1. Q4
2011
Australian Hotel
Market Outlook
Author
Rutger Smits
Consultant

2. They don’t have their own currency or central bank,
The Deloitte Australian Hotel Market Outlook so markets and policymakers can’t respond through
– Q4 2011 reports on the performance of the a mix of low interest and exchange rates. As a result,
Australian hotel industry to September 2011, investors fear defaults, and so demand high interest rates.
based on data until the June 2011 quarter as And those rates make default more likely, meaning a
published by the Australian Bureau of Statistics vicious cycle is developing – one that will affect banks too,
(ABS), and extrapolated through information as they hold a lot of government debt. The risks are high:
collected by STR Global. even if German taxpayers pay up there is still a chance the
Euro goes kaput.
Based on a correlation of this historic market
performance with state-by-state indicators for Luckily, most global growth was coming from emerging
sectoral performance as reported by Deloitte economies anyway. That means that, so far, the woes
Access Economics, we also present a forecast for of Europe and the US are something of a blessing
each market until year-end 2014. The economic in disguise. Yet although emerging economies can
commentary providing the background for this boost their consumer and public spending in the event
outlook is derived from the Deloitte Access of more rich-world troubles, that’s at best a partial
Economics Business Outlook – September 2011. offset. The likes of China and India remain vulnerable to
developments in the US and Europe, and their ability to
Subscribe to Deloitte Access Economics keep growing strongly is limited by their inflation and
publications online. by the size of their government deficits. The upshot is
that global growth peaked in 2010 and, although we
don’t expect a ‘financial crisis rerun’, growth may be
GFC2: good or bad news? well below trend in 2011 and 2012.
Never have the ‘two speeds’ of Australia’s economy The Australian economy
been in greater evidence than over the past year. You know all about what is going wrong: horror
Commodity booms are characterised by strength in headlines are smashing confidence, fearful families
exchange and interest rates, and those effects have aren’t spending, stimulus spending has done its dash,
been further magnified by the ‘recession’ gripping the housing construction recovery has turned to ashes,
the rich world. In turn, the deadly duo of exchange and a series of sectors – with manufacturing, tourism
and interest rate strength has played havoc with the and international education heading the list – are
conditions faced by a number of Australian industries, increasingly failing to deal with what, until recently,
most notably the tourism sector. was the relentless rise of the $A.
Yet now the threat of a renewed global financial crisis is Mining remains the key driver of business investment
playing out – could that be a sectoral saviour for tourism in Australia. Indeed, the latest private capex survey
operators, international education and manufacturing? released by the Australian Bureau of Statistics suggests
There is certainly some potential for that. After all, that most of the growth and more than half of the
financial markets move very fast, so the potential for level of business investment expected to take place
some pain to abate is clearly there. in 2011–12 is mining-related. Unfortunately, resource
However, it may be a case of ‘be careful what you booms bring with them two side effects: the exchange
wish for’. Were a renewed financial crisis to take hold rate goes up because commodity prices do the same,
– not our central view, but a possibility – then some and interest rates go up as booming export earnings
of the sectors in the firing line of current conditions lift national income and demand. That deadly duo
could find themselves simply jumping out of the frying of strength in interest and exchange rates hurts the
pan and into the fire. After all, the first global financial non-resource sectors.
crisis generated the fastest ever recorded collapse in Interest rates
Australian manufacturing output, so a second crisis We still see a possible rate rise – albeit not until 2012.
wouldn’t exactly be all beer and skittles. We know that could be wrong and that you don’t
The global economy: will Europe blow? think there will be a rate rise. Chances are you agree
The self-inflicted wounds of Europe and the US are hurting with markets that times are tough and that rates will
global growth, and could drive them back into recession. fall further. Yet although it’s true that times are tough
The earlier US stimulus is subsiding, and the poor for many businesses and families, that has more to
US debt deal includes cuts that arrive too early. do with the gaps in Australia’s ‘two speed economy’
In Europe, the main threat to the globe, debts in Greece, than it does with the average experience. We have many
Ireland and Portugal will never be repaid by anything sectors doing poorly, but a handful of sectors that are
other than German taxpayers as those nations are stuck really pumped up, with the business investment agenda
in a common currency zone. in the resources sector jumping out of its skin.
