Australian Hotel Market Outlook

Q22011

2

In early February 2011 Deloitte launched Hotel Market Outlook: 2010 in review; 2011 and beyond, predicting year-end results for 2010 some three months before the Australian Bureau of Statistics released its official data. We did this by applying an econometric model, utilising historic ABS data, combined with the latest information from STR Global as well as economic forecasts by Deloitte Access Economics.

We are pleased to note that our forecasts were highly accurate, within a 0.2% occupancy and 0.5% average room rate margin in almost all markets.

The updated economic outlook by Deloitte Access Economics predicts a softer economic environment, resulting in downward revisions in our forecasts for 2011 for both occupancy and room rates. We also present a first look at our projections for year-end 2012.

Subscribe to Deloitte Access Economics publications online.

The global economyThe key question for global growth was always just how big a letdown the passing of stimulus would prove. The early news is excellent – talk of a double dip in the rich world has all but disappeared, albeit partly because emerging economy policymakers (spooked by the revolutions which swept through the Arab world) continue to move far too slowly to rein in their still galloping growth.

That has extended the stay of industrial commodity prices in the stratosphere. The latter have hit record highs and have now been joined there by food prices as well. With emerging economies seeing their growth ease slightly and the developed world seeing its growth strengthen, 2011 and 2012 should see above trend global growth even though both families and governments want to save more than they have been doing.

The Australian economyWhile Australians watched horrified as floods and cyclones hit at home and earthquakes and tsunamis caused tragedies abroad, world prices for the industrial and farm commodities we have in abundance surged past the peaks they hit back in mid-2008. That means the world is begging Australia to grow faster, throwing enormous sums of money at our export sector, and expanding our national income fast.

Yet, despite that, the pace of Australia’s recovery has stalled of late. In part that reflects some ‘two speed economy’ negatives: a resource boom brings with it higher interest and exchange rates, and that mix is weighing heavily on some sectors. At the same time it is hard for the key growth positives to gain traction – mining and engineering construction want to grow very fast, but their expansion is being dogged by slow bureaucratic and corporate approval processes as well as by skill shortages.

The latter may become acute over the next two years, because Australia’s growth prospects rest on a very narrow base of sectors, occupations and States, and because policy moves are making it harder to migrate here.

The list of good news sectors is small, whereas the bad news list is long. Most manufacturers are being very hard hit by the marauding $A and the same currency questions are also bedevilling foreign student numbers and the tourism sector.

Consumers are cautious: savings is the new black as Gen Y realises they haven’t saved nearly enough for their burgeoning family responsibilities, while all generations are feeling the sting of higher interest rates, keeping Australia’s retailers on the back foot.

Even the public sector looks set to slow as stimulus measures run their course.

Although it’ll be a close run thing, we expect the Reserve Bank will have to push up rates over the next year (keeping the $A strong) even though many businesses and families are doing it tough.

3

Hotel Market Outlook Q2/2011

Economic Impacts for the Tourism, Hospitality and Leisure sectorThe longer the Australian dollar remains close to parity with its US cousin, the harder it will be for tourism and international education, two key sectors which dominate our service export earnings, to make their sales. Both are on the wrong side of Australia’s two speed economy, with higher exchange rates combining with changed migration rules and a sharp competitive push from US colleges to generate depressingly large falls in enrolments in key parts of Australia’s international education sector. At the same time, although numbers of inbound tourists lifted in recent months, it is hard to see visitor numbers sprinting any time soon, or perhaps any time that the $A is above US$ parity.

Retail spend is directly related to spending in the domestic leisure segment. Unfortunately, recent years saw capital gains from homes and shares falter, and the global financial crisis led families to reassess the sustainability of their saving habits. The good news is that the worst of the retail downturn is almost over. 2011 won’t be a great year for retail, but the swing to saving that has already occurred has sown the seeds of better times ahead, because families have already broken the back of what they were trying to do – get back to sustainable rates of saving. As income levels continue to grow at comfortable enough rates, greater retail strength should be more evident by the end of 2011, maturing into more solid recovery in 2012.

