2002 Australia Hospitality Outlook

Since 2000,Australian tourism operators have adjusted to several major impacts on the industry, which have created an unusual shift in traditional tourism patterns. Set against the shadow of a buoyant Olympic year, hospitality businesses reported a distinctly weak final quarter 2001.During the first two quarters of the year, the indirect effects of slowing global economies, waning consumer confidence and a softening business investment environment served as dampeners to tourism momentum. Against this background the impact of the U.S. terrorist attacks in September and the subsequent collapse of Ansett Airlines further undermined consumer confidence and perpetuated a mood of economic uncertainty.

Concerns about the length and breadth of a U.S. economic contraction have eased somewhat in recent weeks, and prospects for the Australian economy are relatively positive in the near term. In the September quarter ,GDP grew at an annualized  rate of more than four percent due to robust consumer spending and housing invest- ment. However, the softening impact of global events on other parts of the economy will become increasingly clear during 2002,at a time when the housing upswing will begin to moderate .Provided consumer spending and business invest- ment hold up, the Australian economy should continue to record better growth over the year ahead than other comparable countries, but at a rate below its longer-run potential.

The Reserve Bank of Australia reduced official interest rates by 25 basis points to 4.25 percent after its December 2001 meeting, leaving rates 2.25 percent above the U.S.federal funds rate of 2.0 percent. Despite the reasonably robust domestic economy, the bank deemed it necessary to further ease monetary policy due to the weak international economy. Given the synchronised   downturn, it is likely that 2001 and 2002 will record the weakest growth among Australia ’s major inbound markets since the early 1980s.

Preliminary data on international tourism arrivals suggests a 1.6-percent decline for the year to date November 2001,with the most notable falls post-September. The U.S., Japan and New Zealand exhibited the most significant declines post-September, due to the influence of reduced air capacity, a reluctance to use air transport and uncertainty regarding economies. To their credit, Australian operators have been proactively targeting new market segments to minimise the effects of weaker inbound demand.

Domestic travelers remain timid in the wake of Ansett ’s collapse; however, anecdotal evidence suggests a switch to ground transport, stimulating the mid-market drive destinations and coastal routes during the summer vacation period. Operators with product in the premium and luxury markets are likely to be more affected.

Increased air service by Virgin Blue and Qantas restored airline capacity following Ansett ’s  collapse. The aviation sector looks set for continued development in 2002,with Ansett ’s fleet likely to re-launch if creditors approve a $1.1-billion takeover proposal. Another factor is the emergence of Australian Airlines, a subsidiary of Qantas which will provide limited international services by mid 2002.Inspiring a reasonably disillusioned public will be critical to stimulate leisure demand, whilst renewed corporate demand for air services will depend on the rate of upward economic momentum.

Although analysts expect the U.S. economy to rebound in the near future, uncertainty continues to undermine business investment and consumer sentiment. For hotels, declining occupancy rates during the final quarter of 2001 and strong price competition has in some instances accelerated room rate discounting, placing downwards pressure on room yield performance. Several projects mooted for construction have extended their development timeframes accordingly.

Although many operators feel the hardest months are behind them, the first quarter of 2002 remains a concern to some hospitality and tourism providers. Despite regional and global uncertainties, Australia ’s defiant economic situation remains a saving grace in the light of global uncertainty.

Property valuations falter along with share pricing
Like other global markets, hotel property prices in Australia came under significant pressure following Sept.11,as trading forecasts were revised downward and investors were once again reminded of the volatility of the hotel industry. Share prices of the few remaining listed hotel trusts in Australia dropped significantly post- September as many trusts were already under share price pressure prior to Septem- ber with significant discounting of listed stock price to net tangible asset backing.

Several hotel transactions in the middle of due diligence prior to September ’s events did not attract the anticipated investor interest and/or were subsequently pulled off the market to await recovery of investor sentiment. Hotel valuations completed before September were no longer considered accurate, and valuations post- September indicated declines that reflected weakened 2001 trading results and an uncertain short-to medium-term outlook.

In this uncertain tourism landscape, some operators that secured or defended market presence through equity investment in recent years are now exploring ways to remove these assets from their balance sheets while retaining management rights. The recent devaluation of properties, combined with the low Australian Dollar, may provide opportunities for counter- cyclical investors, with particular interest from opportunistic overseas investors. Several of the remaining listed vehicles are likely to be restructured, which may result in additional properties being offered for sale. Many of these properties will be bound by existing management contracts, thus deterring owners and owner-operators wishing to re-badge the investment. At the same time, domestic institutions remain unconfident that hotels are worthy investments.

Global investment funds gear up
Australian debt providers display an increasing lack of enthusiasm for exposure to hotel assets, with cautious loan-to-value ratios and tightening credit criteria. The refinancing of stressed (overgeared) assets or more adventurous transactions is likely to be hampered as a result. Until hotel performances show marked improvements, led by strengthened domestic and global economic performance, this scenario is unlikely to change.

Overseas providers of both equity and (mezzanine)debt seem more likely to play a key role in funding major transactions at higher gearing ratios than domestic lenders are willing to support Several global investment funds are actively pursuing deals, and 2002 is likely to see several transactions culminate.

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