Australian Hotel Market Property Prospects

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Contents EXECUTIVE SUMMARY... i 1. INTRODUCTION... 1 1.1 Introduction and major objectives of this report... 3 1.2 Report outline... 4 2. DEMAND... 5 2.1 Key Points... 7 2.2 Introduction... 8 2.3 Domestic demand... 8 2.3.1 Domestic visitor nights state of play... 8 2.4 International demand... 11 2.4.1 International visitors nights state of play... 11 2.5 Demand for 3, 4 and 5 star hotels and serviced apartments... 13 2.5.1 Occupied room nights, 4 and 5 star accommodation... 13 2.5.2 Occupied room nights, 3 star accommodation... 13 2.5.3 Composition of demand hotels... 13 2.5.4 Composition of demand serviced apartments... 15 2.6 Airport and airline capacity... 15 2.6.1 Airport activity and future capacity... 15 2.6.2 Airline activity and future capacity... 18 2.6.3 Domestic airfares... 19 2.7 Conferences and conventions... 19 2.8 Forecasts of demand, 4 and 5 star accommodation... 21 2.8.1 Australian economic outlook... 22 2.8.2 Forecast domestic demand for 4 and 5 star accommodation... 26 2.8.3 Forecast international demand for 4 and 5 star accommodation... 27 3. SUPPLY... 31 3.1 Key points... 33 3.2 Introduction... 34 3.3 Total tourist accommodation commencements... 35 3.3.1 Commencements by state... 35 3.4 Serviced apartments... 35 3.4.1 Sydney, Melbourne, Brisbane and Perth provision of serviced apartments... 36 3.5 Supply of 3, 4 and 5 star accommodation... 37 3.5.1 Sydney... 38 3.5.2 Melbourne... 39 3.5.3 Brisbane... 39 3.5.4 Perth... 41 BIS Shrapnel Pty Limited 2012

3.6 Supply forecasts... 41 3.6.1 Sydney supply forecasts... 44 3.6.2 Melbourne supply forecasts... 45 3.6.3 Brisbane supply forecasts... 47 3.6.4 Perth supply forecasts... 48 4. OCCUPANCY AND ROOM RATES... 51 4.1 Key points... 53 4.2 Occupancy rates... 55 4.2.1 Sydney occupancy rates... 55 4.2.2 Melbourne occupancy rates... 55 4.2.3 Brisbane occupancy rates... 57 4.2.4 Perth occupancy rates... 57 4.2.5 Serviced apartment occupancy rates... 59 4.3 Room rates... 59 4.3.1 Sydney room rates and RevPAR... 59 4.3.2 Melbourne... 61 4.3.3 Brisbane... 61 4.3.4 Perth... 63 4.4 Occupancy rate forecasts... 63 4.5 Room rate forecasts... 65 4.5.1 Influences on room rates... 65 4.5.2 City by city 4 and 5 star room rate forecasts... 69 4.5.3 3 star forecasts... 71 5. INVESTMENT ISSUES... 77 5.1 Key points... 79 5.2 Introduction... 80 5.3 Investment issues... 81 5.3.1 Hotel investment characteristics... 81 5.3.2 Demand and supply side risks... 82 5.3.3 Profitability... 82 5.4 Investment returns... 83 5.4.1 Historical trends... 83 5.4.2 Forecast yields, capital values and internal rates of return... 84 5.5 Investment and development risks... 87 APPENDIX... A 1 A Data issues... A 3 B Econometric analysis... A 7 BIS Shrapnel Pty Limited 2012