Activity levels in the corporate sector are strengthening as national income leverages the resources boom, meaning that the local market for mergers and acquisitions is more active than most. That is generating good demand for professional services. However, this is a bellwether sector, and it too is feeling the ‘two speed’ strains evident in the wider Australian economy. Demand for professional services from some sectors and some States remains patchy.

The combination of a sharp drop in international students as a result of the loosened link between studying here and obtaining permanent residency, and increasing labour cost as the unemployment rate continues to move down, has dire consequences for seasonal businesses that are heavily dependent on casual workers. Not only will labour cost go up, it is also likely to bring often already poor service standards further down.

The tourism, hospitality and leisure sector is thus on the back foot amid a climate of high interest and exchange rates on the one hand and the national ‘swing to saving’ on the other. That combination has produced a less-than-favourable business backdrop, with more Australians heading to Bali instead of Broome and Disneyland instead of Dreamworld and stagnant numbers of tourists arriving here.

Some of the earlier strength in cafés and restaurants has faded more recently, and whilst the business trade is seeing some positives, that lift in business profits is narrowly based and it isn’t driving long liquored-up lunches on the corporate credit card. Given that the currency has been continuing to edge upwards of late, there is probably some bad news still in the pipeline for this sector. However, it won’t last forever. In particular, the $A may start to lose some altitude as interest rates go up in the rest of the world – though not too much altitude.

Ironically, whilst everything seems to work against the resort and leisure sector, our corporate hubs are blessed with an absence of any notable additions to the supply of hotel accommodation for more than a decade now, resulting in unprecedented room occupancy levels. This opens the door wide for hoteliers to drive room rate, hard. The ‘two-speed economy’ thus applies to the tourism, hospitality and leisure sector as well, and this seems unlikely to change for the foreseeable future.

Not only will labour cost go up, it is also likely to bring often already poor service standards further down.

4

AustraliaAustralia: Occupancy, Rate and RevPAR Trends

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52.0%

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Room Occ% Room Rate Trend RevPAR Trend

Data from the Australian Bureau of Statistics (ABS) showed a country-wide RevPAR increase of 5.4% to $88.67 for YE 2010, very close to our forecast of $89.10. Room occupancy grew by 1.7% to 63.7%, and average room rates for 2010 grew by 2.6% to $139.16. We have softened our outlook for 2011 somewhat, based on a more reserved growth trend for the main cities and continued uncertainty for leisure destinations. Overall room occupancy is now forecasted to remain relatively constant, showing a marginal decrease of 0.2% to 63.5%. Average room rates should grow by 5.2% to $146 with RevPAR estimated to increase by $4.35 (4.9%) to $93.

Looking ahead to 2012, our model predicts a marginal increase in occupancy by 0.5% to 64.0%. In the absence of supply growth, average room rates are set to increase further by $9.58 (6.5%) to $156, increasing RevPAR by $6.75 (7.3%) to $100.

SydneySydney: Occupancy, Rate and RevPAR Trends

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68.0%

70.0%

72.0%

74.0%

76.0%

78.0%

80.0%

82.0%

84.0%

86.0%

88.0%

90.0%

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Room Occ% Room Rate Trend RevPAR Trend

Sydney hotels recorded the strongest performance in the country recording RevPAR growth of 10.8% to $150.25 for YE 2010. Our occupancy forecast matched the year-end result of 85.5%, with average room rates growing by only 4.0% to $175.70 despite record occupancies.

Sydney surpassed pre-GFC occupancy levels by mid-2010 and has now also recovered RevPAR in full. The outlook for Sydney for 2011 is extremely encouraging, primarily based on continued occupancy growth. Occupancy for the city is modelled to grow another 1% to 86.4%, with average room rates forecast to rise by 11% to $195, resulting in a RevPAR increase of 12% to around $168.

Even with the expected opening of the Meriton Apartments in Haymarket and the extension of Star City Casino late in 2011, the forecast for 2012 anticipates further occupancy growth to 87% and another 14% growth in room rates to $222. RevPAR should thus increase by 14.5% to $193.

