Overview & Outlook – Hotels Australia

Australia’s visitor economy is benefiting from an unambiguously strong recovery underpinned by local demand.  Domestic travel nights are now at or surpassing pre-pandemic levels in the domestic demand dominated states of Qld, SA, WA and Tas with their popular and well-recognised leisure tourism sectors.  Not only are we travelling more across Australia, but we’re also spending more, up around ~40% on pre-pandemic spending in these states. As inbound demand recovers, our major gateway cities of Sydney and Melbourne are gathering momentum with strong gains recorded over the year.
 
Pent-up travel demand has seen Average Daily Rates (ADR) post extraordinary growth over YE Dec 2022, now outperforming pre-pandemic rates across all major markets. Nationally, ADR is up 24% over the year to $228 to outpace 2019 rates by 23%. Occupancy is just 10% shy of pre-pandemic levels at 65%. Key destinations such as the Gold Coast and Darwin have been standout performers exceeding pre-pandemic occupancy across all three performance metrics while Brisbane is just shy. When looking at the last 12 months however, Sydney and Melbourne recorded the strongest y-o-y growth rates across all three indicators, illustrating the recovery in their key corporate/MICE travel and international arrivals gathering pace.

Recovering occupancies and strong ADR growth conditions have assisted in insulating the sector from the effects of rising inflation and as a result investment activity has strengthened over the year, up 15% with deal volumes above $10 million totaling $2.14billion in 2022 over 53 transactions. This is the most active year by number of transactions, 39% above the 10-year average and the second most active year by dollar value on record.  
 
As we look to 2023, CBRE anticipate ongoing strength in domestic visitation and further recovery in international arrivals. Factors such as the reopening of China’s borders will be key to the rate at which our inbound visitation economy recovers.
 
CBRE expect Average Daily Rate growth to moderate over 2023, although most city markets are still expected to post gains as operators maintain strong rate policies in favour of returning to pre-pandemic occupancy levels. Occupancy levels in domestic demand dominated cities are expected to edge upwards from already strong levels, while major international gateway markets of Sydney and Melbourne should continue to see occupancy gains as inbound demand recovers.
 
The Australian hotel market’s expansionary phase is set to peak in the next 12 months. New hotel room supply tracked by CBRE shows that approximately 8,400 rooms are scheduled for completion across our major hotel markets over the course of 2023 and 2024. Almost 65% of these new rooms will be of high quality and are set to see the elevation of luxury hotel standards across Australia. Melbourne is the primary recipient of new room supply (35% of total). Following this wave of additions, higher debt and construction costs are anticipated to suppress the development pipeline with activity being largely limited to key strategic sites usually having mixed use appeal. 
 
An expected stabilising of inflation and interest rate conditions as the year unfolds should see capital markets benefit from greater investor certainty. While a high inflation and interest rate environment will place upward pressure on yield expectations, improving tourism demand fundamentals and impressive performance indicators are likely to cushion the sector from the full impact of higher credit-funding costs.