Hotel Market Outlook November 2012

A growing Asian middle class, and a weakening Australian dollar in the medium term, remain the keys to a positive future for the Australian tourism industry

The Deloitte Access Economics Tourism and Hotel Market Outlook ? Q4 2012 reports on the performance of Australia?s tourism and hotel accommodation sector, based on data published by the Australian Bureau of Statistics (ABS) and extrapolated through information from Tourism Research Australia and other sources.? Forecasts to June 2015 are presented, based on projections generated from our in house tourism forecasting model and hotel accommodation sector model.? These projections draw on Deloitte Access Economics macroeconomic forecasts, as reported in its quarterly Business Outlook publication.?

The macro-economic context

China slowing

The recent slowdown in economic growth in China is being keenly felt in Australia.? In recent months, commodity prices have fallen sharply as increasing supply has coincided with a moderation in demand by China.? Chinese authorities have responded to this slowdown with a fresh round of fiscal stimulus, but have had to do so with caution to avoid further overstimulating infrastructure investment.? The size of the latest stimulus is less than a quarter of that provided during the Global Financial Crisis.

The challenge for China remains to rebalance its growth away from investment and towards consumption.? This will require higher wages, interest rates and exchange rates ? all of which are politically challenging given their adverse impact on business and exports.? Despite these hurdles, our central forecasts suggest only a mild moderation in Chinese growth over the next few years.

On the other hand, growth in Europe and the United States is expected to remain subdued for some time with the IMF World Economic Outlook downgrading growth prospects for advanced economies in October.? Much of Europe remains in recession, although the risk of countries exiting the Eurozone appears to have fallen slightly in recent months following intervention by the European Central Bank.

Across the Atlantic, US growth continues to be modest, with unemployment hovering just below 8%.? As has been well publicised of late, the US may shortly face a ?fiscal cliff? whereby a series of automatic budget cuts worth more than $600 billion dollars will apply from early 2013, unless Congress is able to reach a compromise.? Without Congressional compromise, the risk of a double-dip recession remains real.? Nevertheless, there are some significant upsides to the US economic outlook.

An increase in gas supplies has reduced energy prices, while the Federal Reserve has moved to provide another round of monetary stimulus.? Housing prices also appeared to have stabilised in recent months. ?Overall, the downside risks to the global economy have not materially deteriorated since last quarter but the growth outlook remains subdued, with increasing concerns about the potential extent of the Chinese slowdown.

As has been the case for some time, Australia continues to perform better than the majority of the developed world and the short term outlook remains strong.? While commodity prices have fallen sharply this year, they appeared to stabilise in October as a result of fiscal stimulus in China and monetary action in the US, Europe and Japan.

Past investment decisions mean that resource-related construction is expected to continue to grow, reaching a peak in 2014.? This will continue to drive business investment in the short term but beyond 2014 resource-related construction will begin to decline as the current project pipeline progressively recedes.? While commodity export volumes will maintain their growth, the impact of the mining boom on the broader Australian economy will decline over time, as rising commodity prices no longer underpin national income growth.

Non-mining sectors of the Australian economy ? including manufacturing and utilities ? continue to struggle.? However, growth in consumer spending has remained close to trend in 2012, helped by a series of interest rate cuts ? which are also likely to assist housing construction.? Governments at both the State and Federal level have begun decisive action to improve budget positions, amidst declining tax revenues.? As is already evident, this will see a reduction in public sector spending over the next few years.

Despite the difficulties currently being experienced in non-mining sectors of the economy, the magnitude of mining investment remains sufficient to underpin Australia?s growth prospects ? at least over the near term.? Australia?s GDP is expected to grow by 3.0% in 2012-13, with growth of 3.2% forecast in 2013-14 and 2014-15.? The figures for 2013-14 and 2014-15 are a slight downward revision on last quarter.

Inflation is anticipated to remain within the RBA?s 2-3% target range, having picked up slightly last quarter, partly as a result of the introduction of a carbon price as part of the Clean Energy Legislative Package.? Unemployment is currently sitting above 5% but remains significantly lower than most of the developed world.