MelbourneMelbourne: Occupancy, Rate and RevPAR Trends

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66.0%

68.0%

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72.0%

74.0%

76.0%

78.0%

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84.0%

86.0%

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90.0%M

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Room Occ% Room Rate Trend RevPAR Trend

RevPAR in Melbourne increased by 5.0% to $138.46 in 2010. Room occupancy exactly matched our forecast at 79.8% with growth of 2.5%, while the average room rates of $173.44 came very close to our forecasted growth of 1.6% to $173.14.

The outlook for 2011 is positive with no new supply on the horizon and occupancies expected to increase a further 2% to 81.7%. RevPAR is forecasted to increase by 8.6% to $150 fuelled by growth in average room rates of 6.1% to $184 which is some $7 lower than our previous projection as hoteliers are proving to be less aggressive than expected in raising room rates.

Looking forward to 2012, a little room occupancy growth is left to reach 83%, with average room rates set for double-digit growth of 11% to $204, increasing RevPAR by 12.5% to $169. New supply additions are not expected until 2014.

5

Hotel Market Outlook Q2/2011

BrisbaneBrisbane: Occupancy, Rate and RevPAR Trends

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61.0%

63.5%

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86.0%

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Room Occ% Room Rate Trend RevPAR Trend

Brisbane hotels recorded strong RevPAR growth of 9.7% to $126.27 for YE 2010, which is close to the modelled forecast of $126.75. Forecasted occupancies exactly matched actual results from ABS, with 4.1% growth to 78.8%. Average room rates grew by 3.9% to $160.14.

The outlook for Brisbane remains strong. The city is expected to see an increase in supply by late 2011 and in 2012 with the opening of the second Emporium, as well as a Novotel on Elizabeth Street. Room occupancy will continue to increase however, as demand growth still outstrips supply growth. Our forecast for 2011 and 2012 is for occupancies of 80%, down by 2% from our previous prediction. Average room rates are expected to increase by 7% in 2011 and 10% in 2012 to $172 and $189 respectively. RevPAR is thus expected to increase by 8.5% in 2011 to $137 and by 11% in 2012 to reach $152.

PerthPerth: Occupancy, Rate and RevPAR Trends

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Room Occ% Room Rate Trend RevPAR Trend

Perth hotels achieved record room occupancies before the GFC and remained above 80% throughout. Despite this, room rates dropped by 3% in 2009 and recovered by only 1.1% in 2010 to achieve 82.3% by year-end. Room rate growth of 20% and more before the GFC stagnated throughout 2009 and recorded only 2% growth in 2010, closing at $157 for the year, about $1 shy of our forecast.

The outlook for YE 2011 is good, however, with the city forecasted to achieve the strongest growth rates in the country, with no new supply expected to enter the market in the next three years. Room occupancy is predicted to increase by 3% to reach 85.6% with 11% rate growth to $174 and RevPAR growing by 16% to $149.

This growth trend is expected to continue in 2012, with forecasted average room rates and RevPAR exceeding Melbourne and Brisbane. Occupancies may reach 88%, surpassing Sydney’s projected occupancy for YE 2012. Average room rates may grow by close to 20% again to $206, with RevPAR growth of 23.1% to $183.

AdelaideAdelaide: Occupancy, Rate and RevPAR Trends

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55.0%

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Room Occ% Room Rate Trend RevPAR Trend

Hoteliers in Adelaide achieved a commendable occupancy level of 76.6% in 2010, on par with our forecast. Room rate growth however was only 1.4% to reach $141.84, falling $1 short of our projected rate. RevPAR for 2010 was $108.64.

Unlike other cities in Australia, Adelaide’s outlook shows a negative trend for the city, based on a soft economic outlook. Occupancy is projected to decline to pre-GF C levels of around 74% with only marginal rate increases of 1.5% to $144. With the projected decrease in occupancy and the minimal growth in average room rates, RevPAR is forecasted to decline by 3% to $106, the lowest of Australia’s State capital cities.

