TAA (Vic) Current and Future Hotel Developments August 2019 Hotel Market Outlook 2 Supply and Demand 3 Australian Key International Visitor Trends 7 Australian Key Domestic Visitor Trends 9 Demand Drivers 11 Major Stakeholders 13 New Projects Announced 14 Development Summary Melbourne (including inner suburbs, city and surrounds) o New hotel openings 17 o Under Construction 18 o Approved 19 o Proposed 22 Suburban developments 24 Regional developments 25 Hotel openings over the past 12 years (Melbourne) 27 Tourism Accommodation Australia (Victoria) 1 Market outlook remains broadly positive Prevailing economic conditions “Slowing global growth and a pick up in the pace of housing price losses weighed on consumer spending and household construction over the second half of 2018.” - “Looking forward, a restrained household sector will continue to weigh on growth, but will somewhat be offset by increased government spending and exports growth.” - “Continued falls in the value of their largest asset have prompted households to be more cautious with their wallets, while also causing developers to think twice before beginning new construction projects.1” - Combined, the slowdown in household consumption growth and retreat in dwelling investment were responsible for about half the decline in economic growth (the economy grew at an annualised rate of 3.8 per cent over the first six months of 2018, falling to 0.9 per cent, post a significant slowdown over the balance of the year) (Ibid). - Spending on infrastructure projects by state governments across Australia’s fastest growing cities, the continued rollout of the National Disability Insurance Scheme and tax cuts announced in the Federal Budget will assist to offset future declines in economic activity (Ibid). In a sign of developer confidence in Melbourne “amid current economic uncertainty,” “construction of $700m worth of new office, hotel and apartment projects has kicked off in key urban precincts of Docklands and Fishermans Bend.2 - Projects include a $500 million dollar office tower (Chinese developer, Poly) at 1000 La Trobe Street, opposite Marvel Stadium, where construction recently commenced (Ibid). 1 Economy is a tale of two halves: Deloitte Insights, May 2019 2 Confident developers kick of $700m of new Melbourne projects, AFR, July 15, 2019 Tourism Accommodation Australia (Victoria) 2 - Local developer, Capital Alliance “has appointed Crema Constructions as builder of its $200m mixed-use project, The Normanby (199-201 Normanby Road)” that includes the 200 room debut of Marriott’s AC Hotels by Marriott brand in Australia – AC Melbourne Southbank Hotel (Ibid). Supply and Demand National Long term revenue forecasts for hotels in Australian major capital cities forecast RevPAR growth averaging 3.3 per cent, per annum, underpinned by high occupancy levels, despite a material change in new hotel room supply over the next five years.3 - Supply growth of 3.8 per cent is expected, long term to FY2027, with “uplift concentrated in Melbourne, as developers continue to recognise favourable demand fundamentals” (Ibid). The influx of new hotel brands coming into many Australian cities (17,000 under construction, out of a total proposed development pipeline of 53,000) will help Tourism Australia achieve its strategic goal of growing tourism spending to $115b by 2020 (two years ahead of schedule).4 - Demand growth is forecast at 4.0 per cent to FY2027, while long term growth expectations for Average Room Rate averaging 3.1 per cent per annum are expected (Ibid). Melbourne Melbourne’s long term RevPAR growth average (to FY2027) is projected to be 2.8 per cent. Sustained increases in new supply over the next five to six years will test equivalent demand growth and “operators may respond with rate competition.” Annual demand growth is expected at 4.7 per cent to FY2027 - Whilst occupancy levels are expected to “slightly depress through the height of supply arrivals,” but will be “largely upheld” by strong demand drivers, over the same period5. 3 Dransfield: Hotel Futures 2019: RevPAR forecast – 2019: 2027 4 Hotel glut brings cheaper rooms and more choice, AFR, May 3, 2019 5 Dransfield 2019, p. 8 Tourism Accommodation Australia (Victoria) 3 Strong demand drivers include 500,000sm of new lettable office space in the CBD over the next three years; Melbourne Convention and Exhibition Centre’s status as Australia’s largest convention space; strong domestic and international tourist arrivals; Melbourne’s curfew-free airport status, and the attraction of the ‘best of the best events (many exclusive to our city). Melbourne Supply Melbourne development activity has surged in the past 12 months, with a large movement of proposed hotel projects into construction phase. - As a