The accommodation industry throughout New Zealand has just enjoyed one of its best summers in years. This is not just because of the Cricket World Cup, although that certainly will have helped. International visitor arrivals are up approximately 7 per cent over the equivalent 12 month period last year and reports are that domestic business has shown a marked increase also.
Yes it is quieter now that it’s winter, however looking at the overall year, guest nights were up just over 7 per cent, representing a 5 per cent increase in domestic and an 11 per cent increase in international guest nights. As at May 2015, it was the 14th consecutive month recording increased guest nights. With international visitor arrivals edging very close to the 3 million mark, the Ministry of Business, Innovation & Employment (MBIE) is forecasting a 31 per cent growth in arrivals between now and 2020. The Tourism Industry Association says the industry intends to out-perform the Government’s forecasts.
So much for demand, what about supply? Everything goes in cycles it seems, this industry is no exception. Having been involved in this market since 1984, I have seen the highs and lows along with economic cycles and other influences. The share market crash of 1987 was followed by a big property slump through to the early 90’s. Then the buoyant times in the mid-90’s, which spawned quite of lot of new builds, eventually resulting in over-supply, capped off by the relatively short lived loss of confidence due to the so called “Asian Crisis” in 1997.
This largely put a stop to building and by summer of 2000 the industry was again enjoying better times. A similar pattern emerged from 2002 to 2007 with rising guest nights and new builds under way again. Then of course came the Global Financial Crisis of 2008. What made things worse after the GFC was that the industry was generally in an over-supply phase by then and could have done without the recession to add to its woes. Once again though, building slowed right down as a result.
There were times once again over last summer, when it was reported that there were no rooms available at peak times in the South Island. We have heard this in the past and it only happens once every few years. Does this mean that we are now going to see a building boom over the next few years resulting eventually in over-supply again? That seems much less likely this time around.
The reason being that building and compliance costs have continued to soar over the past few years whilst room rates have not kept up with up with them. Room rates have risen in some cases, however the bottom line at the moment generally does not suggest a commercial rate of return for new developments.
Profits are also being eroded by the high commissions charged by online travel agents, but that is a separate subject in itself. The tourism industry is generally crying out for more accommodation to be built, being understandably worried about capacity constraints to future growth. It has been suggested that the Government and local bodies may need to provide development incentives for investors to put their money behind new hotels, motels, apartments etc.
Christchurch as an example, still has nowhere near the total accommodation capacity that it had pre-quake. Despite this, the developers who have been involved in the past are nowhere to be seen at this time, because they require a commercial rate of return. Some motels have been built recently by new players to the market, often sourcing funds from offshore and possibly motivated to invest for other reasons, also able to afford to take a long-term view.
A motel operator in Christchurch could be forgiven for wishing that any future hotel development will be slow in coming, however many believe that if Christchurch had more hotel rooms, it would have more tourists. The city has recovered by many measures since the earthquakes, however international visitor numbers are still under half of what they were pre-quake. Certainly there will be other reasons for this other than just the hotel shortage, however anything that can encourage these visitors back to the city should be a positive thing.
Other regions and centres in New Zealand also require additional accommodation, as evidenced by record breaking occupancy figures throughout the hotel industry in the last year. Even hotspots like Queenstown have little if any commercial accommodation construction in the pipeline. (A few rumours but nothing solid that we are aware of.)
In times like this, the first thing should happen is that operators stop discounting, then start increasing their rates as they feel confident to do so. To sum up, room rates need to rise across the board for new developments to be commercially viable. Incumbent operators stand to benefit greatly from increasing room rates which on a cyclical basis are now overdue.
If our sales volume this year (and that of other brokers in our business) is any measure of confidence, it would seem that the market is perceived to have bottomed out. Room rates, profits and property/business values may not rise that quickly or evenly throughout the country, but notwithstanding major unforeseen negatives, that certainly seems to be where we are heading.