Looking forward to 2012, room occupancy is expected to decline by a further 1% to 73%, with average room rates projected to increase by just 2.5%, improving RevPAR by just over $1 to $107.

6

CanberraCanberra: Occupancy, Rate and RevPAR Trends

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Room Occ% Room Rate Trend RevPAR Trend

Canberra hotels’ RevPAR growth exceeded Sydney for YE 2010, with 11.3% growth to $114.50, matching the modelled forecast rate. Occupancy also grew stronger than Sydney, with 5.4% growth to 75.9% whilst average room rates grew 3.4% to $150.95.

Canberra’s outlook for 2011 was for a weaker year, and this has been revised further down. Occupancy is now forecasted to decline by 2.5% to 73.5%, as several high-profile exhibits and events last year are not repeated this year. Average room rates are predicted to increase by 3.5% to $156 with RevPAR growing by only 0.3% to $115.

In 2012 occupancy is forecast to decrease a further 1% to 72.5%. However, in the expectation that hoteliers will push through a much needed rate hike, average room rates are predicted to rise by 8% to $169 causing RevPAR to increase by almost 7% to $123.

DarwinDarwin: Occupancy, Rate and RevPAR Trends

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Room Occ% Room Rate Trend RevPAR Trend

RevPAR in Darwin grew 2.4% to $99.38 in 2010. Occupancy growth remained positive on the back of a decline in the previous year, with growth of 2.3% to 70.6%. Average room rates decreased marginally by 0.9% to $140.83 influenced by additions to supply in the previous year.

Darwin’s outlook is positive however with no further supply additions expected. Room occupancy growth is forecasted to improve by 1.5% to 72% in 2011 with renewed growth in average room rates by 5% to $148. RevPAR is expected to increase by 7.5% to $99.

Further ahead, occupancy in 2012 should increase by a further 1% to 73%, with average room rates increasing 7% to $159 resulting in RevPAR growth of 8% to $116.

Gold CoastGold Coast: Occupancy, Rate and RevPAR Trends

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Room Occ% Room Rate Trend RevPAR Trend

The resort market on the Gold Coast was predicted to be slow and actually performed below those expectations. RevPAR improved by 2.4% to $90.13, against a prediction for $91.34. This was caused by occupancy only growing 1.8% to 68.2%, whilst average room rates decreased 0.3% to $132.13 due to continued discounting.

The outlook for the Gold Coast is uncertain. As Stage II of the new Hilton enters the market, overall room occupancy is expected to drop by 1.5% to 66.5%. As this property will hopefully trade above prevailing average room rates, market-wide average room rates are predicted to increase for the first time in three years, with growth expected at 2% to around $135. RevPAR should hold at $90.

Looking forward to YE 2012, occupancy will hopefully improve to around 68%, with average room rates increasing further to $140, resulting in RevPAR projected to increase by 6% to $95.

7

Hotel Market Outlook Q2/2011

Tropical North QueenslandTNQ: Occupancy, Rate and RevPAR Trends

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Sep

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Room Occ% Room Rate Trend RevPAR Trend

Tropical North Queensland (TNQ) hotels’ performance was impacted by the devastating natural disasters that affected the region in late 2010. The continuing rise of the Australian dollar and global economic uncertainty is also hitting TNQ hard. RevPAR in 2010 fell 2.2% to $64.83 in YE 2010, against a forecast of only 0.7% decline. Occupancy decreased by 0.5% to 54.5%, with average room rates declining by 1.3% to $119.

TNQ’s outlook for 2011 remains grim and was revised further downwards, with occupancies expected to decrease by a further 1.5% to 53%, and average room rates reducing by 2% to $117 as hoteliers continue discounting in an attempt to sell rooms. A lower RevPAR will follow, with a forecasted decrease of 4% to $62.

Hopefully a reversal in the A$ exchange rate will see some growth in 2012, with a predicted increase in occupancy of 1% to 54%, and average room rates growing by 1% to $118. This should see RevPAR improve by 3.5% to $64.