Table I: Table II: Table III: Table IV: Table V: Table VI: Table VII: Table VIII: Table IX: Table X: Table XI: Table XII: Table XIII: Tables Demand, state of play, year to September 2011... vi Domestic visitor nights, 4 and 5 star accommodation, by city, 2011 to 2021... vii International visitor nights, 4 and 5 star accommodation, by city, 2011 to 2021... viii Total visitor nights, 4 and 5 star accommodation, by city, 2011 to 2021... ix Key supply indicators... xi Occupancy, room rate and RevPAR summary... xiv Indicative room rate, RevPAR, capital value and internal rate of return, Sydney 4 and 5 star accommodation... xv Indicative yield and capital value forecasts, Sydney 4 and 5 star accommodation... xvi Sydney tourism region, 4 and 5 star demand, supply and occupancy rate, 1988 to 2021... xvii Melbourne tourism region, 4 and 5 star demand, supply and occupancy rate, 1988 to 2021... xviii Brisbane tourism region, 4 and 5 star demand, supply and occupancy rate, 1995 to 2021... xix Perth tourism region, 4 and 5 star demand, supply and occupancy rate, 1995 to 2021... xx Occupancy rate, room rate and RevPAR, Sydney 4 and 5 star accommodation, 1988 to 2021, current and constant prices... xxi Table XIV: Occupancy rate, room rate and RevPAR, Melbourne 4 and 5 star accommodation, 1988 to 2021, current and constant prices... xxii Table XV: Occupancy rate, room rate and RevPAR, Brisbane 4 and 5 star accommodation, 1995 to 2021, current and constant prices... xxiii Table XVI: Occupancy rate, room rate and RevPAR, Perth 4 and 5 star accommodation, 1995 to 2021, current and constant prices... xxiv Table 2.1: State of play, year to September 2011... 7 Table 2.2: Domestic and international visitor nights history and forecasts, 1996 to 2021, Tourism Research Australia... 9 Table 2.3: Composition of visitor nights 2011, Sydney, Melbourne, Brisbane and Perth... 14 Table 2.4: Seat utilisation rates, 2007 to 2011... 19 Table 2.5: Trip nights, domestic and international, 2008 to 2010... 20 Table 2.6: Domestic visitor nights, 4 and 5 star accommodation by city, 2011 to 2021... 26 Table 2.7: International visitor nights 4 and 5 star accommodation by city, 2011 to 2021... 27 Table 2.8: Total visitor nights, 4 and 5 star accommodation, 2011 to 2021... 28 Table 3.1: Key supply indicators... 33 Table 3.2: Value of hotel commencements, chain volume measures ($million, 2008 09 prices)... 34 Table 3.3: Hotels and serviced apartments, new supply, December 2000 to September 2011 (the period since the last major wave of new supply)... 36 Table 3.4: Serviced apartments, share of stock and annual growth by state... 37 Table 3.5: Composition of 3, 4 and 5 star accommodation, Australia, September 2011... 38 Table 3.6: Growth in room numbers, Sydney, Melbourne, Brisbane and Perth... 38 Table 3.7: Major completions, Sydney... 38 BIS Shrapnel Pty Limited 2012

