Analyst & former hotel manager warns of Auckland over-supply risk

Analyst & former hotel manager warns of Auckland over-supply risk

Date: 19. September 2018

As first published in The Bob Dey Property Report Wednesday 19 September 2018

Hotel market analyst Wim Ruepert warned this week that over-construction in Auckland threatened to chop operators’ returns, which were already precarious.

The big plus is SkyCity Entertainment Group Ltd’s international convention centre, under construction between Hobson & Nelson Sts in the city centre, which is likely to attract events outside the high season.

But Mr Ruepert said the big cloud was the high number of projected hotel starts. If all 41 were completed, they’d add 89% to the city’s room supply.

Writing in Horwath HTL’s latest Auckland hotel market outlook report, Mr Ruepert said the familiar calls for more hotels & acceleration of projects would follow the also-familiar reports about high room rates & supply shortage.

Against that call to meet peak season demand, “there is a significant risk of a period of strong occupancy decline unless we see a dramatic stimulus in off-season demand or some developers reconsider their planned projects.

“For the 8 months to August, revpar (revenue:available room) for the major Auckland hotels declined by 4% compared to the same period last year.

“Key contributing factors to this downturn were the absence of major events like last year’s British & Irish Lions rugby tour and the opening of more than 600 hotel rooms, increasing supply by about 9% over the period.

“Hotel occupancy rates of 82.6% for this 8-month period may be considered high, but are the lowest since 2014. Based on the number of new hotel projects under construction, announced or being considered, annual hotel occupancy levels could slip much further.”

Horwath HTL has identified 41 hotel projects in various stages that are planned to open over the next 5 years, adding 6500 rooms and increasing major hotel supply by 89%.

12 hotels containing 1800 rooms are under construction, increasing major hotel room supply by 24%.

Construction is expected to start on 3 more projects, adding another 7% to supply, and 26 projects have been announced or are under consideration.

“If we assume that only those projects which have been announced will proceed, supply is expected to increase by ‘only’ 24 hotels, or 3900 rooms over the next 5 years. Such an increase of just over 50% of existing major hotel supply would trouble most hotel investors in any city,” Mr Ruepert said.

However, he expects major banks will scrutinise projects more closely before approving development funding.

To achieve an average annual occupancy of 75%, these new hotels would need to sell close to 1.1 million room nights/year, but MBIE (the Ministry of Business, Innovation & Employment) has projected an increase in international visitor arrivals to the entire country over the next 5 years of just over 1 million, or 728,000 when excluding those visiting friends & family.

Two answers, Mr Ruepert said, were more off-peak events and targeting emerging markets who travel off-peak. “It will also need to convince existing markets that between May & October, Auckland can compete as a destination with cities in Australia and those in the warmer, northern hemisphere.”

Mr Ruepert joined Horwath HTL in Auckland in 2016 after a number of roles at the Intercontinental Hotel Group in Australia, Japan & New Zealand since 2002, most recently as general manager of the Crowne Plaza in Auckland and the group’s area general manager for New Zealand.\

Contact: Wim Ruepert