The Essential Hotel Viability Formula

Over the past decade there has been minimal development in the commercial accommodation sector and in particular hotels across all Australian cities. It can be said that the majority of all capital city accommodation development has been in the Serviced Apartment segment. Market dynamics that prevail at this moment see demand exceeding supply in Capital Cities and major regional centres.

Occupancies and Average Room Rates are above forecast level and Developers and Investors both private and Institutional are considering the opportunities. In the previous era, Developers not having a complete understanding of the complexities and variables of the hotel development process often had a DA in place prior to establishing the viability formula of the business. The formula for the last round of development in the late 90’s proved to be inappropriate in its application with major operators dictating the process from brand selection and trading formula. The “all gain and no pain” Management Contracts of that era, proved to be the “Cross that broke the Developers back”. The GFC ushered in a new direction through necessity and the major hotel operators implemented new brand strategies to meet the new more refrained consumer spending trends. With new operators and new brands the marketplace became far more competitive and the pressure saw a change in the trading options of the hotel operators and the refinement to management contract formats. There is a great deal more choice for Developers and their Investors and the necessity to have an operator in place is not seen as an essential aspect in the project development structure. Projects are now scoped on potential viability and the brand and operator selection can then be analysed and matched to the project. Brand standards and specifications do not vary substantially between operators regardless of their assertions. The next development cycle is underway and the refinements will ensure project viability can be justified from the outset.
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