AA (Vic) held a highly informative Hotel Market and Economic Outlook event recently at Sheraton Melbourne Hotel. Three of Australia’s most prominent industry analysts provided attendees with comprehensive insights into the pace and scale of our visitor economy’s continued post-pandemic recovery.
MACRO-ECONOMIC ENVIRONMENT
Adam Donaldson
Commonwealth Bank of Australia
- Global economic outlook increasingly optimistic, with strong continued post-COVID recovery;
- The US economy provides a good economic ‘health check’ for other world markets;
- US inflation has ‘cooled off,’ now within the targeted Federal Reserve range (2% annualised).
- Despite global political volatility, US unemployment remains at record lows (3.7 per cent).
- The RBA recognises that ‘multiple shocks’ impact Australia’s economy and create challenges;
- Lack of housing supply, competition and supply chain issues and geopolitical tensions bite;
- Australia is “on the cusp” of a positive economic turn, led by the revival of the US economy;
- Australian is more impacted by interest rate rises, given a high proportion of fixed rate loans and higher debt ratios than US, Canada and USA;
- As AUS inflation further cools, ‘rapid fire’ interest rate cuts not expected, rather circa 1.5% over next 12-18 months;
- AUS Government ‘tax take’ has risen sharply in the past two years – more jobs, more prosperity, thus more tax revenue!
- Recently announced tax cuts give AUS consumers some relief, but aren’t expected to cause a massive stimulatory impact through increased spending;
- Real AUS household disposable incomes currently negative and the worst they have ever been, given the myriad of rising costs including interest rate payments;
- Many AUS households now ‘drawing down’ on savings made during the pandemic;
- AUS households cutting spending in predictable areas. Eating out, holidays and events held up well during deep COVID shutdowns, but are slowing now;
- Discretionary spending in AUS declining, but rapid population growth boosting aggregates;
- Hotels and hospitality had good ‘catch up spending’ but are obviously discretionary;
- Food and beverage, hospitality and recreation spend easing. Flights and travel bookings strong but accommodation spend slowing;
- Returning students are the main drivers of population growth, but increased housing demand adds to rising rents and house prices;
- Business surveys show confidence is subdued and demand continues to moderate;
- Forward product and service orders and employment intention weaker. It is still challenging to find experienced staff too.
- That said, while demand for workers is falling it remains above pre-COVID levels;
- Labour market shift away from full-time to part-time jobs still apparent, with multiple jobs to meet bill repayments;
- Significant wages growth in recent years – minimum award wage increases of 5.75% in 2023 had an impact. Accommodation and food services wages increased circa 5.5%.
- AUS annual inflation running circa 4%. The question being will targeted rates (between 2-3%) be reached?
- Insurance, rents and electricity costs are holding inflation rates up and are not subject to changes in interest rates;
- RBA Governor notes AUS inflation rate expectations are still not consistent with targets. RBA could cut interest rates before they get into the target band;
- Key 2024 AUS economic themes – below trend growth continues; unemployment rates will gradually lift; inflation to fall; wages growth to moderate; home prices to rise (circa 5%); tax and possible interest rate cuts (0.75% in Q3/Q4 2024 and 0.75% in Q1 and Q2 2025) but mortgage holders still under pressure, thus discretionary spending adversely impacted.
Tourism and travel trends
Adele Labine-Romain, Deloitte
- To YE September 2023 around 975m tourists travelled internationally, representing 75% of 2019 levels;
- AUS international tourist arrivals back to 75% of pre-pandemic levels, but trailing global trends (YE: November 2023);
- AUS hotel occupancies back to 95% of 2019 levels, 95% of international airline seat capacities and 94% of domestic seat capacities (YE: Nov/Dec 2023);
- Strong AUS domestic recovery compensating for still returning internationals – domestic expenditure at 136% of pre-pandemic levels and 95% of trips taken (Sept. 2023 vs 2019);
- Regional AUS domestic visitor spend stronger growth than capital cities (140% vs. 132%);
- AUS travellers still willing to pay more for premium regional experiences than was the case, pre pandemic;
- AUS domestic recovery is not consistent across different categories though. Holiday travel has fully recovered, with spend up 48% (Sept. 2023 vs Sept 2019). VFR-travel almost back to pre-pandemic levels (trips) with spending 36% up. Business travel in reasonable shape, but trailing (spend up 17% and trips down by 15% on 2019);
- International travel share vs. pre-pandemic mostly still down – holidays (71% of spend and 57% of trips), VFR (121% of spend, 90% of spend), Business (95% of spend and 69% of trips), and education (84% of spend and 69% of trips) – Sept. 2023 vs. Sept. 2019.
