A healthy economy means disposable income for leisure pursuits like holidays.

Around the country we are seeing high occupancy rates in all varieties of tourist-based accommodation but does this encourage property developers to invest in new accommodation property?

This is a tricky question with no straightforward answers. For example, large resort-style developments can involve projects with timelines of over a decade. Many fluctuations in the market can occur over this time, so a developer must be sure of their product and confident of investment.

While many property developers and industry associations acknowledge that there is a shortage of high quality accommodation in Australia, identifying the appropriate locations for development and funding that development is not a simple equation. For example, the 2007 wotif survey identified the capital cities, particularly Sydney and Melbourne, as the most popular places for tourists to stay.

AHA's Hamish Arthur

However, as Hamish Arthur of the Australian Hotels Association points out, “On the accommodation market, there’s been a lack of new supply for a variety of reasons. Room rates are much, much lower than corresponding products from the rest of the world. That has to do with market confidence, coming off a low base where the market really suffered around the 80s and 90s. Still in the upward surge from that, as an investment prospect, in major cities offices are more lucrative. Room rates would need to be around $500 per night to see a surge in development.”

In terms of new hotel development, the demand is there. As Mr Arthur said, “It’s very difficult to get a room in Perth through the week. It’s one thing to have high occupancy and until we see strong growth in RevPAR we’re not going to see many new hotels being built. Accor is building Pulman in Sydney, the first traditional new hotel in a decade.”

Apart from hotels, in cities, serviced apartments are soaring in popularity. They can be combined in mixed developments with offices or apartments and extend the variety of accommodation within city centres. One company who has built serviced apartments in every capital city in Australia is Quest Apartments. For 20 years, Quest has been developing this sector of the industry and it is now Australasia’s largest and most successful operator with apartments all over Australia and in New Zealand and Fiji.

Originally intended for corporate travellers, Quest found that their apartments were also in demand from leisure travellers appreciating the independence of having their own kitchen and the option to have it stocked by the Quest Pantry Shopping Service and full on their arrival. Quest apartments are operated by franchisees.

According to Bill Hitching from the Urban Development Institute of Australia in Victoria, the pressure cooker that is Sydney has reaped benefits for Melbourne. Finding that accommodation is expensive and difficult to locate prompts overseas companies and tourists to consider the benefits of Melbourne for a holiday or to relocate. Over the last few years a plethora of new development has seen hotels, serviced and casual accommodation being built in the city.

“There’s been a lot of takeovers of hotels and new development for example at Southbank and Southgate, the casino, Eureka Stockade, Key West with a mixture of serviced apartments, apartments and short term accommodation,” Mr Hitching said.

“Because of the shifting of the workforce, the global companies first consider Sydney, then they realise that to keep their workforce it’s too expensive so they’re moving into serviced apartments in Melbourne.”

“Melbourne has become noted for its events and those things keep the hotels in a healthy position, for example the grand prix, Australian open tennis and the Melbourne Cup. It’s becoming known as the sporting capital of Australia.”

Coastal areas are at the centre of new accommodation property development in Victoria. The traditional holiday areas of Mornington and Bellarine Peninsulas, together with the south coast along the Great Ocean Road will continue to see strong development, particularly at the upper end of the scale. However, the Mornington Peninsula is still waiting to see quality accommodation options to be developed. Although there are several hotels on the Peninsula, the demand means that there is a minimum stay of two or three nights and casual accommodation is not very available. This is despite the fact that the Mornington Peninsula has traditionally been one of the main holiday areas for Melbourne. The reality of a huge population of retirees relocating there will tend to protect the amenity for holidaymakers. The residents will want it to be a playground as well, with a resort style of living all year round.

It is the south coast that has witnessed a strong surge in development, with golfing resorts at beaches such as Torquay. Further west, Lorne has really taken off with first class accommodation now offered, including a resort developed by the Sydney-based Mirvac Group. There are no signs of the development abating although caravan parks do seem to be suffering redevelopment.

The wine producing areas of Victoria have also attracted the tourist dollar with high quality golf course resorts in the Yarra Valley. The traditional wine producing areas of South Australia such as the Barossa have not yet followed suit.

Rob Alvaro’s company, Built Environs, has been involved in building hotels in Adelaide but he does see that there is a lack of quality accommodation available in tourist areas in South Australia such as Kangaroo Island. He said that the Barossa Valley has some good accommodation but it’s pretty limited. This is despite the fact that South Australia does have a strong economy.

“If we look at Adelaide as a capital city, we’re seeing a period of really good strong growth in the last couple of years,” said Mr Alvaro.

“All the analysts are tipping that the growth is going to continue and from our point of view being involved in property and construction, we agree with that. If you look at a macro level, what’s happening with our economy is that we are seeing the economic benefits of our resources. It’s affecting all sorts of things – commercial, residential – all sorts of areas right across the state.”

Moving further west, the relative isolation of Western Australia gives it a unique place within the tourist economy. A long coastline of pristine beaches, adventure holidays in the Kimberly region, one of Australia’s best and most distinctive wine producing regions and a relaxed, open capital city give it an edge that it is just beginning to exploit.

