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Horwath Australia Reports

Australia: New additions to guest room supply over the next two years will threaten an expected uplift in operating performance post SARS

Data released by Horwath Asia Pacific at the 2003 Australia & New Zealand Hotel Investment Conference held in Sydney has confirmed…

Data released by Horwath Asia Pacific at the 2003 Australia & New Zealand Hotel Investment Conference held in Sydney has confirmed that new additions to guest room supply over the next two years for the majority of the Australian capital cities, will threaten an expected uplift in operating performance post SARS.

Notwithstanding the global and domestic events which have negatively impacted the tourism industry in recent years, the single biggest threat to the hotel industry is continued excess room supply, said Mr Vasso Zographou, Managing Director of Horwath Asia Pacific.

Whilst crises such as SARS have had a devastating affect on the industry in recent months, particularly in Asia, the recovery period is now expected to be short term (3-12 months) – whereas an oversupplied market can take years to recover, he said.

In 2002, the Sydney market reported a net reduction in room stock of approximately 11% (1,800 guest rooms) due predominantly to residential conversions and the withdrawal of the Hilton Hotel, which is undergoing an extensive refurbishment. Whilst a further reduction in room stock is anticipated in 2003 with the proposed residential conversion of the Millennium Hotel, the subsequent re-entry of the Hilton Hotel together with a smaller hotel, will see an additional 695 guest rooms back onto the market in 2004, representing an increase of 4.5%.

For Sydney, the trading performance outlook is positive for 2003 and 2004, albeit 2004 will be dependent on the proposed timing of the introduction of the new room stock, and the strength of demand at that time.

Serviced apartments continue to dominate the 2003 new room stock additions in Melbourne, which has been the trend in recent years. 2003 will also see the opening of the Crowne Promenade Hotel (465 rooms). Whilst the reported 2004 supply additions are significantly lower than prior years, there are also a number of mooted developments, some of which may still proceed.

Accordingly the outlook for 2003/2004 remains subdued, with oversupply expected to continue to impact the market.

Despite strong occupancies reported in recent times, the Perth market has not benefited from increased average daily room rates that could be expected. Perth may lose the opportunity to increase average daily room rates as Perth will receive a 4% increase in room supply, also dominated by the serviced apartment sector.

Historically, the Brisbane market has been characterised as being relatively fragile, however, the past two years has seen both occupancy and average daily room rate growth, which indicates sustainable room supply. As there is no additional room stock proposed in 2003 and with only one additional serviced apartment property forecast to open in 2004, the market outlook is positive. Both Adelaide and Darwin represent much smaller guest room supply markets in comparison to the eastern capital cities. The considerable supply additions occurring during 2003 and 2004 are expected to result in a subdued market outlook for both cities.

The Australian hotel industry has continually demonstrated its resilience to unforeseen and often extraneous events which have an adverse impact on trading. Fortunately for Sydney, the strength in the residential property market enabled some under-performing properties to be converted to residential.

Unfortunately, this one time solution is unlikely to be available for other markets. Whilst there is a need to meet future demand expectations, there is also a need for stablisation and consolidation of guest room supply within each market, to enable both occupancy and room rate growth, said Mr Zographou.

Otherwise, an oversupply situation will occur, which has already been experienced in the Sydney market, and which ultimately results in a deterioration in trading conditions.

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