Time to gear up hotels market as tourism picks up on dollar’s decline

The capital city business travel markets and accommodation in the mining areas have been the strongest sectors. But demand ­associated with tourism, both inbound and domestic, has been dismal. The collapse of demand in Cairns is a classic example. Similarly, overseas student education and associated accommodation has weakened significantly in ­recent years.

All that will change. Mining investment will be much lower, ­affecting the regions and the capital cities which service those ­regions. And the lower Australian dollar will boost domestic trade-exposed industries such as tourism, both inbound and domestic, and overseas student education.

Non-mining business investment will be strong, boosting services sectors in the capital cities.

In the regions, tourism demand has been sluggish for a long time. Most hotel operators, including large, small and B&B operations, have been struggling to survive.

Australia remains an attractive tourism destination, but the strength of the dollar made us expensive compared with overseas destinations. Overseas tourists planning travel often chose better value for money destinations than Australia. And Australian tourists have been travelling overseas rather than to relatively expensive domestic locations on the coast or inland. Even the weekend away has become too expensive.

It’s all about the strength of the dollar. It’s too high to allow a competitive domestic industry. It’s a classic problem of our export (inbound tourism) and import-competing (domestic tourists) industry in the face of the high dollar. Already, even with only a moderate decline in the dollar, overseas tourism has picked up pace. As the dollar falls further, the local industry will benefit from increased ­demand by both overseas and domestic tourists. That may mean substantial investment in remediation and upgrading of facilities, which have been neglected for some time.

The upshot is that, five years from now, the tourism industry will be in a strong growth phase. On the other hand, until recently, the accommodation industry has been struggling to meet demand in mining regions. The surge in fly-in, fly-out workers to mining areas created an enormous boost to ­demand, not just for accommodation, as we fed, clothed, housed, ­entertained and transported these workers on a regular basis.

Already, the number of FIFO workers has dropped sharply. Many of them were working on mine expansions and/or new mining projects. And this is just the beginning. We expect construction associated with mining investment to fall by 40 per cent over the next four years. Although production will continue to grow strongly, they employ more people in the construction than the operational phase. There is a lot worse to come, not just for accommodation, but for the strength of those regions.

Some regions are underpinned by both tourism and mining. But those relying on tourism have been slaughtered. While those servicing mining areas have boomed. Five years from now, the shoe will be on the other foot. Mining-related demand will have plummeted. And, given a lower dollar, tourism demand will have soared.

Meanwhile, in the cities, the hotels markets servicing business travel have been extremely strong with the boost to occupancy rates leading to increased room rates, rising revenue per available room night and hotel profitability.

But most of the shortage of hotel space has been due to limitations on supply rather than strong demand. Development halved following the GFC. Certainly demand was boosted by the mining boom, particularly in Brisbane, Perth and now Darwin. But the non-mining sectors have been weak since the GFC. While business travel has been solid, it has been unspectacular. The problem was that supply didn’t keep up to moderately increasing demand.

With tight supply, city business hotels have been booming for the last three to four years, and only now are we seeing a supply response. But it has gone over the top, sparking what can only be described as a boom in hotel building, primarily in the cities. Demand will rise as the economy strengthens, but mining-related travel will weaken. The strength of building will end up creating oversupply — a classic cycle.

Meanwhile, we haven’t really started to build for the tourist market. While that’s understandable given the weak demand, as the dollar falls and demand increases, we’ll end up getting caught short. This is not a bad time to position into that upswing. This economy will look very different in five years time, creating swings and roundabouts for the hotels markets.

Source: The Australian - 18th September 2014