Covid-19 continues to haunt the hotel sector, with occupancy levels in Brisbane, the Gold Coast and Cairns all falling below 20 per cent in April—but regional markets including Rockhampton and Mackay outperformed their city cousins thanks to ongoing essential corporate demand, a new report shows.
Preliminary data from Colliers’ Queensland hotels market update has revealed the impact of the lockdown measures on revenue streams of hotels and hospitality venues in the Sunshine State, and though it paints a fairly bleak picture, there is cause for some optimism in a sector hit hard by the pandemic.
Retail liquor sales across the nation were one of the few areas to benefit from government directives to stay at home and the closure of on-premise venues, spiking by 32 per cent in March 2020 over the prior year and remaining 14.9 per cent higher in April and up 45.8 per cent in May.
In stark contrast, turnover in Queensland’s cafes, restaurants and catering declined by -32.5 per cent in March 2020 over the prior year and a larger -68.4 per cent in April, the first full month of restrictions, as businesses closed their doors.
But report authors, Colliers’ Baden Mulcahy and Paul Ellis, say that as the restriction measures are gradually unwound, turnover is expected to return to trend levels as the economy continues to normalise.
National Liquor Retail Turnover
^ Source: ABS
“In addition, measures such as the discontinuation of buffets and improved cleaning protocols may become more permanent outcomes that will have an ongoing impact on venue cost structures in future.
“Further relaxation of social distancing measures including floor space requirements and maximum venue limits, combined with the re-opening of stadiums, arts and entertainment venues should aid future revenue growth, albeit the ultimate stabilised trading outcomes will be influenced by broader economic conditions.”
The closure of Australia’s international borders, the subsequent closure of the state border, lockdown measures and the grounding of commercial airline fleets severely impacted most accommodation businesses throughout Queensland.
According to STR data, market occupancies within the major centres of Brisbane, the Gold Coast and Cairns all fell significantly to below 20 per cent for the month of April and fared only slightly better in May.
These occupancies are based on hotels open, with economic occupancies actually lower when the 14 per cent to 25 per cent of hotel rooms closed in each market are considered.
Regional business locations such as Townsville, Mackay, Rockhampton and Gladstone have outperformed relatively due to ongoing essential corporate demand.
As pandemic concerns and restriction measures ease, interest in travel is taking off again, with SiteMinder data comparing 2020 daily bookings as a percentage of the corresponding daily 2019 bookings showing renewed and stronger growth in Gold Coast and Cairns leisure destinations and Townsville—although Brisbane growth has been more muted.
Demand growth has been led by the intrastate domestic leisure sector, particularly to road-trip destinations in proximity to major population centres.
“Future growth will be aided by the reopening of state borders and the return of regular interstate airline flight schedules and larger hotels and tourist attractions in major leisure destinations should continue to gradually reopen and increase capacity over the third and fourth quarters of 2020,” Mulcahy and Ellis said.
They also noted that Virgin Airlines, on completion of its sale, is expected to recommence as a scaled-down mid-market airline with a reduced fleet capacity, and while this may impact on access to some destinations, it could also provide opportunities for some of the smaller regional airlines.
As far as corporate demand goes, Brisbane remains slow to recover with many major employers still not allowing staff to return to their offices—and some not planning to until the fourth quarter of 2020—let alone allowing them to travel.
But intrastate travel is expected to be boosted by major mining and infrastructure projects, including those associated with the opening up of the Surat Basin, according to Mulcahy and Ellis.
“Conferencing and event demand will take longer to recover given the lead times required for this business and is anticipated to ramp up over the course of 2021 following the easing of social distancing measures.”
^ Source: STR
Queensland’s inbound market will be slow to return, the authors say, governed by the easing of border restrictions and unlikely to recommence in earnest until the second half of 2021.
“Historical demand patterns will not be replicated in the short term as the visitor mix for each respective market recovers at different rates.
“This is likely to lead to strong peak demand periods for leisure destinations but weaker off-peak periods and lower occupancies overall,” the authors said.
The Brisbane market is forecast to experience a “softer” short-term occupancy due to reduced conferencing and inbound demand, however regional markets that rely primarily on intrastate business should recover more quickly, Mulcahy and Ellis said.
“Overall, the markets with significant exposure to inbound visitors are not expected to stabilise until 2022 to 2023.”
With cash flows across all hotels and hospitality businesses under extreme pressure thanks to significantly reduced or eliminated revenue, Mulcahy and Ellis explain that attempts to modify operations to cope with restriction measures—or closing entirely—has meant significant cost-cutting and reduced staffing levels.
Support measures such as Job Keeper, rent reductions and loan repayment deferrals introduced by the federal and state governments and banks have offered some support to businesses during the worst of the pandemic and helped maintain a core workforce for the future recovery phase.
Whilst some businesses will recover reasonably quickly, Mulcahy and Ellis predict that many markets and asset types will take a longer period of time to recover, and in some cases, this may extend for two to three years, particularly for those with a high exposure to inbound visitors.
“Cash flows in these sectors will remain under pressure, particularly as the support measures are unwound over Q4 2020, subject to review.
“Strict cost controls will need to be maintained as business momentum builds to ensure that profitability is not permanently eroded should revenue growth not meet expectations.”
The Covid-19-induced lockdown has accelerated some trends that were already evident in various sectors and despite the support measures, there are some businesses that have closed the doors and will not re-open due to a lack of capital or obsolescence.
Mulcahy and Ellis note that capital markets reacted quickly to the evolving health crisis and the implementation of restriction measures, with existing contract negotiations breaking down, parties walking away from potential deals, and proposed marketing campaigns being shelved.
This was not the case across the board, though, with “a number of licensed premises contracts staying afoot, albeit on negotiated terms, which included extended settlements or pre-Covid-19 income triggers”.
The report’s authors say the net result of this has been a softening in pricing to account for the loss of profit over a defined period of typically 0.5 to 1.5 years, but the impact on yields remains “opaque” because of the potential longer-term impact on EBITDA.
In addition, a number of transactions of freehold investment hotels were concluded during the first half of the year, including the Acacia Ridge Hotel, the Indooroopilly Hotel and the Yeppoon’s Railway Hotel, but Mulcahy and Ellis note that these transactions were in progress or settled prior to the worst of the pandemic lockdown.
“Despite the challenging market conditions, investor sentiment surveys indicate that the current environment represents a buying opportunity for good quality major assets, particularly in Brisbane, however, selling intentions remain reasonably low,” Mulcahy and Ellis said.
“Secondary quality assets and markets which have a longer-term recovery profile have a higher proportion of sale intentions and weaker demand profile.”
Transaction activity is anticipated to pick up from Q4 2020 as business levels return and cash flow improves, which will also be stimulated by the withdrawal of support measures in some instances.
“The impact on pricing will then become clearer as greater certainty can be placed on the future financial performance of a business.”