result, Melbourne currently holds the “mantle of the largest live pipeline (of new rooms) of all capital cities.”6 Dransfield’s supply forecast reflects expectations that 12,100 rooms will enter the market over the next nine years (to FY 2027), “at an average annual growth rate of 4.7 per cent.”7 - Melbourne’s live pipeline (recently completed, under construction and proposed) has increased from 45 to 70 projects, with 25 projects currently under construction (Ibid). - All classes of new hotel stock are well represented in these projects. This increases the need for older stock to be refurbished, to remain competitive. Occupancy levels are expected to “slightly depress through the height of (new) supply arrivals,” but will be “largely upheld” through commensurate increases in demand drivers, resulting in expectations that Melbourne occupancies will “return to current levels at the back end of the forecast” (to FY2027)8 - Occupancies are expected to average 82 per cent over the forecast period, while rate growth expectations averaging 2.7 per cent are expected, when factoring in “additional supply pressures and anticipated operator reaction” (Ibid) RevPAR growth is expected to fluctuate over the forecasted period, with “full forecast expectations to FY2027 for a 2.8 per cent growth, per annum.” 6 Dransfield 2019, p. 14 7 Dransfield 2019, p. 47 8 Dransfield 2019, p. 48 Tourism Accommodation Australia (Victoria) 4 - FY2019 – Expectation to maintain prior year’s RevPAR, “with rate growth offsetting a slight occupancy reduction” - In the medium term (to FY2021), RevPAR growth is expected to be “restrained averaging 0.8 per cent, per annum, as (new) supply impacts occupancy and discounting behaviour emerges.” This “subdued performance” is likely to persist to FY2024, as the “supply pipeline rounds off.” - A longer term ‘recovery’ in RevPAR growth is expected, as “a window of supply stagnation” caps projects that will be delivered, approaching the end of the forecast period in FY 2027 (Ibid). “Supply significantly reduces compression and slows rate growth” - The number of busy nights for Melbourne (in excess of 90 per cent occupancy) has reduced from 112 in 2015 to 89 in 2018, resulting in a two percentage point differential in Average Daily Rate Premium (33 per cent in 2018 and 31 per cent in 2018).9 STR’s projections reflect Melbourne’s under contract pipeline of new rooms reflects the following additional supply, over the next five years: - 2,300 in 2019 - 3,800 in 2020 - 2,400 in 2021 - 1,700 in 2022 - 1,000 in 2023 By 2023, Melbourne will only have 1,700 rooms less than Sydney, at circa 47,300. (Ibid). Travel trends Falling corporate and leisure passenger numbers, higher fuel costs, the low Australian dollar and reduced consumer confidence are hurting the travel and aviation sectors10 9 An Insider’s look to Australian accommodation performance, STR, May 2019 10 Dark skies ahead for travel, airlines and airports, AFR, May 24, 2019 Tourism Accommodation Australia (Victoria) 5 - The three month average growth in traffic numbers for international passengers and Australian residents is now falling, compared with consistent growth of 4-5 per cent in recent years (Ibid). - Melbourne Airport CEO, Lyell Strambi “admitted fuel prices and geopolitical forces (US China trade war and Brexit) are hurting the industry”, but warned against taking a “whole of market (negative) view,” when claiming there are “opportunities amid the gloom” (Ibid). Construction Weak off-the-plan apartment sales and worsening market conditions have resulted in a number of major apartment projects being “shelved or converted into offices, student housing or hotel projects, after not achieving sufficient sales results.” Apartment valuations have also been adversely impacted.11 - The ‘Australia 108’ will be the tallest residential building in the Southern Hemisphere, with 88 per cent (971) of the 1,103 apartments in the 101-level Southbank tower (currently under construction) having been sold. This figure is down on the 1,081 apartment sales reported in September 2017, “indicating a high (contract) cancellation rate of more than 10 per cent” (Ibid). Historically high rates of new supply for Melbourne’s student accommodation market, with 13,000 beds to be built in Melbourne over the next four years (representing 46 per cent of the current student accommodation pipeline), will not be enough to meet burgeoning demand from domestic and international students - Accounting for this new stock of student accommodation, Melbourne “will still have the biggest deficit (in required beds) in 2022, with 5.2 international students, per bed.” - Overseas investors are starting to recognise growth opportunities in this undersupplied market, with “keen interest coming