The focus on monthly, quarterly and yearly data by hotel managers and investors often masks trends that are shaping the investment horizon over longer periods. For this reason, we have examined the best and worst-performing hotel markets in Australia using RevPAR growth rates¹ over rolling five-year periods ending 1993 through 2019, while recognizing that many holding periods are between eight and fifteen years.

The challenge facing hotel investors can be seen in the rankings of markets by RevPAR growth rates and the distribution of RevPAR growth rates over the past 27 five-year holding periods as shown below. Ideally, investors seek to acquire hotels in markets that are likely to achieve top quartile RevPAR growth rates over an extended holding period.

Some hotel investment strategies involve matching a given RevPAR index such as Top 10 Australian Hotel Markets. To lower transaction costs, an investor may not want to own the entire index. As an example, suppose an investor wanted to match the Top 10 Australian Hotel Market Index as closely as possible with an investment in five hotel markets.

The challenge becomes one of selecting five of 10 markets that minimize over, say 10 years, the sum of annual RevPAR growth on the Top 10 Australian minus the annual RevPAR growth on 5 markets, (there are over 250 ways to do this!) There are over 3,000 ways of choosing five markets out of 15 markets if we included tertiary markets such as Newcastle, Wollongong, Sunshine Coast and Coffs Harbor!

Distribution of RevPAR Growth Rates for Top 10 Australian Hotel Markets for 5-Year Holding Periods 1993 – 2019

Source: Hotel Investment Strategies, LLC based on Australian Bureau of Statistics & STR data.

The second major finding from our analysis relates to the appearance of markets over successive periods, a phenomenon known as serial correlation. For example, the Perth market made an appearance in the top two RevPAR growth markets on seven consecutive occasions (2007-2013). Serial correlation is the relationship between a variable and a lagged version of itself over various time intervals.

Winners & Losers in Top 10 Australian Hotel Markets for 5-Year Holding Periods – RevPAR Growth 1993 – 2019

Source: Hotel Investment Strategies, LLC based on Australian Bureau of Statistics & STR data.

Four of the nine hotel markets that appeared in the top 2 markets had serial correlations of five years or more. They were Melbourne (5-years, 1996-2000), Brisbane (5-years, 2003-2007), Perth (7-years, 2007-2013), and (Cairns 5-years, 2015- 2019).

Over the 27 five-year holding periods ending between 1993 and 2019, only one market, Adelaide failed to appear in the top two markets in terms of RevPAR growth.

Three of the ten markets that appeared in the bottom two markets had serial correlations of five years or more. They included Gold Coast (5-years, 1997-2001), Melbourne (5-years, 2003-2007), and Cairns (6-years, 2007-2012).

Frequency of Top 10 Australian Hotel Market Appearances in Top & Bottom Two Markets for 5-Year Holding Periods for RevPAR Growth 1993-2019

Source: Hotel Investment Strategies, LLC based on Australian Bureau of Statistics & STR data.

As illustrated in the table above, the Perth hotel market has appeared in the top 2 markets for 5-year holding periods on ten occasions over the past 27 years. It is followed by Cairns (9 appearances) and Darwin with seven appearances.

Our analysis reveals that the Gold Coast appeared in the bottom two markets on ten occasions over the period of analysis. The markets of Perth, Cairns, Melbourne and Adelaide appeared in the bottom two markets on seven occasions.

So, based on a variety of multivariate analyses including econometric models, K-Means clustering, correspondence and principal component analysis we are able to forecast the hotel markets likely to outperform most other Top 10 markets over the next five years. Over the same period, we are able to identify potential underperformers. These markets may however, provide investors with value-add or opportunistic plays.

A major and highly valuable by-product of developing target markets is a list of markets to avoid! If investors are confident that certain markets will perform well, based on models and market intelligence, they should be equally confident that some markets will not do well. Because avoiding declining markets helps to enhance the performance of a hotel portfolio, it seems important for investors to develop a list of markets to avoid. Surprisingly, developing such a list doesn’t seem to be as important as developing target markets!

Finally, the availability of timely market intelligence, and the seemingly predictable nature of hotel real estate markets, also give investors more confidence to target markets. Over the past ten years, good statistics on markets have become readily available, giving investors ammunition for market forecasting, and identifying target markets from the hotel investable universe.

Over the past 30 years, we have assisted hotel investors with a range of forecasting needs. If you would like to explore how we might assist you in targeting potential “winners” and avoid potential “losers”, please contact us at +61 466 017 823.

1 RevPAR growth has been used historically as a reliable indicator to measure the potential for hotel profit growth. Robert Mandelbaum, a Director of Research Information Services for CBRE Hotels’ Americas Research, found that there was an 86% correlation between annual changes in RevPAR and gross operating profit (GOP) from 1960 to 2016. An excellent article by STR titled “How RevPAR growth translates into profits” illustrates that a 1% increase in RevPAR equates to a 1.5% – 2% increase in gross operating profits per room.  We can conclude therefore that changes in RevPAR provide a very strong indicator of changes in GOP.

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