The New Zealand hotel industry enters 2023 with the highest degree of optimism since the onset of the Covid-19 pandemic three years ago, despite a range of headwinds on the horizon.
International borders were fully reopened in August last year, which has led to a strong summer trading period based on wider pent-up demands from the majority of New Zealand’s key inbound markets.
In recent weeks, our second largest market, China, has also commenced overseas travel, which will be a significant contributor to even stronger demand in 2023 and beyond.
Recent data from the Tourism Export Council New Zealand forecasts that international visitor levels will rebound to approximately 2.1 million by year end May 2023 with a general view that inbound numbers could approach pre-Covid levels as early as year end May 2025.
YHA Hostel, Lake Tekapo.
“The FIFA Women’s World Cup that will be co-hosted by New Zealand and Australia is set to be one of the largest global sporting events of the year and that will be held on our shores in July and August,” Humphries says.
“Outside of Auckland there has also been a largely dormant pipeline of new developments meaning there has been an overall net reduction in short-stay accommodation options across most regions due to a decline in motel and third-party platform inventory.
“This decline in alternative accommodation options such as motels and Airbnb properties has seen people pivot toward hotels to ensure they have a safe, secure, and comfortable holiday or trip.”
Humphries says travellers are also moving towards taking longer trips as they combine business and leisure leading them to also look at self-contained accommodation options such as serviced apartments.
“All of the above factors lend themselves to the wider hotel sector providing strong resilience to a range of global economic headwinds during the next 12 months, including inflation, the higher cost of capital, and slower economic growth.”
From an investor’s perspective, New Zealand hotels are witnessing revenue growth, which is in line with international trends.
This is primarily due to exceptionally robust room rates and strong demand following the reopening of our borders.
“Many regions are fast reaching industry high pre-Covid revenue per available room level. We predict Christchurch, Wellington, and Rotorua to surpass 2019 levels by year end 2023 followed by Queenstown and Auckland in 2024 and 2025, respectively.”
YHA Hostel, Franz Josef.
Hotels are one of the few bricks and mortar asset classes that can immediately adjust revenue or returns to the rising costs of inflation and hence remain a savvy hedge in the current climate.
As hotel revenue can be adjusted daily, this has an immediate impact to cashflows and profitability, positively assisting property values and investment returns.
“By way of example, hotel owners and managers have been able to increase room rates in the general vicinity of 20 per cent during the second half of 2022.
“Conversely, we note operational costs are also increasing although at a disproportionately lower level than revenue, meaning profitability margins are generally keeping ahead of wider inflationary pressures.”
Humphries is expecting transaction numbers to remain low during the opening half of 2023 as prospective purchasers continue to adjust to recent bumps in the Official Cash Rate, which has impacted yields and investment return criteria.
“As we see strong forecast earnings transferred to robust and healthy bottom-line profits, we anticipate this will provide investors and lenders with increasing confidence in this sector and transaction volumes to increase in the second half of the year.”
Read the full New Zealand Hotel Market Snapshot for Q1 here.