Your industry, our expertise Our dedicated practice provides a wide range of services to financiers, property owners, investment fund managers, private investors, developers, operators, and associated stakeholders, including architects, government departments, professional and business lobby groups, and tourism intermediaries.

We act on assignments across the hospitality sector including:

• Hotels, resorts, serviced apartments and integrated developments

• Aviation and transport

• Tourism

• Betting and gaming

• Entertainment

• Pubs and clubs

• Food and catering organisations.

We offer a full range of services to address key industry issues associated with economic conditions, regulatory change, competition, emerging market sectors, technological advancements, mergers and acquisitions, and changing needs of investors. These include specialist services focused on:

• Administration and recovery

• Human capital

• Financing

• Market and asset due diligence

• Pricing and distribution

• Market development

• Branding and online products

• Sustainability.

Your business, our teamThe THL team is led by industry veterans Rutger Smits and Ron de Wit, whose long-standing consulting experience and practical industry knowledge provide a powerful combination when supported by Deloitte’s team of technical experts.

With specialists in all geographies and across all competencies, we quickly mobilise teams to support our clients’ needs.

Deloitte is recognised as one of the leading global advisors to the Tourism, Hospitality and Leisure (THL) industry, with a practice of more than 2000 professionals. In Australia, our multidisciplinary group of industry experts have a deep knowledge of the market issues and business challenges faced within the THL industry, both domestically and internationally.

This publication contains general information only, and none of Deloitte Touche Tohmatsu Limited, its member firms, or their related entities (collectively the “Deloitte Network”) is, by means of this publication, rendering professional advice or services.

Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser. No entity in the Deloitte Network shall be responsible for any loss whatsoever sustained by any person who relies on this publication.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.

Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to help clients succeed wherever they operate. Deloitte’s approximately 170,000 professionals are committed to becoming the standard of excellence.

About Deloitte Australia

In Australia, the member firm is the Australian partnership of Deloitte Touche Tohmatsu. As one of Australia’s leading professional services firms, Deloitte Touche Tohmatsu and its affiliates provide audit, tax, consulting, and financial advisory services through approximately 5,400 people across the country. Focused on the creation of value and growth, and known as an employer of choice for innovative human resources programs, we are dedicated to helping our clients and our people excel. For more information, please visit Deloitte’s web site at www.deloitte.com.au.

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Member of Deloitte Touche Tohmatsu Limited

© 2011 Deloitte Touche Tohmatsu.

AM_Syd_05/11_044530

Contact us For further information on how we can support your business needs, please contact:

www.deloitte.com.au

AustraliaRutger Smits+61 (0) 2 9322 5455rsmits@deloitte.com.au

New South WalesRon de Wit+61 (0) 2 9322 5458rdewit@deloitte.com.au Northern TerritoryMark Rowberry+61 (0) 8 8980 6225mrowberry@deloitte.com.au QueenslandMartin Leech+61 (0) 7 3308 7245mleech@deloitte.com.au

South AustraliaAlyson Trottman+61 (0) 8 8407 7259atrottman@deloitte.com.au

VictoriaAndrew Bethune+61 (0) 3 9671 7968abethune@deloitte.com.au

Western AustraliaGary Doran+61 (0) 8 9365 7080gdoran@deloitte.com.au

Audit & AssuranceStephen Holdstock+61 (0) 2 9322 7299sholdstock@deloitte.com.au

ConsultingSteve Hussenet+61 (0) 8 8407 7629shussenet@deloitte.com.au

Corporate FinanceAndrew Jones+61 (0) 2 9322 5917andrjones@deloitte.com.au Corporate ReorganisationJohn Greig+61 (0) 7 3308 7108jgreig@deloitte.com.au 

Deloitte Access EconomicsRic Simes+61 (0) 2 9322 7772rsimes@deloitte.com.au

Deloitte PrivateWeng Ching+61 (0) 2 9322 3513wengching@deloitte.com.au

TaxMax Persson+61 (0) 2 9322 7538mpersson@deloitte.com.au SustainabilityShauna Coffey+61 (0) 2 9322 3504shacoffey@deloitte.com.au