More broadly, the outlook for Australia remains stronger than traditional tourism source markets such as Europe and the US.? Europe is forecast to grow by only 0.2% in 2012 while the UK is forecast to grow by a modest 1.3%.? Slightly stronger growth is forecast for the US at 2.1% in 2013.? On the other hand, South East Asia is forecast to grow by 5.3% and India by 7.1% in 2013.? The forecast for Chinese growth in 2012 has moderated from 8% last quarter to 7.7% this quarter, but is forecast to increase to 8.3% in 2013.? These figures continue to point to the importance of Asia as a growing market for Australian tourism.

Exchange rates

Despite the sharp decline in commodity prices ? long seen as the main driver of the Australian dollar ? and the decision of the Reserve Bank to cut interest rates to 3.25% in October, the Australian dollar continues to remain strong.? At the time of writing, the exchange rate remained above parity with the US dollar and at relatively high levels against the currencies of most of our other major trading partners.

While the persistent strength of the Australian dollar may seem surprising, it is largely an artefact of the weak economic position of the US and EU which has led investors to seek safety in Australia and Canada, which the IMF is soon adding to its survey of global reserve currencies. ?The recent monetary expansion in the US, Europe and Japan has also weakened demand for their currencies.? As a result, the Australian dollar remains relatively high against most major currencies.

Nevertheless, the recent fall in commodity prices suggests the Australian dollar is currently above its fundamentals.? Once interest rates in the rest of the developed world start to increase ? something likely over the next couple of years as their respective economies start to recover ? the Australian dollar will begin to moderate.? This moderation is expected to be relatively gradual, with most of the decline coming after 2014 once interest rates in the rest of the world begin to trend upwards.? The trade weighted index is expected to fall by 1% in 2012-13 but then decline more quickly over time, falling by 3.1% in 201314 and 5.7% in 2014-15.? Relative to the US dollar, the Australian dollar is forecast to decline 1.9% in 2012-13 followed by 2.7% in 2013-14 and by 5.7% in 2014-15.? By 2014-15 the Australian dollar is forecast to fall to $0.92 per US dollar, a significant moderation but still above historical averages.

The easing of the currency will make outbound travel less attractive and reduce the cost of staying in Australia for international visitors.? However, a significant depreciation in the Australian dollar may not occur for some time (barring unexpected events) and thus tourism operators need to remain focused on operating successfully under a high exchange rate environment.

Shifting spending patterns

While many traditional bricks and mortar retailers have been struggling in recent months, growth in consumer spending remained close to trend in 2012.? Part of the reason traditional retailers have been struggling is the long term trend away from spending on household equipment, clothing and footwear and towards recreation, housing, health and education.

The latest ABS Household Expenditure Survey, released in September 2011, found that while total expenditure had grown by 38% from 2003-04 to 2009-10, expenditure on household equipment has risen by only 13%, while spending on clothing and footwear had risen by 26%.? Expenditure on recreation, housing and health care all grew by more than 40%.? This long term trend towards greater spending on services was also reflected in holiday expenditure, which increased by 51% between 2003-04 and 2009-10.? However, the strength of the Australian dollar and changing consumer preferences has meant that most of the expenditure was directed towards international holidays.? Expenditure on international holidays grew by 90% over this period, whereas spending on domestic holidays grew by only 25%.? As the Australian dollar moderates, this will provide greater opportunities for domestic tourism operators to capture increasing amounts of this travel- and leisure-related spending.

Another major trend in consumer spending patterns has been the rapid growth of online purchasing.? Together with the growth in review forums and travel blogs, online purchasing has significant potential to further disrupt the way tourism operators do business ? creating challenges in adaption and opportunities for growth.

Growth in international visitor arrivals was relatively modest in the year to June 2012 as weak economic growth in Europe, Japan and the US continued to impact traditional source markets.? At the same time, visitor arrivals from China and other emerging Asian economies such as India and Indonesia continued to grow strongly.