Table 3.8: Major completions, Melbourne... 39 Table 3.9: Major completions, Brisbane... 39 Table 3.10: Short-term forecast of completions, Sydney... 45 Table 3.11: Sydney 4 and 5 star accommodation room nights available, 2011 to 2021... 45 Table 3.12: Short-term forecast of completions, Melbourne... 46 Table 3.13: Melbourne 4 and 5 star accommodation room nights available, 2011 to 2021... 46 Table 3.14: Short-term forecast of completions, Brisbane... 47 Table 3.15: Brisbane 4 and 5 star accommodation room nights available, 2011 to 2021... 48 Table 3.16: Short-term forecast of completions, Perth... 49 Table 3.17: Perth 4 and 5 star accommodation room nights available, 2011 to 2021... 49 Table 4.1: Occupancy, room rate and RevPAR summary... 53 Table 4.2: Sydney tourism region, 4 and 5 star demand and supply, 1988 to 2021... 64 Table 4.3: Melbourne tourism region, 4 and 5 star demand and supply, 1988 to 2021... 66 Table 4.4: Brisbane tourism region, 4 and 5 star demand and supply, 1995 to 2021... 68 Table 4.5: Perth tourism region, 4 and 5 star demand and supply, 1995 to 2021... 70 Table 4.6: Table 4.7: Table 4.8: Table 4.9: Table 5.1: Occupancy rate, room rate and RevPAR, Sydney 4 and 5 star accommodation, 1988 to 2021, current and constant prices... 72 Occupancy rate, room rate and RevPAR, Melbourne 4 and 5 star accommodation, 1988 to 2021, current and constant prices... 73 Occupancy rate, room rate and RevPAR, Brisbane 4 and 5 star accommodation, 1995 to 2021, current and constant prices... 74 Occupancy rate, room rate and RevPAR, Perth 4 and 5 star accommodation, 1995 to 2021, current and constant prices... 75 Indicative room rate, RevPAR, capital value and internal rate of return, Sydney 4 and 5 star accommodation... 79 Table 5.2: Indicative yield and capital value forecasts, Sydney 4 and 5 star accommodation... 85 Table 5.3: Internal rates of return, property sectors... 87 Table A1: Establishments added in June 2003 ABS data revision... A 4 Table B1: Regression results... A 9 Table B2: Regression results, Melbourne... A 9 BIS Shrapnel Pty Limited 2012

Chart I: Chart II: Chart III: Charts Occupancy rate, room rate and RevPAR by city, 4 & 5 star accommodation, 1988 to 2021... ii Demand indicators... iv Hotel and serviced apartment supply indicators... xii Chart 2.1: Demand indicators... 6 Chart 2.2: International visitor nights, top six sources, and occupied room nights... 10 Chart 2.3: Composition of demand... 12 Chart 2.4: Inbound passenger flights, domestic airfares, and conference and convention arrivals... 16 Chart 3.1: Hotel and serviced apartment supply indicators... 32 Chart 3.2: Room numbers by star grade and capital city... 40 Chart 4.1: Occupancy rates by city, 3, 4 & 5 star, 1998 to 2011... 52 Chart 4.2: Hotel and serviced apartment occupancy rates by city, 2005 to 2011... 54 Chart 4.3: Average room rate, 3 and 4 & 5 star accommodation, 1987 to 2011... 56 Chart 4.4: RevPAR, 3 and 4 & 5 star accommodation, 1987 to 2011... 58 Chart 4.5: Chart 4.6: Occupancy rate, average room rate and RevPAR, 4 and 5 star accommodation, 2001 to 2021, current prices... 60 Occupancy rate, room rate and RevPAR by city, 4 & 5 star accommodation, constant prices, 1988 to 2021... 62 BIS Shrapnel Pty Limited 2012