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3. Hotel Market Outlook Q4/2011
What looks likely to hold the miners back is a lack of supply Yet, interestingly, overall growth rates in consumer
rather than any lack of demand. Indeed, skill shortages will spending are currently close to their longer term
be an ongoing story in the next few years, and those skill average. However, more of that is leaking to foreign
shortages always carry inflation risks. Moreover, the trigger internet sales, and is also getting chewed up in things
for rate rises could be closer than you think in part because that the retailers don’t see, such as consumer spending
our productivity performance has been so pathetic. by Australians on higher rents and higher utilities
charges, as well as on the increased consumption
The path of interest rates from here is almost entirely
on a range of services such as health.
Europe driven. If Europe stumbles badly, the Reserve
Bank has shown that it is willing to respond rapidly Consumers have also been spooked by what is
and could cut rates further. If not, then it may not happening in the headlines – nations in Europe
be too long before rate rises are back on the agenda. seemingly on the brink of bankruptcy, US politicians
The drum of underlying price pressures is still beating, who can’t agree on the time of day, and the highly
and while it is clear that the Reserve Bank is watching charged political debate here at home. So there is a
global developments with eagle eyes, they may still risk that families will save more in the next little while
end up having to have to raise rates at some stage. because they’re scared rather than because higher
interest rates will make them save more.
Exchange rates
At their simplest, exchange rates may be thought of as At the same time, changed regulations pulled the
relative prices across nations. Australia’s relative price is rug out from underneath foreign student numbers.
well above historic norms because so too are (1) prices Education earnings were down 13% through the
for the things we sell, especially industrial inputs to Asia course of last financial year as a result and – despite the
such as coal and iron ore, and (2) the ‘price’ (interest useful response to the new Knight report – they remain
rates) paid on Australian markets versus the interest rates under pressure given that the average length
available in the hard hit economies of the rich world. of course (the ‘product cycle’ in education) is
something like three years. That means the falls
The clouds over Europe and the globe are big and black,
in student starts are showing up gradually in overall
but the $A will continue to ride high while commodity
education export earnings, implying that there’s
prices and local interest rates do the same. And although
more bad news ahead.
there is no certainty about the direction of the next move
in Australian rates, they don’t look likely to move much. That said, there are some responses underway, including
to the Knight report – which provides a review of the
That said, the $A won’t touch the sky forever. In the
Student Visa Program. For example, the Government is
short term, global developments will be the determinant.
reducing the amount of money students must have in
Looking a little longer term, interest rates will rise more
the bank before coming to Australia, and will also allow
abroad than here, while commodity prices will ease
students to stay for work experience once they have
as global mineral supply starts to narrow the gap with
completed their studies. That should help the outlook.
galloping demand. Subject to those global caveats,
these forecasts see the $A maintain some strength in the Economic impacts for the Tourism,
coming year, before then gradually shedding some of the Hospitality & Leisure sector
excess pounds it has put on in recent years. Hotels – particularly in the nation’s CBDs – have been
doing pretty well of late. That is because business travel
Outlook
demand is up, and the gains on that front have been
For now, our central view may be summarised as
sufficiently strong to encourage operators to edge up their
‘China’s strength dominates the bad news out of Europe
room rates. Yet that is one of the few points of light amid
and the US’, meaning that the sectoral landscape
an otherwise distressed landscape for the tourism sector.
should basically show more of the same – great growth
potential in engineering construction and in mining, The high flying $A has seen Australia take flight in
with spillover strength to business services, but worrying its wake, with the number of outbound Australian
news in most other industries. Such an industrial travellers doubling in the past seven years. Across the
landscape – with its big winners and many losers – same period, inbound travel is also up – but not by
may remain the dominant one for the moment. much, and the lingering weakness in tourist flows has
led to the tourism sector not investing too much in new
Key sectors
rooms, facilities and better attractions.
Those hardest hit by current conditions are Australian
retailers, with their bricks and mortar offerings being The latest TTF-MasterCard Tourism Industry
increasingly shunned since the $A touched stratospheric Sentiment Survey reveals a continued downward
highs and that strength has combined with advances in trend in tourism industry sentiment, with the mood
online technology to provide punters with cheap and of operators approaching the lows of the global
cheerful online alternatives compared to their spending financial crisis.
patterns of the past.