Despite the modest growth in international visitor arrivals, the outlook for the sector continues to be positive.? There was solid growth in the September quarter arrivals data and international visitor nights actually grew solidly in the year to June 2012 as international visitors elected to stay longer.? Once the advanced economies begin to recover and the Australian dollar moderates, stronger growth is anticipated with international visitor arrivals forecast to grow by 4.0% p.a. on average over the three years to June 2015.

While growth in international arrivals has been somewhat subdued over the last year, domestic visitor activity has outperformed expectations. ?Domestic overnight trips increased by 5.8% for the year to June 2012 compared to the same period last year, while domestic visitors nights grew by 6.7%. ?These growth rates are the strongest experienced in the last decade.? Domestic visitor nights have now almost returned to the levels of 2007-08, prior to the Global Financial Crisis.? The forecast for growth in domestic visitor nights has been revised upwards, with domestic visitor nights projected to grow by an average of 1.3% p.a. over the next three years.

While forecasts continue to point to international visitor nights overtaking domestic visitor nights on the back of the growth of emerging Asian economies, the strong recent performance of the domestic segment means that this is now not forecast to occur until 2020. ?The chart shows the forecast trajectory of domestic and international visitor nights over the next three years.

Domestic visitors

Recently released data shows that domestic visitor numbers have continued to buck the long term trend and indeed have grown strongly over the last 12 months.? In the year to June 2012 domestic overnight trips reached 75.1 million, a 5.8% increase on the year to June 2011.? The number of overnight trips taken in the June quarter was 9.9% higher than in the June quarter of 2011. ?This increase in overnight trips led to a 6.7% increase in domestic visitor nights in the year to June 2012 compared to the same period last year.

The increase in domestic day trips was even more marked than domestic overnight trips.? Domestic day trips rose 8.0% in the year to June 2012, compared to the year to June 2011. ?This strong growth in domestic tourism activity is a continuation of the growth experienced in the March quarter.? While the strength of the March quarter may have partly reflected the impact of natural disasters on the March quarter 2011, the continuation of this growth in the June quarter is a positive sign for tourism operators.? However, not all are benefiting.

Almost all of the growth in domestic visitor nights was attributable to business travel and those visiting friends and relatives, with business visitor nights rising 9.2% and VFR growing 13.8% in the year to June 2012.? Domestic visitor nights by holiday travellers rose by just 0.4%, continuing the trend of sluggish growth in the domestic leisure segment.

The chart shows the growth in domestic visitor nights by state in the year to June 2012 relative to the year to June 2011.? It illustrates considerable differences in growth across states, with comparatively low growth in domestic visitor nights in New South Wales and South Australia and double digit growth in Queensland, Western Australia and Tasmania.

The performance of Queensland is unsurprising given the impact of natural disasters in 2011 and the likely growth in business travel associated with the mining boom, which can also help explain Western Australia?s double digit growth.? The growth in visitor nights in Tasmania is somewhat more surprising and is largely attributable to a 46% increase in visitor nights for those visiting friends and relatives.

The strength of domestic tourism activity provides further evidence that the domestic tourism market may be moving to a positive trend.? Accordingly, projected growth in domestic visitor nights has been revised upwards, with domestic visitor nights forecast to grow by an average of 1.3% p.a. over the next three years.? While this growth outlook remains moderate, it is in stark contrast with the negative trajectory of the domestic segment over much of the last decade. ?This could also represent the front edge of a new demographic shift: the oldest of the Baby Boomers have been hitting age 65, so this generation may be reaching the end of their ?overseas travel? phase (which was also helped along by the exchange rate) and are now entering a phase of life where they are travelling nearer to home or to visit the grandkids.

Outbound travel by Australians

Outbound travel by Australians continues to grow, albeit at slower rates than witnessed over recent years.? In the year to June 2012, outbound trips grew by 8% to reach 8 million trips for the first time, an average of more than one-in-three Australians travelling abroad each year. ?However, monthly data indicates that the pace of outbound growth is still moderating considerably.? While in September 2012 outbound trips were 6.8% higher than September 2011, the corresponding figures for July and August were 0.7% and 2.8% respectively.? These figures suggest outbound trips are continuing to grow, but at a more moderate pace than the double digit growth witnessed in previous years.

