance with state-by-state indicators for their interest rates – is modest so far. That not merely sectoral performance as reported by Deloitte leaves their short term outlook excellent, it also means Access Economics, we also present a forecast for overheating risks remain. With developed economies each market until year-end 2014. The economic doing better and emerging economies only throttling commentary providing the background for this back a bit, the upshot overall is continuing global outlook is derived from the Deloitte Access growth both this year and next. Economics Business Outlook - June 2011. The Australian economy Subscribe to Deloitte Access Economics Yes, it is tough out there for many families and publications online. businesses. Most of Australia’s growth engines are misfiring: (1) families are saving rather than spending; (2) stimulus has run its course, and its absence will be keenly felt; (3) housing construction – a pocket rocket The ‘two-speed’ screws are tightening in past recoveries – is limping into this one as interest The weather wiped out what would otherwise rates drown out population pressures; while (4) have been continuing growth in Australia’s economy our export gains from resource sales volumes are in early 2011. Mines couldn’t be worked, sugar, being mostly matched by lost sales from tourists, banana and cotton crops were destroyed, livestock manufacturers and international students. Add in the drowned, grain crops were flooded, building sites were huge costs of floods and cyclones, and no wonder abandoned, employees couldn’t get to work, shoppers people are shaking their heads at hints that the couldn’t get to the stores, and tourists stayed away in Reserve Bank may raise rates further. droves – the impact was huge. However, the flood and cyclone costs were a one-off, Moreover, when news of just how much Australia’s and production is already rebounding from those losses. economy had shrunk in the opening months of 2011 One growth positive is enormous: businesses (especially finally came out, that figure was worse than most miners) want to spend a fortune on adding to their had imagined. capacity, and that will power continuing recovery even if they only achieve a fraction of what they are aiming for. Most notably, consumers remain cautious. They haven’t Growth prospects are very narrowly based however: had any lack of income growth, but they have been one sixth of Australia’s economy has to account for almost trying very hard to save rather more substantively than two thirds of its growth in the coming financial year. they did in times past. We think that should be achievable though. And, if interest rates do rise in the coming year, Sectors Australian families are now so indebted that any such On the sectoral front, the ‘two speed economy’ increase in the cost of credit is likely to see saving rates pressures on the industrial landscape are intensifying. lift further still. That has been partially masked by the striking impact of The result is that the domestic tourism sector is weak floods and cyclones, which hurt mining exports. But the at present, but it is not all necessarily bad news continuing stellar strength of the $A is combining with looking forward. Australia is, after all, in the midst of expectations of further interest rate increases ahead, an unprecedented resources boom and there will be a exerting pressure across a range of sectors. range of dividends from that: more jobs, wage growth, That is no surprise. After all, value added per employee profits and government revenues, which are all boosting in mining is seven times the average, so the desire to growth in the corporate accommodation sector. see that sector contribute more to national income has The global economy set off a scramble that will boost construction of Forecasters are dialling down estimates for advanced mining facilities before it can lift the mining sector itself. economic growth in the wake of a surge in commodity But both these two will struggle to grow as fast as prices and Japan’s awful earthquake. they’d like as skill shortages will keep them on a short leash.2
  3. 3. Hotel Market Outlook Q3/2011In turn, the pressure from high exchange and interestrates is making life extremely uncomfortable in muchof manufacturing, as well as in tourism, parts ofeducation, for retailers, and in farming. Moreover,as the straitjacket on skilled workers is tightened overthe next two years, many of the latter list of sectorswill also find they face unwelcome wage pressurefrom competition for employees from the mining and Australians are now holidaying in the rest of theconstruction sectors. world instead of at home, while foreigners are beingEconomic impacts for the Tourism, Hospitality deterred by the sheer strength of the $A. And although& Leisure sector the currency isn’t the only driver of inbound tourismLeisure-based tourism is a discretionary spend, and numbers, it has been the biggest mover on that front,as such directly related to retail spend. Unfortunately, and the pain of rising exchange rates will increasingly beretailers have had to sail into the teeth of a howling evident in revised wholesale contracts for internationallyheadwind in the last few years. The classic signs of based travel agents. That means the $A exchange ratecaution are there to be seen, with food spending could experience no change from here and yet puntersleading the retail leader board list, whereas most around the world will find Australia a relatively morediscretionary categories have been lagging badly. expensive destination in six months or so.The global financial crisis gave the world a scare. The huge natural disasters in both New Zealand andAnd although Australia’s economy escaped much of Japan have not helped what are traditionally two keythe damage seen elsewhere, the damage to the psyche inbound tourism markets for Australia.of savers was just as marked here as in the rest of Yet although these are a series of important negativesthe developed world. This surge towards savings has for the recreation sector, it is worth remembering thatprobably not yet finished. Interest rates will probably – even in an economy amid the stresses and strains ofhead up a bit further from here, and chances are utilities ‘two speed’ pressures – business demand is on the rise.prices will as well. The resultant squeeze on family That is perhaps most evident in the hotel sector, andincomes may see savings rates climb further still in the especially those hotels selling to business clients. Risingnext little while. That said, we expect consumer, retail room occupancy rates have allowed hotels to edge upand leisure spending will once more be growing in lock average room rates with further room ratestep with family incomes a year or 18 months from now rises expected in 2012.