1. INRODUCTION 1.1 Introduction and major objectives of this report Australian Hotel Market Property Prospects, 2012 to 2021 is the fifth edition of BIS Shrapnel s hotel market report. This year, for the first time, we include the Perth market in the report. Market conditions in Perth are on a strong upward trajectory and there is considerable interest in the city. Over the last two years there has been a strong recovery in the hotel market. Occupancy and room rates are increasing and profitability has improved. Much attention has been given to the hotel sector s outperformance in terms of investment returns when compared with office, industrial and retail properties. Is this a resumption of the cyclical upswing that was in place prior to the GFC? Or is it merely a correction of the post-gfc downturn? This report addresses these key questions and more underpinned by a thorough analysis of demand and supply. The report has a particular focus on the 4 and 5 star accommodation sector comprising hotels, serviced apartments and motels in the Sydney, Melbourne, Brisbane and Perth Tourism Regions. It also incorporates an assessment of both the 3 star sector and serviced apartments. Along the way we cover the following topics. We examine the prospects for both domestic and international-sourced demand, discussing the outlook for the Australian and overseas economies and the impact of movements in the $A. We trace the varying fortunes of the key sub-sectors of demand of particular relevance to the 4 and 5 star sector domestic and international business and holiday travel. Could weak business and consumer confidence derail the recovery in demand? And will rising room rates lead to a cut-back in corporate travel expenditure? After taking into account the differing composition of visitor nights in Sydney, Melbourne, Brisbane and Perth, we present 10 year forecasts of demand for 4 and 5 star accommodation in these cities. On the supply side, there is a growing push at all levels of government to seek out policies to support the hotel sector and these could involve incentives for development. Many market participants take comfort from the relatively small development pipeline. Are they right in their assessment that limited new stock will keep the market tight? Will incentives alter this, bringing forward supply and undermining hotel investment prospects? Moreover, could the Melbourne experience be repeated elsewhere? This saw over 2,500 rooms added to the 4 and 5 star accommodation stock over the last three years, when most said that room rates were too low for financial feasibilities to stack up. What is the outlook for occupancy rates, room rates and RevPAR? The long term performance of room rates has been weak at best. Market players have failed to capitalise on the opportunities to aggressively raise room rates in the past. What if anything is different this time? How do the prospects vary by city? On the investment side, yields firmed markedly up to December 2007, in common with the trend in other property sectors. A key driver was the weight of money seeking a home in investment property. Yields subsequently softened by some 50 to 100 basis points for prime hotel properties, less than in other property sectors except retail. Now that the market is in recovery mode, what is the outlook for hotel investment yields? Will they regain or even surpass 2007 levels? The report draws together the forecasts of revenue, profitability and yields to calculate prospective capital growth and total returns over the next decade. BIS Shrapnel Pty Limited 2012 3

The report also discusses a range of investment and development issues, including those risk factors that set hotels apart from other property classes, and puts hotel returns in context against other property classes. A key objective of the report is to map out the cyclicality of the hotel sector over the next 10 years. Whilst year by year forecasts are prepared, the focus is on the likely duration of the upswing, the level of returns that can be expected over this period, and the timing and magnitude of the ensuing downturn. The report is of relevance to owners, operators, developers and planners, who require an independent perspective on these questions in order to plan their activities over both the short and long term. For offshore investors, it provides a detailed understanding of the Australian hotel market and its prospects for the future. 1.2 Report outline Our report is not intended for one-off reading; it is meant to be a constant reference for practitioners. The following is a guide to assist your reading. The Executive Summary provides a snapshot of the Australian hotel market, our key forecasts and a discussion of the nature of investment in the hotel sector and its risks. The executive summary contains the key forecast tables. Chapter 2 discusses the sources of room night demand domestic and international visitors. Domestic demand remains the larger component, despite its much slower growth rate than international demand. Historical trends are discussed, the composition of visitor nights in 4 and 5 star accommodation is set out and the chapter assesses a variety of influences on demand including a summary of our outlook for the Australian economy over the forecast horizon, a critical influence on domestic demand. Chapter 2 presents our forecasts of domestic and international demand over the next 10 years, both at a general level and specifically for the 4 and 5 star accommodation sector for Sydney, Melbourne, Brisbane and Perth. Chapter 3 looks at the supply side, discussing the growth in stock of 4 and 5 star (combined) and 3 star accommodation by city and the growing proportion of serviced apartments relative to hotel rooms. Chapter 3 also discusses influences on future supply and sets out annual forecasts to 2021 of available room nights for 4 and 5 star accommodation in the four major capital cities. Chapter 4 focuses on occupancy and room rates. An overview is given on the current state of play for both 4 and 5 star (combined) and 3 star sectors, before presenting forecasts annually for the next 10 years for Sydney, Melbourne, Brisbane and Perth. The chapter discusses the relationship between occupancy rates and room rates and other influences on room rates going forward. Chapter 5 presents forecasts of capitalisation rates, capital values and total returns, as well as discussing a range of investment issues. The chapter looks at the prospective performance of hotels compared with other property sectors. Finally, the Appendix explains data issues and sets out the results of our econometric work. 4 BIS Shrapnel Pty Limited 2012