The chart shows the growth in outbound departures each quarter relative to the same quarter in the previous year.? For example, the growth in September 2012 reflects the growth in departures relative to the September quarter 2011.? The chart suggests a clear moderation in the growth of outbound departures in the past two quarters, with growth in the June and September quarters both being less than 4%, relative to the same quarters in 2011.

While there is a reasonable amount of volatility in the chart (growth in the March quarter 2011 was also comparatively low) the broader trend points towards a moderation in outbound growth. ?Part of this moderation appears to be due to a decline in outbound holiday travel which grew by 10.2% in the year to June 2012 but by only 3.7% in the period from April to September 2012 relative to the same period in 2011.

The forecasts suggest annual growth in outbound travel by Australians slowing to between 3% and 4% per annum on average over the next four years, as the value of the Australian dollar moderates and Australians continue to substitute back to domestic travel.

International visitors

The number of international visitors coming to Australia grew relatively modestly in the year to June 2012, increasing by 1.3% relative to the year to June 2011 in an indication that global economic uncertainty continues to impact travel decisions.? However, the outlook for growth in international visitor arrivals remains encouraging. ?Recently released data on international arrivals for the September quarter showed that international arrivals grew by 4.6% relative to the September quarter 2011.? International visitor nights grew more solidly than international visitor numbers in the year to June 2012, rising by 3.9% relative to the year to June 2011.? This is consistent with the broader trend of international visitors choosing to stay in Australia for longer.

Another interesting trend in international visitor markets has been the resurgence of convention and conference visitors, a sector that fell sharply during the Global Financial Crisis.? The chart indicates that international convention visitors have grown by more than 10% over the last two financial years, although growth in the sector is considerably more volatile than international visitors overall.

The moderate headline growth in international arrivals in the year to June 2012 masks the high degree of variation across source markets.? Arrivals from China were up 16.8%, while arrivals from Indonesia and India grew 6.2% and 5.3% respectively relative to the year to June 2011.By contrast, there was a 5.4% decline in visitor arrivals from Japan and a 5.6% decline in visitors from the UK, while visitor arrivals from the US and New Zealand remained relatively flat.

In the September quarter 2012, visitors from China continued to grow strongly, rising by 17.2% relative to the September quarter 2011.? Strong growth was also recorded for Singapore, Malaysia and Hong Kong.? Economic conditions continued to weigh on visitor arrivals from North-Western Europe, with numbers declining by 2.1% in the September quarter 2012 relative to the September quarter last year, led by a 5.1% reduction in arrivals from the UK.

Despite the large degree of variation across source markets, the improvement indicated by the September quarter arrivals data is another positive sign for tourism operators.? As Europe begins to emerge from its current economic malaise, the outlook for arrivals from traditional source markets will improve, while the emerging economies of Asia are forecast to continue to grow.

The forecast is for international visitor arrivals to grow by an average of 4.0% p.a. over the period to June 2015, while international visitor nights are forecast to grow by an average of 4.3% p.a. ?A key driver of this growth outlook will be growth in arrivals from China and other emerging Asian economies. ?The chart shows that China has been by far the largest source of growth in international visitor nights since 2000.? In 2012, China alone accounted for over 24% of the total growth in international visitors since 2000.

The next five fastest growing source countries in terms of visitor nights accounted for a further 33% of growth since 2000. ?This group included South Korea, India, New Zealand, Malaysia and Taiwan.? While the US and UK account for a relatively large for proportion of total visitor nights growth in visitor nights from the US and UK has been relatively flat since 2000.