(that is, once rate rises have been absorbed). Some of the earlier strengths in cafes and restaurantsOur export earnings have soared more than 30% in the has faded of late, while the mooted poker machinethree years to 2010, but mostly because we are selling reforms could also have an impact on this sector.at higher prices rather than because we are sellinghigher quantities. That leap in world prices for industrial And then there is the grounding of Tiger Airways.commodities has had two effects on volumes: it has Though still uncertain if it will ever fly again wheninstituted an investment program which will eventually writing this report, its grounding spells bad news forlift resource export quantities, but it has also resulted in the leisure sector, especially in regional destinations,sharp and rapid bad news for export volumes of pretty as it takes the cheapest airfares out of the Australianmuch everything else: farm goods, manufacturing, skies, creating opportunity for its competitors to hiketourism and international student numbers all have to up their fares. In times of a squeezed household wallet,grapple with the higher interest and exchange rates that this is pushing people back in their cars, puttingcharacterise commodity booms. destinations further afield out of reach for the main population centres.Tourism and international education are the twokey sectors which dominate our service exports. Finally, as the straitjacket on skilled workers is tightenedPast ‘growth heroes’, both these sectors are now on over the next two years, the service sectors will also findthe wrong side of Australia’s two speed economy, they face wage pressure from mining and construction,with higher exchange rates combining with changed putting further pressure on the bottom line.migration rules and a sharp competitive push from US Visitor flowcolleges results in depressingly large falls in enrolments According to the latest publication from the Tourismin key parts of the international education sector. At the Forecasting Committee (TFC, May 2011), departuressame time, although numbers of inbound tourists did continue to outpace arrivals at Australia’s shores, at everlift of late, it is hard to see visitor numbers sprinting any increasing rates, resulting in an increase in the net visitortime soon. Although the $A isn’t the be-all-and-end-all exchange, as demonstrated in the following graph.of tourism prospects, it remains painful as long as the$A is above parity with the $US. 3
  4. 4. Whilst Australia recorded some 1.5 million more Asia is expected to continue to lead the growth arrivals than departures around the turn of the century, in inbound arrivals to Australia in the short and this began to reverse during the financial crisis in longer term. mid-2008 and has now reached a negative net For 2011, there has been an upward revision for outflow of more than 1.5 million visitors. The Tourism arrivals from China (from 21.9% to 25.8%) and Forecasting Committee (TFC) is expecting this trend Indonesia (from 6.8% to 13.1%), as aviation capacity to revert almost instantly, as a result of both increased continues to increase. Arrivals from most other growth of international visitors and a normalisation of Asian countries are forecast to grow in line with the continued increase in departures. previous expectations, or at a slightly increased pace. A notable exception is Japan, where arrivals have been 10000000 9000000 8000000 downgraded substantially (from 401,000 to 293,000) in 7000000 2011, due to the recent natural disaster in that country. 6000000 Australia 5000000 HMO Q3 Slides.xlsx 4000000 3000000 70.0% $200 2000000 68.0% $180 1000000 66.0% $160 0 -1000000 64.0% $140 -2000000 62.0% $120 Mar-83 Mar-84 Mar-85 Mar-86 Mar-87 Mar-88 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 60.0% $100 Residents Departing Tourists Arriving Net Tourist Exchange 58.0% $80 56.0% $60 TFC expects domestic visitor nights to fall by 0.3% to 54.0% $40 259 million in 2011 which is a downward revision from 52.0% $20 50.0% $0 the previously expected 0.6% growth. The weaker Sep-93 Sep-94 Sep-95 Sep-96 Sep-97 Sep-98 Sep-99 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 short term outlook can be linked to the effects of Room Occ% trend (LHS) Room Rate trend (RHS) RevPAR trend (RHS) recent floods and cyclones on travel coupled with the Australia-wide hotel performance is steadily improving Australia sustained and increasing strength of the Australian from its RevPAR low at the end of 2009. This steady dollar (which makes outbound travel more attractive) trend masks significant discrepancies between various and restrained consumer spending. The annual average markets, however, and more particularly between the growth rate of 0.3% in the longer term is similar to leisure and business segments. previous expectations with domestic visitor nights forecasted to be 266 million in 2020. City-based hotels are generally recording excellent occupancy levels, close to capacity during midweek Australian resident outbound departures are forecast periods and thus providing only limited opportunity for to grow by 10.1% to 7.8 million in 2011, which is an further growth. RevPAR growth in the cities is therefore upward revision from the previous forecast of 7.7%. almost solely driven by rate improvement. Leisure This growth is driven by the continued high value of destinations are not that fortunate, and are fighting the Australian dollar and strong growth in aviation to maintain occupancy levels, often at the expense of capacity to many key outbound markets including growth in room rates. China, Indonesia and the United States. The longer term outlook for outbound travel is slightly higher Our supply outlook shows a pushback on a number of than previously forecast, with annual average growth hotel development projects, resulting in a slightly higher expected to be 3.7% (rather than 3.2%) and departures occupancy outlook in the short to medium term. to reach 10.3 million in 2020. Room rates are not growing as fast as we had hoped, and have been revised downwards. Inbound visitor arrivals are forecast to increase by 3.1% to reach 6.1 million in 2011 – a downward revision Overall, our RevPAR forecast for Australia in 2011 from the previous forecast (5.6%). This was due to remains unchanged at $93 and 4.9% growth over 2010. rapidly escalating oil prices linked to political unrest in We have increased our occupancy outlook from 63.5% the Middle East; the continued slow pace of recovery to 64.3% however, at the expense of a slight reduction in developed economies; and effects from the natural in rate growth, finishing the year at $153, a 5.6% disaster in Japan. The longer term outlook remains improvement over 2010. Our RevPAR forecast for 2012 similar to that previously forecast, with annual average was revised downward slightly, from $100 to $99, growth expected to be 3.6% rather than previously with slightly higher occupancies and lower room rates. expected 3.9% with inbound arrivals to reach 8.4 million by 2020.4

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