By Martin Kelly

HOTEL room rates may increase by up to 45 per cent in key Australian markets over the next three years as the industry enters a golden period of prosperity characterised by high demand and low supply.

Yet analysts say the imminent revenue bonanza – sparked by occupancy rates regularly topping 80 per cent – may not be enough to trigger the next hotel development cycle.

That’s because construction costs are rising just as quickly, thanks to high land prices and increasingly expensive materials, setting the scene for a remarkable era of stability in a historically volatile industry.

One operator told staff in an internal briefing: “All economic indicators suggest that the hotel sector will continue its positive performance for the rest of the decade.

“The era of over-supply that plagued the industry has now balanced out … (and there is) a more realistic attitude towards new supply, with the emphasis more on upgrading existing product than building new hotels.”

As a result, there seems no end in sight to recent sharp room rate increases.

During the March quarter average room rates rose strongly for the third consecutive quarter. Perth increased 16 per cent to $127, Canberra 12.8 per cent to $129, Brisbane 9.8 per cent to $137 and Sydney 8 per cent to $182.

Operators say this momentum has continued, athough they warn that the poor performance of inbound Japanese tourism will hurt softer markets such as Cairns.

Elsewhere, the situation could not be more different with Robert McIntosh, Director Asia-Pacific for CBRE Hotels, forecasting that rates in key markets will rise by between 10 per cent and 15 per cent per annum, barring any unexpected economic shocks, for the foreseeable future.

McIntosh says the average national room rates may reach historic highs within the next 12 months, and is particularly positive on the major business markets of Sydney, Melbourne, Perth and Brisbane.

Significantly, he says the traditional pattern of room rates lagging occupancy by around 18 months may soon be shattered given the continuing friction between demand and supply.

“Our view is that the glass ceiling on rates is likely to be broken in this cycle,” McIntosh says.

Karen Wales, Vice President of Research at Jones Lang LaSalle Hotels, also see further significant price increases in Sydney, “while obviously Brisbane has been very strong and there’s no reason to suggest this is going to change.”

Simon McGrath, Vice President – Australia, Accor Asia-Pacific, says his company is seeing strong demand around the country.

“In the past 12 months hotels have generally been getting double digit room rate growth across all markets – now people are confident about asking for $200 or $300 rates or greater,” he says.

A major trend, according to McGrath, has been the shift to dynamic room pricing away from contracted rates and significant allotments to big wholesale or corporate clients.

As a result, rather than being set months in advance, rates are flexible depending on demand, which hoteliers are better able to forecast thanks to sophisticated yield management technology.

He says hotels are also looking more critically at their contracted base business, which in the past could account for up to 50 per cent of occupancy, to free up rooms for higher-rate business.

The nature of contracted business is also changing. “The key in many markets at the moment is inventory – what are people prepared to pay for access to inventory?” McGrath says.

He believes that rates will keep rising strongly, leading to a situation “sooner rather than later” where new hotel development can be justified in certain key markets.

However, the hotel development community, such as it is, remains cautious.

Dean Dransfield, industry analyst and Director of Dransfield Hotels and Resorts, does not believe there will be a rash of new accommodation development any time soon thanks to rising construction costs.

“Every day it gets further away not closer,” Dransfield says, adding while the property development and investment community is closely monitoring the situation, the numbers never seem to add up.

“They are aware of the potential opportunities, the future of occupancies and room rates, but are very realistic about construction costs … the dollars are going everywhere but hotels.”

He says the hotel investment and development market has changed dramatically since the last construction cycle.

“You look at the players who did things in the past and they don’t exist any more. It’s all fund mangers or bankers now, there are not many entrepreneurs left. Conversely, though, there are lots of people looking to invest.”

This demand is likely to drive the yield on which hotels are sold down from already historic lows of between seven per cent and eight per cent, according to McIntosh.

“But at the moment hotels still look like pretty good value,” he says, adding that five and four star hotels in Sydney are particularly attractive.

Travel Trends: August , 2007 

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