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Deloitte report: Tourism sector remains a shining light for Australian economy

Sydney Harbour new

Australia’s tourism sector remains a shining light for the nation’s economy, with strong growth in both international and domestic visitor numbers, according to Deloitte Access Economics’ latest Tourism and Hotel Market Outlook report.

While strong macroeconomic tailwinds eased marginally as the Australian dollar edged up, international visitor arrivals continued to grow at record pace, after accelerating over 2016. The growth Australia is experiencing is the fastest in a generation and is seeing it outpace both global performance and travel across the Asia Pacific. In fact, international visitation to Australia is growing at nearly three times the rate of global travel.

Deloitte Access Economics’ Bryon Merzeo said: “Against any reference point, the performance of the Australian tourism industry is remarkable – the fastest growth and faster than our global competitors are achieving.

“What is especially encouraging about the growth we’re witnessing in international travel is its broad-based nature. Although emerging Asia continued to underwrite much of Australian tourism’s strength, Asian travellers only accounted for 50% growth in visitor arrivals in 2016, compared to 70% the year prior,” he said.

While markets such as China, India, South Korea and Vietnam continued their double digit growth, many of Australia’s oldest legacy markets also performed strongly, with Japan defying a sluggish local economy to post growth of 23% and the US shaking off economic and political uncertainty to record arrivals growth of 18%.

On the domestic front, the good news continues, with leisure travel sustaining its momentum to grow by 8.2% over the year to September.

“Our report confirms that, for the sixth consecutive year, more Australians are travelling at home, and they’re travelling to Australia’s leisure favourites,” Merzeo said.

“Successful promotional campaigns on food, wine and coastal tourism have contributed to a 6% increase in domestic guests at Cairns and Hobart airports, and double digit visitor night growth for both Western Australia and Southern Australia.”

Domestic corporate travel growth, however, slowed considerably to 2.3% as the weaker economic performance observed over the latter part of 2016 weighed on business travel, although the strength of the domestic leisure segment was sufficient to keep overall domestic travel growth at above trend.

Despite the sustained strength of Australia’s tourism sector, performance of the hotel sector was restrained over the latter half of last year.

A significant contributor to this was growth in supply. At around 4,900 new rooms, the nationwide additional supply in 2016 was almost double the 15 year average. However, performance was also affected by variable demand side conditions.

“The weaker demand observed across many markets partly reflects the softening of corporate travel, which accounts for one in three capital city hotel nights on average and considerably more for some individual properties,” Merzeo said. “However, it also suggests that leisure travellers are increasingly looking beyond traditional options for their holiday accommodation.

“They are clearly enjoying the choice and variety of accommodation offered by the likes of Airbnb. Leisure travellers’ use of non-traditional accommodation increased by 11.5% in 2016, contributing to 8.7% growth in use of this form of accommodation overall,” he said.

Despite this, it was Australia’s leisure destinations leading the way in terms of hotel market performance:
-Tasmania tourism continues to go from strength to strength, with Hobart overtaking Perth to assume third place in the occupancy rankings;
-Gold Coast and Tropical North Queensland maintained strong hotel performance growth over the second half of 2016; and
The mantle of the nation’s highest occupancies remained with Sydney (89%) and Melbourne (88%), while strong supply growth weighed on performance in Perth and Brisbane.

“The outlook for the chief macroeconomic drivers of travel and tourism remains conducive to the super growth sector continuing to re-write the record books,” Merzeo said.

“Despite increased global political uncertainty, the economic growth prospects across key source markets remain sound.”

Deloitte Access Economics forecasts international visitor trips to grow by 6.3% p.a. and visitor nights by 6.2% p.a. on average over the next three years – a marginally stronger outlook. The growth will be led by India at 13%, closely followed by Indonesia and China at 10%.

“On current forecasts, we expect by 2020 that the value of inbound tourism from China will exceed the entire inbound international tourism market as it stood in 2000,” Merzeo said.

For domestic tourism, the story remains one of resurgent leisure travel, coupled with a transitioning economy and a corporate travel profile slowly re-orientating to the nation’s south-east. With economic conditions expected to strengthen over the next two years, this points to a solid outlook for domestic travel with domestic trips forecast to grow by 3.3% p.a. and visitor nights to grow by 3.2% p.a. on average over the next three years.

A number of demand-side factors, including shifting corporate travel trends, historically high international arrivals growth and the increasing use of non-traditional accommodation options, are bearing heavily on the outlook for hotel markets. However, the single biggest influence on the performance outlook is supply.

Merzeo said: “After years of record occupancies and rising room rates, investors and developers have finally responded. The sizeable development pipeline which has emerged in Perth and Brisbane and which saw large additions to inventories in 2016 is being replicated in markets such as Sydney, Hobart and Melbourne, albeit to a lesser degree.”

Over the next two years, another 12,800 rooms are expected to come online, resulting in the nation’s hotel supply growing 2.5 times faster than its long term average rate. In aggregate, Australian stocks are expected to expand by 122 properties and 15,800 rooms to December 2019.

The total pipeline of tourism-related investment stands at $29 billion, up from $17 billion three years ago. Two-thirds of the investment pipeline is accommodation.

Merzeo said: “Yes, demand growth will still outpace growth in supply nationally. But the gap between the two has narrowed markedly over recent years and the number of markets where supply growth is outpacing demand has increased.”

Room rates are expected to grow at an average of 2.5% p.a. for the next three years to $170 per night, chasing the 10 year historical average growth rate of 2.6%, while revenue per available room (RevPAR) is expected to grow by 3.1% to a national average of $123 by 2019. Markets enjoying recent buoyant performance such as Hobart, Melbourne and, to an extent, Adelaide, have now established a solid pipeline of hotel developments, which will alter the demand/supply dynamics over the medium term.

“In a clear demonstration of the economics of hotel development at work, investors have clearly responded to the commercial opportunities in these markets,” said Merzeo.

Perth and Brisbane hoteliers will continue to feel the double-pinch of increased competition from new entrants, along with moderate demand growth compared to the mining boom peaks of five years ago.

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