Investors bide time on hotels

PERTH’S hotel market is showing strong signs of growth, with recent reports placing the state’s hotel market among the top performers in the country.

Though the leisure market remains sluggish, occupancy and room rates are tipped to reach similar heights to those experienced before the GFC by the end of the year, thanks to a strong economy buoying the large corporate travel market.

Deloitte’s recent Hotel Market Outlook projects that Perth’s hotel occupancy rates will reach 88 per cent by the end of the year, up 6 per cent from 2010 and 7 per cent from 2009.

The story is similar with room rates; Perth’s average rate is tipped to grow by $20 per night this year, taking it to $178 and placing it third highest in the country after Sydney at $196 and Melbourne at $191.

The projections are high but, according to the hoteliers who spoke with Business Class, both are achievable.

The Duxton is sitting above 90 per cent occupancy, The Esplanade is at 81 per cent and Pan Pacific, which has the most hotel rooms in Perth (see ‘Book of Lists’, page 16), is tracking ahead of last year after only a month managing what was the Sheraton.

So in conditions that seem attractive and a market that hasn’t seen a significant hotel developed in years, investment opportunities are available. But are there any takers?

According to The Esplanade Hotel’s general manager Rod Coates, occupancy levels and room rates need to get higher if Perth wants to attract major hotel developments.

“There will be no new investment in hotels in Perth purely because of the cost of construction and the return on investment isn’t there, not until (room) rates improve substantially,” he says.

Grant Raubenheimer, general manager of the recently rebranded Pan Pacific Perth, agrees and welcomes the addition of competition and investment in the market.

“The investor certainly wouldn’t be building a hotel if they didn’t think they would get a return on investment. If they are bullish enough to be building, it has to be a good thing for the market,” he says.

Mr Coates pointed to finance as another factor lessening the appeal.

“The only way you would ever get anything out of the ground at the moment is with a mixed-use development. An investor investing in tenantable commercial building activity has a greater rate of return than anybody who wants to build a hotel, so the only way you will get a hotel to work is to provide a mixture of that in the same complex to ensure you have a balance,” Mr Coates says.

The question remains, however, how high do those levels need to go before the city’s accommodation market receives significant investment?

It’s a question to which Mr Raubenheimer didn’t have an answer.

“If that figure (88 per cent) was higher, I would be saying yes, we are short stocked in the market, but there are weekends where we don’t fill, which means we have latent stock there,” he told Business Class.

Tourism WA chairman Kate Lamont says rates are already high enough to warrant investment.

“Average hotel occupancy rates in Perth are consistently 80-90 per cent, which essentially means most hotels are full most nights of the week,” she says.

“Perth has a critical shortage of quality hotel and short-term accommodation rooms, and has had for some time now.”

Perth Convention Bureau managing director Christine McLean pointed to major upcoming events to explain how critical the issue is.

“The city’s capacity will be stretched for the Commonwealth Heads of Government Meeting (CHOGM) in October this year but the issue will become even more critical with Perth securing the world’s biggest and most prestigious liquefied natural gas conference, LNG18, which is expected to attract more than 5,000 delegates when it is staged here in 2016. The clock is ticking,” Ms McLean says.

She says business travel generated about $1.6 billion per year for WA but the broader benefits to the state often went unrecognised.

“Australian Convention Bureau research confirms that an international delegate spends up to six times more than a leisure tourist,” Ms McLean says.

She highlighted the importance of investing in accommodation as a foundation to securing conferences, saying that without significant investment in hotel infrastructure and destination development, WA is likely to lose about $435 million worth of foreign exchange earnings over the next 10 years.

Mr Raubenheimer says there will be benefits in some fresh competition coming into the market.

“I think the Western Australian market could possibly do with an injection of new properties, whether that is a new build or a new brand coming in and expansion, because it is always good for a market; there is nothing worse than a stagnant market,” he says.

“If the market can take the increase, then it is a good thing for all the players.”