The rapid growth to Chinese visitors to Australia reflects the stunning trajectory of the Chinese economy in recent years, which has grown at a rate of 10.1% p.a. on average since 2000.? Real GDP per capita has grown from around $945 US in 2000 to $6,094 US in 2012.? This growth has substantially expanded the ranks of the Chinese middle class, typically defined as those earning over $10,000 US per annum.? While China?s overall savings rate stands at 51% of GDP, middle class Chinese have a strong appetite for luxury goods and lifestyle experiences such as travel.

In 2011 Tourism Australia estimated that 63.8 million Chinese travelled abroad, with Australia capturing 3.6% of Chinese travel outside the North East Asia region.? For Chinese visitors, Australia offers a relatively short flying time and access to luxury brands, fine dining and casinos.

The United Nations World Tourism Organisation had previously forecast that by 2020 the number of outbound Chinese travellers would reach 100 million, but the growth in Chinese outbound tourists has been such that this milestone will be reached well before then. ?Indeed, in 2011 the Tourism Forecasting Commission estimated that 130 million Chinese tourists will travel overseas by 2020.? The forecast indicates that this will result in substantial growth in the number of Chinese visitors coming to Australia.? By 2021 well over 1 million Chinese visitors are forecast to come to Australia, compared to 584,000 currently.

Looking further forward, the growth trajectory is of course less certain.? But the growth witnessed from Asian nations that developed ahead of China provides food for thought.? On current forecasts, China?s GDP per capita in 2036 will be approximately equal to Japanese GDP per capita in 1991 (in 2012 US dollars).? If Chinese visitation rates were to match those of Japan in 1991, 5.8 million Chinese would visit Australia in 2036.? That is, visitation by Chinese visitors in 2036 would be only marginally less than total international visitor arrivals today.? While there are a myriad of factors which will determine whether such a figure is met ? or even exceeded ? it in any case highlights the magnitude of the opportunity which is emerging in China.

Australia

The continued growth in domestic visitor nights in the June quarter saw a slight improvement in national occupancy rates after the strong performance last quarter.? Occupancy rates nationwide reached 65.9% in the year to June 2012 following on from the 0.4% increase to 65.8% recorded in the year to March.? As can be seen in the chart, occupancy rates are at their highest levels since nationally consistent data was recorded and published.

While the forecast is for national occupancy rates to remain around 65% over the next year as supply increases in some key markets, occupancies are forecast to continue to grow over the medium term, reaching 67.1% in the year to June 2015.

While several major capital city developments will come online over the outlook period, we are also seeing supply growth in the mining regions.? Over the next three years new accommodation is planned for Karratha, Port Headland and Darwin to improve supply in mining regions.? The recent opening of the Mercure in Gladstone in September is a further example of how supply is beginning to respond to the demand for accommodation in these areas.

Nevertheless, the national outlook is for room nights sold ? effectively ?demand? ? to grow by 1.7% p.a. on average over the next three years, with growth in room nights available ? effectively ?supply? ? averaging 1.1% p.a. in the three years to June 2015.? That is, demand continues to outstrip supply.

Average room rates are forecast to grow by 3.7% per annum over the next three years, reaching $164 in the year to June 2015.? The growth outlook remains $210 relatively similar to last quarter?s forecast of 3.9%, $175 with the marginal softening reflecting the slightly $140 weaker domestic economic outlook.? Average room rates were $147 in the year to June 2012.

Projected average yield per room (Revenue Per Available Room ? RevPAR) is forecast to increase by 4.3% per $35 annum over the next three years, from $97 per room in the year to June 2012 to $110 per room in the year to June 2015.? Consistent with the forecast for room rates, the outlook for yields has eased over the second half of 2012.

Sydney

Trend occupancy rates in Sydney remained solid in the year to June at 85.1% ? down slightly on the 85.4% recorded for the year to March.? Over the last year, trend occupancy rates in Sydney have moderated around 1% but occupancy rates of 85% still suggest the city is close to capacity at peak times.

The forecast points to occupancy rates moderating slightly in 2013 before increasing to 87.7% in the year to June 2015.? The moderation in 2013 in part reflects the recent opening of the 200 room QT Sydney in the old Gowings building in the CBD.? QT Sydney is a designer boutique hotel which has generated considerable interest in the local hotel scene with its quirky contemporary design.

