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Demand a stellar win for hotels sector

The eastern seaboard markets of Sydney and Melbourne were the standout performers in 2016 with the continued achievement of strong market KPIs against a backdrop of compressing yields. As a result, the hotel real estate asset class is outperforming other property classes in the Australian market.

With international and domestic visitors growing 11.5 per cent and 5 per cent respectively in calendar year 2016, the hotel industry has not seen growth at this level since the Sydney 2000 Olympics.

Chinese visitor growth of 22 per cent is the dominant contributor to this stellar performance, which is being driven by a growing Chinese middle class having access to increased air capacity between China and Australia, as well as the relatively low Australian dollar making the country a more affordable destination.

In a positive sign for the depth of the market, the international inbound growth has been experienced across a wide range of markets, with most from established Asian markets, as well as the United States, above 15 per cent.

Tourism Research Australia's 10-year forecast provides a positive outlook for continued growth with international visitor nights and domestic visitor nights expected to grow at 5.6 per cent and 3.1 per cent a year respectively. Australia can expect to see increased room night demand nationally for the foreseeable future.

Forecast world GDP growth of 3.5 per cent underpinned by China's "steady as she goes" 6.5 per cent GDP forecast and the US's expected GDP improvement of 2-3 per cent under Trump's "Make America Great Again" mantra, augurs well for Australia's economic outlook.


In this regard, the high level of corporate movement between Sydney and Melbourne and the unprecedented infrastructure projects under way in those states are also driving healthy gross state product growth.

Forecasts from Deloitte Access Economics point towards potential interest rate rises in the US, strengthening the US dollar against the Australian dollar to a forecast range of between US65¢ and US70¢. Should this occur, Australia will become more affordable, promoting further tourism growth and increased foreign direct investment. Hotel capital markets have once again been dominated by eastern seaboard transactions, not surprisingly given Sydney and Melbourne are among the strongest performing hotel markets with the largest populations in Australia.

The scarcity of hotel product for sale, particularly in the CBD markets, matched against a wall of foreign and local capital searching for opportunities, continues to drive yields firmer within a highly competitive transaction environment. Should inflation and interest rates remain low, capitalisation rates will continue on their downward trend for at least the next 12 months.

Michael Simpson is the managing director hotels at Savills Australia