According to Ms Lamont, the issue runs deeper than just a stagnant market and tired hotels; she believes the number of hotel rooms in Perth is one of the main issues burdening the city’s ability to successfully bid for and attract major conferences.

“Hotels are critical infrastructure for our visitor economy, and this shortage is impacting on business as much as it is on tourism,” she says.

“The hotel room shortage is a priority issue for Tourism WA, which is working hard to encourage significant hotel infrastructure investment.”

Mr Coates agrees a room shortage will affect the city’s conference pulling power, but says he is not certain the effects had yet been seen.

“There is a bit of a fear that the limited supply of accommodation won’t allow for large conferences to come into the city, I am not convinced of that,” he says.

Mr Coates does, however, agree that development needs to take place now to make way for future demand.

Is bigger better?

There may be no development on the horizon that will significantly boost the number of rooms in Perth, but there is a number of smaller hotel developments currently under way and awaiting approval.

A 46-room boutique hotel is planned as part of the Old Treasury Buildings precinct refurbishment, a $584 million redevelopment by the Barnett government which will comprise commercial and retail space.

The redevelopment of St Georges House (part of the heritage listed Bishops See site on St Georges Terrace) into a boutique hotel will add 15 rooms and eight suites to the market by August this year, should the project be given the go-ahead from the City of Perth this month.

Another hotel up for planning approval this week is the $42 million redevelopment of the Carlton Hotel, which would add 59 hotel rooms to the market.

By far the largest injection of rooms will be Frasers Property’s Queens Riverside development, which will comprise commercial, residential and retail space and 236 hotel suites.

Ms Lamont supports the developments but notes they are not significant enough in size to fill Perth’s need. She is pushing infrastructure development as a critical element of Tourism WA’s strategic plan 2010-11.

“Although we are seeing some developments such as Aman Resorts’ planned move into the Old Treasury Building and Frasers Suites in East Perth, they alone will not address the situation, which is causing significant economic and reputational damage to the state,” Ms Lamont says.

“We are excited about the opportunities that exist for hotel development within the new Perth Waterfront, Riverside and Perth City Link projects. We’d like to see a broad spread of properties, including those in the three- and four-star brands, as well as five star.”

Out with the old ...

Developers may be reticent to significantly invest in Perth’s hotel scene, but with the corporate market making up a significant portion of business, some of the city’s oldest and best-known hotels have recently undergone refurbishment in an effort to attract business and corporate contracts.

The Duxton general manager Bruce Doig was reluctant to share an exact figure but says the hotel is close to finishing a complete refurbishment of all its rooms – a job that will culminate in a bill of millions.

“It was well overdue, the comments came back from our guests that the rooms were tired and yes they were, now we have a fresh approach,” Mr Doig says.

“It will definitely give us more business in the corporate sector.”

For The Duxton, ambitions are high; occupancy sits above 90 per cent for the month of January and Mr Doig expects that figure to grow this year, growth he said would be helped by the complete refurbishment of the hotel.

“By the time we finish we will have the ‘wow’ factor,” he says.

The Esplanade’s Mr Coates says upholding the hotel’s conference centre has been integral to business, given that 70 per cent of the hotel’s client base is corporate.

“A lot of people see this as a tourist hotel, it’s not, it is a business hotel. We have purposely built a business model (and a dedicated convention centre) over time that was going to attract large conventions to Fremantle,” he says.

Pan Pacific is also focused on remaining competitive in the market by rejuvenating its conference facilities; its Singapore-based owners are planning to spend between $4.5 and $5 million on Pan Pacific’s convention floor.

“There are so many places sprouting up that offer convention or conference space and if you are not keeping up with the trends and the market you are left behind a bit,” Mr Raubenheimer says.

“The hotel was built 38 years ago, I think they have had one convention floor refurb in that time, and it was due.”

Pan Pacific is also planning to refresh its guest rooms, lobby and food and beverage offerings – or ‘revitalising the product’ – something 42-year-old Parmelia Hilton is also doing, having recently refurbished its Globe restaurant, pool and gym with plans to relay carpets throughout the hotel in April.