Are Hotel Room Rates Set to Rise?
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The firm has identified the current low level of new hotel and serviced apartment development as one of the key drivers which could help a much needed rise in room rates and profitability for hotel operators and owners.
The forecasted improvement in the domestic economy in the new few years ahead of three per cent per annum and the 3.5 per cent annual increase projected in overseas visitors out to 2016 by the Ministry of Tourism in 2010 should also assist hotel occupancies to rise.
The impact of the global financial downturn and recession in 2009 - 2010 has probably resulted in leaner operating cost structures and more aggressive sales and marketing in many hotels in an attempt to maintain operating and profit margins and return on investment for owners. This should provide a strong platform for future profitability growth.
The Rugby World, and related demand by teams and fans in the month or so before and after, should ensure that average achieved hotel room rates for the 2011 calendar year comfortably exceeded 2010 levels. A bonus will be if occupancy in the RWC 2011 period exceeds September- October 2010 levels of 70 per cent which will depend on the amount of overseas visitor demand and less on displacement of current hotel demand. Overseas visitor growth in the 2011 calendar year has been forecast by the Ministry of Tourism to be 6.5 per cent, almost twice that of 2010.
The main risk to improving profitability in 2011/12 is likely to be inflation which was four per cent in 2010, in particular wage increases and ownership costs such as energy, rates and insurance.
These costs could increase greater than the projected annual CPI for the next two years of three per cent, and severely dent hotel profitability if room rate increases are not achieved.
A key challenge will emerge for hotels, particularly post RWC 201l, if wages rise, as to whether hotel business models can adapt to a "high occupancy -low room rate" environment and maintain or increase hotel profit. This may be challenging given improving staff productivity and reducing operating costs have been the focus of hotel owners and operators in the last two years. The increasing trend towards Internet hotel bookings via hotel or third party websites could perhaps provide an opportunity to reduce sales and marketing activities and costs spent in more traditional channels.
The relatively low returns from hotels and serviced apartments, lack of developers, tight bank funding for new build hotels and strata title hotel and service department developments, and continuing investment opportunities in distressed hotels, fall-out from the GFC, will keep a lid on new hotel and serviced apartments developments for the next two to three years according to Terry Ngan, director at Horwath HTL Ltd.
The only new hotels or serviced apartments under construction are:
- the Novotel at Auckland International Airport
- the Formule One near the Auckland domestic airport
- the Sudima near the Auckland domestic airport
- the Hilton hotel and serviced apartments at Kawarau Falls Station in Queenstown
- the Distinction hotel in Dunedin
Such development conditions will mean that new hotels developed in the next three years will be limited to "strategic" investment, where return on investment is not the prime or only reason, lower cost "limited service – limited facilities" hotels backed by a strong brand and distribution systems and office conversions where purchase cost was favourable, according to Terry Ngan.
It is interesting to compare the current state of the hotel industry with five years ago, a period which included the GFC and recession and the tail end of the "boom" period. New Zealand Hotel Council monthly statistics of its member hotels show that in the last five years, annual average occupancy dropped from 66 per cent in 2006 to 62 per cent in 2008 and recovered to 66 per cent in 2010.On the other hand, the average room rate dropped from $134 (excluding GST) in 2006 to$128 in 2010, down five per cent. The important KPI for hotels, RevPAR or Revenue per Available Room, dropped seven per cent from 2006 to 2010, which has squeezed profitability in a period of rising inflation. The main cause of this pricing downturn has been corporate and conference markets whose average room rate has dropped 12 per cent from 2006 to 2010, according to the NZHC data. The corporate and government markets have become more value for money conscious in the last two years both for business travel and conferences. In Auckland, NZHC member occupancy in 2010 was 75 per cent, the highest level since 2006.
Unfortunately the average room rate dropped four per cent over the period, as did RevPAR.
The pattern was similar for Wellington but on a more significant scale with RevPAR dropping seven per cent due to drop in both occupancy and room rate over the period. A key issue for Auckland hotels will be the future strategies employed by the 4.5 star Rendezvous the largest hotel in Auckland, and the five star Pullman Hotel and Residences which has been rebranded from the Hyatt Regency.
In terms of hotel market outlook, Horwath HTL see Christchurch and Queenstown as the most potentially worrying destinations due to recent or impending new hotel supply. In Christchurch the new Novotel and Marque hotels which opened in 2010 assisted in market occupancy decreasing three points to 68 per cent from 2006 to 2010 and room rate dropping 15 per cent to $115 according to NZHC data.
In Queenstown, hotel occupancy and room rate will be severely tested by the 278 new hotel rooms and apartments to be opened by Hilton in March 2011 at Kawarau Falls Station on the outskirts of the township. According to NZHC, occupancy in 2010 was 69 per cent, back up to the level in 2007, and room rate $133 in 2010 which was close to the $136 achieved in 2007-2008. A positive trend has been the high yield strategies employed in 2010 at Queenstown's five star hotels and serviced apartments ie the Sofitel, M Gallery and The Rees, who are now achieving average room rates at the top of the New Zealand hotel market, and in turn providing more reasonable returns to owners.
Horwath HTL Ltd and New Zealand Hotel Council are cohosts of the NZ Hotel Industry Conference to be held on Thursday May 12, 2011at the SkyCity Auckland Convention Centre.
This conference, in its fifth year, is the only such event dedicated to the New Zealand hotel industry and focuses on the operational and financial performance of the sector with international and local speakers and panellists.
Horwath HTL
