Hotels too hot for developers

Author: Lisa Allen
Date: 12/11/2009
Publication: Australian Financial Review

The traditional volatility in the hospitality sector, exacerbated by the global financial crisis, means developers are turning their backs on hotel projects.

At Noosa on Queensland's Sunshine Coast, a $400 million resort development is in receivership with more than half of its million-dollar villas unsold.  In Wollongong, south of Sydney, the mortgagee-in-possession owners of a 90 per cent-completed hotel have spent the past year searching for a buyer.  In the Brisbane CBD, badly needed five-star hotel complexes valued at billions of dollars have been scuttled by the credit crunch.

Australia's hoteliers are recording some of the highest occupancy levels in the Asia-Pacific region, but developers are shying away from building accommodation because of the sector's volatility.  Plunging room rates, lack of finance and the fact that returns are better from building residential and office projects have driven developers away from the hotel sector.

"The simple answer is right at the moment there are a lot of [hotels] that are not worth more than they cost to build,"  Dransfield Hotels & Resorts managing director Dean Dransfield says.  "Some of the other building options are more attractive, like residential and commercial."

Developing a hotel and securing a hotel manager is such a complex process that few Australian developers are capable of taking on big projects, Dransfield says.

"Developing a hotel is a more complicated development process [than an office block] and the number of participants in that space is much less than for alternative buildings," he says.

Dransfield Hotels provides advice to two of Australia's largest developers of residential, commercial and industrial projects.

"They do not have the skills to develop a hotel," Dransfield says.  "It is such a small part of their prospective market.  It is too hard.''

For these reasons, the serviced apartment development model has been favoured over large hotel developments in recent years.  However, many of these projects, started by lower and middle-tier developers, have gone broke.  "It's easier to get started with these projects but [they are] harder to run,'' Dransfield says.

If new projects keep drying up, there will be few accommodation offerings available for cashed-up American, British and Asian business tourists beyond ageing four and five-star hotels.

The number of hotel rooms proposed for Australian cities is at a five-year low, the Jones Lang LaSalle Hotels Development Register shows.  Since January, the number of proposed hotel rooms has plummeted by 66 per cent.

"At just $11 million in June 2009, approvals were at their lowest level in any month since records began in 2000," the report says.

The lack of hotel developments comes as Sydney, Brisbane and Melbourne record the second, third and fourth-highest hotel occupancy levels in the Asia-Pacific for the year to August, Deloitte says.

Sydney claimed the second-highest occupancy in the region for the year to August, it says, with 75.9 per cent of rooms occupied, down from 79.7 per cent for the previous corresponding period.

Brisbane also ranked well with 75.8 per cent of its accommodation occupied, down from 79.8 per cent.  Melbourne hotels were 74.1 per cent occupied, down from 78.5 per cent.

"This is a relatively good result for Sydney, Brisbane and Melbourne given the performance of the other cities in the Asia-Pacific region," Deloitte Real Estate group lead partner Ian Breedon says.  "Hotel occupancy levels dropped by approximately 5 per cent in these Australian cities but they were nowhere near the double-digit drops experienced by other Asia-Pacific cities.''

Over the same period, Bangkok hotels sustained a 28.7 per cent drop in occupancies.  Ho Chi Minh City's hotels copped a 26 per cent drop over the same time frame.  Jakarta's hotels were down 10.2 per cent and establishments in Singapore and Kuala Lumpur suffered falls of nearly 12 per cent.

However, Australian hotels have been plagued by falling revenues for some time.  Yields at Sydney hotels are down 15.2 per cent with average room rates plummeting 10.7 per cent to $159.44 in the June quarter compared with the previous corresponding period, Tourism & Transport Forum figures show.

Melbourne hotel yields dropped nearly 13 per cent to an average room rate of $157.98 over the same period.

On the business events side, Business Events Sydney chief executive Jon Hutchison says there is no question that the global financial crisis has taken long-haul travel off the agenda, particularly for business travellers.

The number of business events hosted by Sydney dropped from 37 involving 129,000 delegate days in 2007 to 33 involving with 124,260 delegate days this year, he says.

Despite the rising dollar, Business Events Sydney expects 2010 will be a record year for Sydney, which will host 39 events and 300,000 delegates.

One of the largest of these events will be the Lions Club International Convention, which is expected to draw 25,000 people.

And the Seventh International Orthodontic Congress is expected to host 6000 people.

However, the company's chief operating officer, Lyn Lewis-Smith, warns: "The rising dollar will have an impact in future years if it is sustained at this level or goes higher."

The travel industry has long welcomed business and convention delegates.  These delegates spent an average of $234 a night last year, compared with $163 a night for other travellers, Tourism Australia research shows.