Tourism Lobby Turns Positive Into Negative

What do you want first – the good news or the bad news? Ok, we’ll go with the good news, get it out of the way. Capital city hotels are doing great business, especially mid-week, and room rates are rising.

Now for the bad news – capital city hotels are doing great business, especially mid-week, and room rates are rising. Yes, in the tourism industry, the good news and the bad news are often the same thing.

That is if you listen to the tourism lobby groups and industry business leaders, who have a great knack of taking a piece of good news and turning it into a negative.

Or maybe that’s just lobby groups generally. Good news is bad, bad news is good. Spin it hard.

Confused? I am.

Anyway, the Tourism & Transport Forum recently reported that average occupancy in the June quarter for capital city hotels was 78.5 per cent while revenue per available room (RevPAR) increased 8.5 per cent year on year.

Sydney’s been the best performer followed by Perth, and the other cities aren’t far behind.

Make no mistake. This is great news. Hotels have had their issues over the past few years – business crashed post-GFC – and it’s taken a while to recover.

Now surely is the time to make hay.

Yet the TTF chose this moment to complain about a situation that’s actually good for its members.

I’m referring to the lack of hotel development, which is great for the incumbents, the investors who took a risk, invested in a notoriously volatile sector and are now reaping the dividends.

There are a few good years ahead for them with very few new hotels planned in the major cities.

Why no developer action?

The industry refrain is that the numbers still don’t stack up, that there are currently still better uses for capital, although construction generally seems to be in a hole.

That said, the TTF believes lack of new hotel development to be a bad thing because it limits the potential for future tourism growth.

So it’s calling for government assistance.

It believes hotel developers should get tax breaks through a capital works deduction incentive, while there should also be swifter depreciation for furniture, fittings and equipment to stimulate the refurbishment of existing hotels.

“The current tax system does not encourage investment in both new hotel builds and refurbishments, which we think needs to be addressed,” says TTF Chief Executive John Lee.

Now we get to heart of their spin – tax breaks for poor old property developers, something that never really plays well and doesn’t really do the sector justice, so you’ve got to say we’re doing it tough.

But, hang on, hotels have in fact out-performed other property markets.

The PCA/IPD Hotel Property Index, which collates data from 97 Australian hotels, recorded a return of 16% for the 12 months to June 31, comprising 8.8% income and 6.7% capital growth.

Over the same period the overall commercial property market delivered 10.6% total return.

Meanwhile, Tony Ryan, Principal of Ryan Lawyers, claims that over the past six years “contrary to popular belief, hotels have as similar volatility as prime office but a significantly higher return”.

Now that really is excellent news but not good enough apparently with potential developers unable to access the debt necessary to fuel the building of new hotels.

At this point the obvious question is – what is the performance threshold that has to be breached for investors to return to the hotel market.

Is it when average room rates for say the better five-star properties, which have out-performed the market in recent times, reach $200 or $250 or even $300?

The problem is no-one can say. There is a real lack of transparency on this key issue.

And until the industry is able to provide that kind of detail it will look like the boy who cried wolf.

Ends.

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One thought on “Tourism Lobby Turns Positive Into Negative”

  1. The topic becomes confused because there are two issues that need to separated. Existing vs new hotels.

    The return on existing hotels has been good and will continue to be good as they were nearly all acquired at a discount which was substantial.

    Should there be incentives for new hotels and when are they developable?

    The first is a social/political issue about tourism infrastructure and I think there is a case for it no different to airport and road infrastructure. It can be informed by the second where I suspect a level of incentive that benefits the community is acceptable but not one that transfers wealth to evil developers.

    DHR has a well advanced development index methodology that indicates where rates need to be in each city to justify development for each type of hotel and compares them to where they are now together with a prediction of when the trigger would be reached. We have put the project on hold because the initial results were fairly far from the green zone and there is little debt or equity capital interested in new build vs existing. We decided to put our resources elsewhere but may revisit.

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