POSTCARD

Tourism developments aren't immune to the rising cost of development and construction delays affecting major projects in this state at the moment.

In fact, it could be argued that tourism has had a tougher run than most in trying to get new developments up and running, especially in the Perth CBD.

There are a growing number of illustrations of this challenging environment, with tourism trying to compete against the commercial and residential development, which appear more of a sure bet when it comes to return on investment.

Take luxury hotel operator Stamford Land Corporation's decision to develop a 13-storey office tower next to the Woodside building in the city instead of its original plans for a hotel. The strong demand for office space, and record high office rents, prompted the change in direction.

And the Singapore-based owners of Scarborough's Observation City have submitted a proposal for a residential development on the site (which was recently rejected by council, but subject to appeal).

While hotel room rates have experienced very strong growth - among the highest in the country - it's still not enough to entice would-be hotel developers to invest in product here.

Research suggests that the cost of building a 200-room five-star hotel is about $600,000 a room. Closer analysis suggests that, for the hotel to achieve a benchmark return, or about an 8 per cent yield, the average room rate would need to reach $400 a night.

On average, that's at least 50 per cent higher than the current rates at some of Perth's five-star hotels, and more for the discounted weekend rates.

Of course, the cost gets progressively less as the star rating goes down, but you get the picture.

But if you consider the rate of cost escalation for Perth of almost 10 per cent a year, the situation is unlikely to improve any time soon.

For the hotels currently operating, it's a perfect scenario. Demand is strong and it's allowing them to increase their rates to catch up to their eastern states counterparts.

But the tourism industry sees a bigger role for government to play in incentivising tourism developments across the state.

The redevelopment of the Old Treasury building is a great start, as are plans for a hotel as part of the Swan makeover project and the new airport redevelopment - a sign the government has, at least, recognised the issue.