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4. Tourism operators are bracing for continued challenges, The Tourism Forecasting Committee (TFC) has recently
with the exchange rate being an all-round threat, released the 2011 Forecast Issue. Finally recognising
whilst many regional centres in particular are experiencing that reality is not quite following their predictions,
a drain of labour from tourism and hospitality to the the outlook has now been substantially downgraded
mining sector. For many, the strength of the $A has from the last forecast, with expectations for
impacted the appeal of Australia as a tourism destination international arrivals curtailed for this year and next.
and reinforces the need for effective marketing, support
• Overall tourism consumption is forecast to decline
for major events and new tourism product development.
by 0.3 per cent in 2011 (had been expected to
grow 0.4 per cent)
On the bright side, the Federal Government has been busily
trying to extend Australia’s bilateral aviation agreements • International visitor arrivals are now forecast to grow
– including most recently one with China. That may yet just 0.4 per cent in 2011 (a downward revision from
help with inflows of visitors. So too (over time) will the 3.1 per cent in previous forecast), with stronger
rise of incomes in China and elsewhere among emerging growth from Asia (+3.2 per cent) offsetting declines
economies. There will eventually be a major market among from markets outside Asia (–1.6 per cent)
our neighbours. In the meantime, however, this is a sector
• Domestic visitor nights are expected to decline
which is clearly on the wrong side of the high interest and
0.3 per cent in 2011 (in line with previous forecast)
exchange rates of recent times, and we don’t expect that
its modest recovery of late will generate more momentum • Outbound departures will remain strong with
in the near future. Although there is a brighter longer term 9.2 per cent growth (slightly lower than previous
future ahead, and although the European crisis offers hope 10.1 per cent growth).
of an early fall from grace of the $A, chances are many
The tourist deficit is now expected to reach almost
parts of recreation have to crawl through the charnel house
1.9 million by the end of the year (up from 700,000
of currency strength for a while longer yet.
just two years ago) and will surpass 2 million in 2012.
Visitor flow
Australia HMO Q3 Slides.xlsx
Whether you are in Disneyland or Dubai, Aussie accents
70.0% $200
are increasingly common as the pumped up $A allows
68.0% $180
Australians to venture forth from Down Under to 66.0% $160
foreign fields. We are doing so at a very rapid rate, 64.0% $140
and one that shows no sign of slowing growth. But that 62.0% $120
impact on imports has its flipside on exports. Although 60.0% $100
traveller numbers arriving into Australia have edged up 58.0% $80
of late, they remain little different to where they were 56.0% $60
five years ago. There will be big long term gains to
54.0% $40
52.0% $20
Australia’s tourism sector from rising incomes in Asia,
50.0% $0
but the early impact of that same phenomenon – the
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rise of Asia – has been a matching rise in the $A which, Room Occ% trend (LHS)
Room Occ% trend (LHS) Room RateRate trend (RHS)
Room trend (RHS) RevPAR trend(RHS)
RevPAR trend (RHS)
despite a recent loss of altitude, has been keeping the
Both our occupancy outlook as well as our average Australia
world away from our doorstep.
room rate projections for the last two years of the
Whilst international tourism globally grew by 4.5% forecast period improved marginally, against a slightly
in the first half of this year, international arrivals to more optimistic longer term economic outlook,
Australia improved by only 0.8% in the first six months, and partly because of further delays in several new
equivalent to an additional 22,000 travellers. hotel projects. However, whilst the overall future
An additional 330,000 Australians left for foreign performance of the Australian market may appear
shores however, reflective of an increase in strong in comparison to historic results, it still hides
departures of 10.5% over the same period. a pronounced performance dichotomy between core
10,000,000
CBD markets and regional hotel and resort properties.
9,000,000
8,000,000 Overall, our RevPAR forecast for 2011 remains positive
7,000,000
with 6% growth over 2010 to $94. We have further
6,000,000
5,000,000
increased our occupancy outlook from 64.3% to
4,000,000 64.6%, along with a modest room rate improvement
over our latest forecast, growing at 4.5% over 2010
3,000,000
2,000,000
1,000,000 to finish at $145 for the year.
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Residents departing Tourists arriving Net tourist exchange
Residents Departing Tourists Arriving Net Tourist Exchange
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