Viridian Resort, Noosa

Hawaiian is a developer that has recently completed an extensive refurbishment of the Cable Beach Club Resort at Broome and has also built the Parmelia Hilton, Perth’s most centrally located five-star hotel. The general manager of the Cable Beach Resort, Ron Sedon, gave his perspective on where the state stands on the future of accommodation development.

“While hotel rates and occupancies are reasonablybuoyant at the moment there is still relatively little full service hotel development occurring. The majority of accommodation development still appears to focus primarily on four to 4½ star standard serviced apartments and smaller scale resorts of approximately 80 -120 rooms.

“Additionally the more costly, labour intensive and usually lower margin activities such as day spas, restaurants and ancillary support services are often out-sourced to private operators under tenancy agreements or simply not provided for, operators preferring to leave guests to utilise surrounding stand alone F&B outlets or those of neighbouring hotels.

“The high build costs and relatively low margins produced historically by hotels are still viewed with an element of suspicion by many investors, hence the tendency for many recent projects to be financed via sales (often off-the-plan) of strata titled units that hasunder-pinned much of the development over the last 10 years. This has produced mixed results in terms of returns to unit owners, while some have seen significant capital gains, actual cash returns from this type of investment often leave investors disappointed with their investment’s revenue-generating quality.

“Interest rate increases only serve to increase the pressure on owners (often small scale investors supporting heavy overheads) to increase their returns thus the cycle of pressure on property management increases. Notwithstanding this, there are pockets across the nation where growth is both warranted and viable.

“Perth would certainly fit into this category given the current record occupancies and room rates enjoyed bymany four to five star CBD hotels. Other growth sectors would include smaller CBC boutique-style full service hotels (such as Medina), three to 3½ star regional hotel/motel (Quest) owner operator concepts. Demand is increasing for higher end eco tourism products featuring private facilities and a limited F&B (offering pre-packedcommissaryproduct andDIY cooking). Future hotel and particularly resort development appears to be mixed with arguably more scope on the west coast of Australia thanthe significantly more established (perhaps saturated?) east coast.”

Moving back to the east coast and looking at Queensland, it seems that Ron Sedon’s comments about finance for tourist accommodation coming from people purchasing individual units of-the-plan has been a common practice and will continue to provide the investment source for construction.

Leighton Properties is constructing a development such as this at Noosa. Located in a prime position above Noosa’s Main Beach and Hastings Street with its boutique shops and restaurants, Viridian Resort and Spa will occupy 20ha with over 200 villas from one to four bedrooms in size. The project has been selling now for over a year and has already raised close to 100 million dollars in sales. In the same market and location, two other developments are under construction but Bob Borger, the project director, believes that Viridian has the edge.

“It’s a real resort… we think we’re at the upper level of product and we think we’re at the upper level of location. We know that our pricing is reflective of those strengths. The competition is such that we’ve measured that competition and we believe we’re in front of it. I see it’s a hard market. The resort market is hard because there are many more issues you’ve got to address and there are a whole lot of compliance issues that you’ve also got to focus on – compliance with ASIC requirements and licensing requirements. You’ve got to be tenacious with projects such as this because this Viridian project has now been 10 years in the making.”

Leighton's Bob Borger

Leighton has only recently moved into accommodation property development. Traditionally the company develops commercial property but Bob sees a definite future for this Viridian style of development. It involves finding locations with a unique, ‘magic’ quality. For Leighton, developing property such as this moves the company towards a portfolio with a better mix. There is another property at Kingscliff in northern NSW that has a similar unique quality, being on the ocean front with a river behind. That project has been underway for two years and they haven’t even got a development application yet.

The idea of developing low rise, low impact buildings that are no more than three storeys high in an accessible but unique location has proved so far to be popular with investors. The Viridian Resort has been approved using a title that does not allow permanent occupancy. When completed Outrigger will take over and manage the resort.

Queensland has the climate, the coastline and the locations to facilitate many more such developments. In taking an overview of the state’s accommodation development, UDIA chief executive Brian Stewart pointed out that, “While the holiday market is highly susceptible to short-term fluctuations in the economic environment, only long term economic problems generally affect the development industry.

Brian Stewart UDIA Chief Executive

“Developing a hotel or resort takes years of planning and preparation and consequently projects due to be released in the next few years are already in the pipeline. In other words, it is likely that the rate of development of holiday-based accommodation will remain constant for the foreseeable future.

“If we do see a significant economic downturn that, despite the recent interest rates rises and US recession is far from certain, it is likely that Queensland developers will be somewhat better off than their interstate counterparts. Queensland’s natural attractions such as the Great Barrier Reef and Whitsundays mean the region is always in demand whether that be from domestic or international visitors.”

One thing is certain, the new accommodation property development that we see around Australia will be varied and specific to the location, whether inner city, beach or country. The practice of funding development through owner occupation is likely to continue and increase, whether it is for a block of apartments or a large five-star resort. The proliferation of smaller hotels, B&Bs and self-contained cottages will continue to meet the demand for accommodation in more remote areas and serviced apartments will be competing for customers with traditional hotels in city centres.

Sally Price - AMG Industry Reporter