Staying power

Staying power

Total Property - Issue 3 2017

Tourism is New Zealand’s number one industry. Visitors are arriving in record numbers and spending big money. The boom, driven by New Zealand’s growing international appeal and the expansion of air services, is pushing up demand for hotels across the country. High occupancy rates in Auckland and Queenstown are leading to significant price rises, and concerns that New Zealand could fast run out of accommodation space. Industry analysts have said New Zealand needs to build an extra 4,526 rooms, above and beyond what is already planned, to be able meet demand by 2025, and believe the country is ripe for the multi-billion-dollar escalation in development that China and Australia have already enjoyed. Has there ever been a better time to invest in a hotel?

The surge in international visitor arrivals, especially from China and Australia, has boosted the economy – with annual tourism revenue up from $28 billion in 2014 to $34.7 billion last year. It has also led to high occupancy rates and an increase in room rates: the average rate paid per night for an Auckland hotel room by international holiday-makers in December 2016 was $206, up from $176 in December 2015.

Chris Roberts, Tourism Industry Aotearoa chief executive, says New Zealand is well on its way to growing annual tourism revenue to $41 billion by 2025, but believes improved infrastructure is the key to further success.

“Our challenge now is to encourage international visitors to disperse to all parts of the country, and to come to New Zealand in autumn, spring and winter,” Mr Roberts says. “However, we do need to invest for success. We need well-targeted investment in infrastructure so we can sustainably manage future growth.”

The tourism industry as a whole has identified the shortfall in visitor accommodation as its number one infrastructure challenge. The shortage is particularly evident in Auckland and Queenstown, although accommodation providers in Rotorua, Wellington and Christchurch have also reported reaching capacity during peak seasons.

Faruk Balli, Associate Professor in Economics and Finance at Massey University, says the Government can do more to encourage hotel development such as offering tax breaks to developers or offering incentives for them to build in less high-profile areas of natural beauty, particularly in the South Island. “Hotels can create their own demand - if you build it, the tourists will come,” he says. He argues that even though New Zealand is highly competitive in the global tourism market, “its infrastructure lags behind keys competitors, and this is becoming an increasing problem. Infrastructure is key to growing return visits. Hotels are important part of that, but tourism infrastructure also includes road and rail networks, airport facilities and retail.”

Mr Roberts agrees: “Government, both at a local and national level, needs to be far more imaginative in its response. People in other countries are intervening in the market to attract hotel developers and New Zealand risks being left behind.”

He says that regions outside the big five tourist centres of Auckland, Wellington, Christchurch, Queenstown and Rotorua face a Catch-22 situation when it comes to hotel development. “They can't attract more tourists because they don't have the hotels. And the hotels won't come because they don't have the tourists numbers. It comes down to a leap of faith for the developer,” he says.

New Zealand Trade and Enterprise's Project Palace programme has been set up to attract overseas and domestic investment in hotels. NZTE, Tourism New Zealand and the Ministry of Business, Innovation and Employment are working with local government and the private sector to identify sites for more hotels in Auckland, Rotorua, Wellington, Christchurch and Queenstown.

A recent report by the MBIE on tourism infrastructure noted that the quantity and quality of tourism-related infrastructure was key to sustaining record growth. “While New Zealand’s natural environment provides the setting for a range of visitor experiences, quality infrastructure is needed to support the range of activities that visitors enjoy,” the report states.

Globally, investors are looking to "build beds" in markets where there is under-supply of accommodation, and have poured money into hotel developments in China and Australia in recent years. Because it is seen to offer stronger returns on investment, New Zealand could be the next country targeted (the fact that 26 major hotels have changed hands in the last two years, many to offshore buyers, suggests there's heightened interest in New Zealand's accommodation sector).

Hyatt and Ritz-Carlton have plans to enter the market while the Sheraton brand has announced it is returning to Auckland after a spell of absence, with a new 21-level, 255-room hotel - the new Four Points – which is to be converted from an existing office block at 396 Queen Street.

Established players are also refurbishing old stock to defend their market share. The recent rebirth of Wellington’s Museum Art Hotel as QT Museum Wellington and the makeovers at the Mercure and Hotel Windsor in Auckland show the benefits of upgrades.

Even though demand for hotel accommodation has grown significantly, hotel development has been more muted. Several factors could explain this delayed response:
• Hotel construction often requires well-located land in urban central business districts;
• Competition for prime locations can be high;
• There is a large amount of activity in the overall construction sector, which is driving up the cost of labour and building materials; and
• Building and resource consent processes can delay construction projects.

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