The forecast increase in occupancy rates to June 2015 is slightly lower than was forecast last quarter, in part reflecting the moderate decline in occupancy rates this quarter.? One important supply development in Sydney this quarter was the decision by the Four Point Sheraton at Darling Harbour to seek approval for a $150 million redevelopment which would significantly enlarge its current site.

Forecast growth in yields and room rates in Sydney remain broadly similar to last quarter.? RevPAR is expected to grow by 4.5% over the next three years from $162 for the year to June 2012 to $185 for the year to June 2015.? Room rates averaged $191 in the year to June 2012 and are forecast to increase by an average of 3.5% p.a. to $211 by the year to June 2015.

Melbourne

Trend occupancy rates in Melbourne were similar to last quarter, falling from 80.6% last quarter to 80.5% in the year to June 2012.? While occupancy rates in Melbourne have been relatively flat in the year to date, Victorian economic growth is forecast to improve over the next three years resulting in a significant improvement in occupancy rates.

Trend occupancy rates in Melbourne are expected to improve considerably, reaching 85.5% in the year to June 2015.? This is a slight increase on last quarter where occupancy rates were forecast to reach 84.6% in the year to March 2015 and 85.1% in the year to June.? This strengthening largely reflects planned opening dates on some developments being delayed slightly.

Room rates are forecast to grow at an annual average rate of 4.1% over the next three years, rising from $178 in the year to June 2012 to $201 in the year to June 2015.? The forecast growth in room rates is 4%.? RevPAR is forecast to grow by 6.2% per annum over the next three year, up from 5.6% last quarter as a result of the increase in forecast occupancy rates in the year to June 2015.

Brisbane

After a significant jump in the March quarter, Brisbane occupancy rates eased by 0.2% ? to 80.8% ? in the year to June 2012.? Room occupancy rates in Brisbane now exceed those in Melbourne.

Occupancy rates are forecast to reach 81.9% in the year to June 2015.? This is an upward revision from last quarter reflecting improved supply information for Brisbane.? Aside from the Mosaic Grand Chifley there is a limited definite supply pipeline for Brisbane over the next few years, although looking further forward plans have been announced to put new hotels in the Southpoint Tower and Brisbane Technology Park.

Room rates are forecast to grow by an average of 5.7% annually over the next three years, while growth in yields is expected to be 6.2% p.a.? These growth rates are broadly similar to last quarter, reflecting the continued strength of the outlook for the Queensland economy.

Perth

Perth?s occupancy rates continue to lead the nation.? Occupancy rates in Perth were 86% for the year to June 2012, similar to the 86.2% recorded last quarter for the year to March.? Occupancy rates at this level suggest very little spare capacity in Perth, especially during the week when business travel is at its peak.

While the opening of the 236 room Fraser Suites in October will help ease capacity constraints in Perth over the next year or so, the outlook for occupancy rates is strong.? The forecast for occupancy rates in Perth remains similar to last quarter with occupancy rates forecast to rise to 88.2% in the year to June 2015.

With the peak of mining-related construction activity predicted to occur in 2014, there will be increasing pressure on room rates which are forecast to increase by an average of 10.3% p.a. over the next three years.? Yields are forecast to grow by 11.3% p.a. over the same period rising from $165 in the year to June 2012 to $227 in the year to June 2015.

Adelaide

Occupancy rates in Adelaide eased 1% from the 75.5% recorded in the year to March to 74.5% in the year to June 2012.? The forecast indicates occupancies in Adelaide will remain relatively flat over the next three years, increasing only marginally, to 74.8% in the year to June 2015.? The proposed opening of the Mayfair and Ibis hotels over the forecast period should mean that demand broadly matches supply over the forecast period.

Room rates in Adelaide remained flat in the June quarter, continuing the flat trajectory of the last four years.? Room rates are forecast to grow by 3.0% p.a. over the three years to June 2015 ? lower than the Australia-wide average, but an expected improvement on the weak growth experienced over the last four years.? Yields are forecast to grow by 3.2% p.a. over the three years to June 2015.