- Recovery in Victoria continues to ramp up – spend at 117% ($37b vs. $32b) and visitor numbers at 93% of 2019 levels;
- Victorian domestic tourism spend is currently $31b (137%), with trips at 94% of 2019 levels;
- International visitor arrivals to AUS have grown from 8% of 2019 levels (Jan 2022) to 81% (Nov. 2023) but have plateaued since March 2023;
- International VFR travellers to AUS reflect a strong and sustained recovery, while holiday and business travel volumes have plateaued at circa 70% of 2019 levels;
- International traveller returns for conventions has been the most volatile AUS travel segment, ranging between the mid-60% – low 80% range across 2023 months;
- AUS outbound international departures have been strong and steady across 2023, ranging between 79% – 97% (Nov. 2023) of 2019 levels;
- Australians are a nation of travellers though – spending $4,180 pp and $2,600 pp (YE: Nov 2023) on domestic and international travel;
- Domestic overnight trips and expenditure across AUS are holding up well despite a strong return in outbound international travel from March 2022 – September 2023;
- Despite cost-of-living pressures AUS consumer intentions to continue to spend on travel have remained consistent and stable across Dec. 2022 – Dec. 2023);
- If anything, intention to spend on recreation, entertainment, restaurants and leisure has shown a small increase, when comparing Dec. 2023 vs. Jun. 2023);
- Unsurprisingly, higher income households are driving the strength of domestic travel spending in AUS. They are less impacted by cost-of-living pressures, more able to absorb costs and continue to travel;
- Despite these pressures, domestic and international travel intentions for AUS travellers have remained consistent across the period May 2022 – Dec. 2023;
- Travel intention for consumers in many inbound AUS markets has moderated, with the exception of China and India;
- Travel is resilient despite increasing cost pressures. Corporates are taking fewer, more focused and longer trips than pre-pandemic;
- 2024 travel trends – increased seat capacity will soften international prices; blended travel experiences (business mixed with leisure travel) drive employee engagement; employee wellbeing a key issue; Gen-Z push for tech and sustainability; super commuting emerges are a new category and employees want ‘leisure-like’ control;
- AUS traveller likelihood to travel for business in the next three months reached a post-pandemic high in August 2022 (73%), but has fallen and plateaued since then (59% in December 2023);
- Domestic overnight travel (trips) forecast is expected to continue to perform above 2019 levels across 2024 (118%), 2025 (125%) and 2026 (131%)
Key hotel performance metrics
Matthew Burke – STR
- Hotel occupancies across the world have largely rebounded to 2019 levels. The Central American region is leading the way (107% of 2019), while the Australia and Oceania region (A&OR) is at 94%;
- ADRs (full year 2023) for A&OR are 5% up on 2019 levels at $171 USD;
- Australian occupancies are circa 5% down on 2019 levels, while ADRs are up circa 28%;
- Melbourne hotel occupancies are up 14% on 2022 levels (Sydney up 20%);
- Darwin, Hobart and Gold Coast reflect smaller hotel markets that over performed during COVID, but are now back to traditional norms, -13%, -3% and -2% on 2022 levels respectively;
- Capital cities performed more strongly in 2023 vs. 2022. Regional centres are now reverting back to traditional means. New room supply up 5-6% nationally;
- Occupancies across regional Australia are softer than post-COVID peaks, but 2023 results still reflect some of the best results achieved historically;
- Melbourne ADRs consistently 15-20% higher than historical averages, across all of 2023;
- Melbourne hotel room supply increased by between 12-15% across 2023 (vs. 2019), while demand returned to 2019 levels;
- Significant differences in new hotel room supply across 2023 (circa 14% for Melbourne and only 5% for Sydney) contributed to Sydney’s ADR growth being larger than Melbourne’s (circa 22% up vs. circa 18% for Melbourne). Sydney, of course, also started from a higher ADR base;
- ADRs aren’t heavily influenced by Australia’s prevailing inflation rate (falling inflation doesn’t result in rising ADRs);
- GOPPAR across the Asia-Pacific region is higher, however GOP% returned to owners has barely moved, given increased operating costs. ADR growth is the only way to drive more hotel profitability;
- Half of Melbourne’s new hotel room supply has already been absorbed (28% new supply since 2019 and circa 14% new demand). ADR growth is most prevalent in the Upper and Upper Mid-Scale hotel categories, up circa 20% on 2019 levels;
- Hotel occupancies for properties in Melbourne’s CBD has become more consistent across properties, when comparing 2023 vs 2022 performance;
- All parts of Melbourne are showing similar patters with ADR% changes (2023 vs 2022);
- Melbourne midweek hotel performance has been consistently better across 2023 vs. 2022;
- Melbourne lags behind all other Australian capital cities on the percentage of workers who have returned to the office (only 60% vs. pre-COVID). Lots of room for growth and upside here;
- ADR growth for Melbourne is starting to soften. There is renewed pressure on weekends to drive ADR performance;
- Most new hotel room supply for Melbourne has come in the ‘Southbank and lower streets’ area vs. ‘Parliament and upper streets’ area – 30% up vs. 10% up respectively. The ability for ‘lower Melbourne’ to drive rate is not as strong currently, given more competitive tension there;
- The importance of events, of all kinds, is reflected in related significant upticks in occupancies when these occur;
- Forward booking forecasts are encouraging, with more occupancy currently ‘on the books,’ across all time periods, that the same time last year;
- Whilst Taylor Swift’s concerts did not bring the biggest occupancy levels that Melbourne has ever seen (Ed Sherran and Billy Joel were better), they did result in the best ADR and RevPAR levels Melbourne has achieved;
- Forward data also reflects occupancies don’t dip too much across Melbourne’s winter season, so good seasonal ‘evenness’ of demand is apparent. Occupancies will rebound to 2019 levels this year.