Deloitte Lachlan Smirl

Mixed economic signals point to growth for some, and a softer future for others, says Deloitte’s Lachlan Smirl in an exclusive column for HM.

The forces impacting Australia’s tourism industry and hotel market are changing.

For some time, the story has revolved around a dollar hovering near parity with its US counterpart, domestic travel being driven heavily by mining-related corporate activity, Australians holidaying overseas at unprecedented levels and Asia driving inbound growth.

The performance of tourism regions and hotel markets has been dependent on their market mix. Those with direct exposure to the mining sector – Western Australia, in particular – have been the beneficiaries. So too have the gateway capitals, where Asian travellers have preferred to spend their time. On the flip side, traditional leisure destinations have faced more challenging conditions.

Hotel occupancies have reached record highs, and room rates have grown at double-digit pace. At the same time, and on the other side of the market, growth in the supply of short stay accommodation has been modest.

Certainly, the role of Asia in driving inbound growth is a constant. But beyond this, the forces are shifting. With the currency abating, Australians are being increasingly enticed to holiday at home, and our competitiveness in the global tourism market is once again increasing. And when you consider the inbound arrival growth Australia has sustained in a high exchange rate environment, this certainly bodes well for the future.

However set against this encouraging news are clear signs that the frenzy of activity associated with the mining boom is easing. So too, therefore, is the travel and hotel patronage associated with it.

A new constant is likely to be continuing growth in international visitor arrivals – they grew 4.9 per cent over the year to March 2013, while international visitor nights grew 7.2 per cent, significantly outpacing average growth of the last decade.

China is, and will remain, the single largest contributor to growth, with Chinese visitor nights forecast to grow by nearly seven per cent per year over the next three years. Overall, Asia is projected to account for two thirds of forecast growth as international visitor nights grow by a forecast 4.9 per cent per annum.

And in an encouraging sign for our larger regional tourism destinations, signs are emerging of Chinese travellers venturing beyond our capital cities in increasing numbers. The Gold Coast and Tropical North Queensland, for example, are now more commonly frequented by Chinese leisure visitors than by international leisure travellers generally.

Just as encouragingly, there is also evidence that our more traditional international markets are bouncing back (and in advance of the weakening of our dollar), with a sustained pick up in visitor arrivals from the United States, and visitor nights from Japan.

On the domestic visitor front, a softer Australian economic outlook and signs of a continued pick-up in holiday travel indicate the leisure segment playing a more prominent role in driving domestic tourism over the next few years – particularly if the dollar continues to recede.

Domestic holiday visitor nights grew 11.6 per cent in the March quarter, and 3.7 per cent over the year to March. This represents the fastest rate of growth since before the GFC and a considerable narrowing of the gap with outbound leisure travel, which grew by 4.6 per cent over the same period. Overall, we forecast an average annual domestic growth rate of 1.6 per cent over the three years to December 2015.

Just as the tourism sector is experiencing shifting tides on the back of new economic and exchange rate realities, the story for individual hotel markets is also changing.

Nationally, and despite a strengthening hotel and serviced apartment investment pipeline, demand remains forecast to outstrip supply by a factor of nearly 2:1 over the next three years, placing upward pressure on occupancies and room rates.

Looking beyond our three-year forecast horizon, the hotel accommodation investment pipeline remains considerably stronger than 18 months ago, with 65 projects in various development stages, significantly up on the 45 developments recorded at the beginning of last year.

Much of this forecast development is three and four star hotels and serviced apartments, with the cost of five star hotel developments remaining more difficult to justify for developers.

Nationally, our three-year forecast indicates that occupancy rates will continue to grow – by 1.9 per cent to 67.9 per cent by the year to December 2015. National room rates are forecast to grow 3.5 per cent per year over the same period, to $165, and Revenue per Available Room (RevPAR) will grow by 4.6 per cent per year to $112.

At a macro level, the demand outlook remains broadly unchanged, with a softer outlook for corporate travel largely counterbalanced by the positive impact of the weakening Australian dollar.
Several individual markets, however, are in the midst of a marked change of pace.

With the very clear signs that business travel associated with the mining sector is slowing, the last two quarters saw a softening in occupancy rates in Brisbane and Perth – with average occupancies for the year to May 2013 around two per cent lower than the previous year.

While coming off a very strong base, growth in occupancies and room rates in markets associated with mining-related corporate travel is forecast to be more subdued, as the resource-related construction boom reaches and passes its peak.

More positively for leisure-oriented markets which have struggled in recent years, a weaker Australian dollar is forecast to provide further support for visitation, room rates and occupancies. Ahead of this, strong growth in domestic holiday travel to the Gold Coast is already good news, while strong growth in international visitor nights is driving a rebound in Tropical North Queensland.

Lachlan Smirl is a Director at Deloitte Access Economics and the author of Deloitte’s bi-annual Tourism and Hotel Market Outlook.