Canberra

Despite the increase in domestic visitors in the June quarter, occupancy rates in Canberra fell for the year to June 2012 to 72.9% compared to 74.0% last quarter for the year to March.? This softening has contributed to a weaker outlook for the Canberra market, with occupancy rates now forecast to increase to 75% in the June quarter of 2015 ? around one percentage point lower than the Q3 forecast, despite no major change to the supply outlook.

Much of this increase will occur toward the end of the forecast period, with demand forecast to be relatively flat over the next two years, as budget tightening by the Commonwealth government restrains travel to Canberra.? Room rates in Canberra are forecast to grow relatively moderately over the forecast period, increasing from $164 in the year to June 2012 to $184 in the year to June 2015.? This represents an average annual growth of 3.7% p.a., with yields forecast to grow by 4.7%.

Darwin

Occupancy rates grew at the fastest rate nationwide for the second consecutive quarter.? As a result, occupancy rates in Darwin overtook those in Canberra for the first time in three years.? In the year to June 2012, occupancy rates in Darwin reached 74.6%, a 2.3% increase on rates recorded last quarter for the year to March.

However, the outlook for growth in occupancy rates in Darwin is modest, with additional supply being brought onto the market to accommodate increasing demand from the Inpex development.? In addition to the developments which were identified last quarter, Ausco has announced that it is planning to build a 270 room short stay accommodation facility to address the likely demand for accommodation created by the oil and gas boom in the region.

This additional supply is expected to moderate last quarter?s anticipated growth in room rates for Darwin, which are forecast to increase at an average annual rate of 3.7% over the next three years.? Reflecting the anticipated growth in occupancies, yields are forecast to grow by 4.2% p.a. on average over the outlook period.

Gold Coast

Occupancy rates on the Gold Coast improved in the June quarter, rising to 68% in the year to June 2012 from 66.9% in the year to March.? However, as can be seen in the chart, occupancy rates on the Gold Coast have tended to fluctuate within a range between 65% and 68% over the last five years.? Occupancy rates are forecast to largely remain within this band in the short term, rising around one percentage point to 68.8% by the year to June 2015.

Gold Coast occupancy rates remain lower than the capital cities, reflecting the large volume of supply that has been built in the past as well as the region?s reliance on visitors from New Zealand and Europe, where growth has been modest in recent years.

Room rates on the Gold Coast are forecast to grow at an average annual rate of 3.3% over the next three years, consistent with our Q3 forecasts.? At the same time, room rates are projected to increase from $135 in the year to June 2012 to $149 by the year to June 2015.? This growth rate remains below the national average.? Yields are forecast to grow by 3.7% p.a. over the next three years.

Tropical North Queensland

Occupancy rates in the Tropical North Queensland (TNQ) region are continuing to recover from the decline in the Japanese market and the impact of recent natural disasters. ?They rose to 58.8% in the year to June 2012, up 0.7% from the 58.1% recorded for the year to March.? Among other positive signs, the decision of China Eastern to commence flights to Cairns will have a positive impact on visitation and hence hotel market performance in the region.

However, while occupancy rates have rebounded, they remain well off the levels experienced prior to 2008 and it is likely to take some time before they return to their pre-GFC heights.? That said, by the year to June 2015, occupancy rates are forecast to reach 66%, driven both by an increase in demand and by the absence of forecast changes in supply over the next three years.? However, TNQ is heavily reliant on international visitors and so forecast increases in demand are very much contingent on the growth trajectory of key source countries.

TNQ is forecast to experience average annual growth in room rates of 3.9% over the next three years, reaching $131 by the end of the forecast period.? Room rates for the year to June 2012 averaged $117.? Combined with the forecast improvement in occupancy rates, this growth is projected to lead to RevPAR growth of 8% per annum over the period to June 2015 ? a strong performance for one of Australia?s most significant tourism regions.