Veriu Group CEO Zed Sanjana discusses the challenges and opportunities in Australia’s hotel development landscape.
Construction costs continue to be the single biggest impediment to bringing new hotel supply to market. The cost of constructing a room has increased by more than 30% over a five-year period, with Building Index growth outstripping inflation growth in every year since 2017.
Much of this pressure has been driven by labour shortages experienced across the country because of State and Federal Government led public infrastructure construction projects of major rail and roads – particularly in Sydney and Melbourne.
This has also been coupled with two years of inflation growth which has driven increases in interest rates which have brought down the value of completed asset valuations and increased development costs as a result of financing pressures.
At the same time, we have identified a number of potential opportunities in the market. With interest rates predicted to ease in 2025, government debt at an all-time high and a Federal election looming, public spending is likely to tighten in the coming year or so, which will stabilise the development environment for the construction of new hotels.
In the Living sector, we expect to see significant and continued growth in the demand for residential development, including build-to-rent (BTR) projects and social housing. This creates clear opportunities for mixed-use developments which incorporate short-term accommodation as part of the overall project.
In terms of regional development, there is a growing trend of people moving to regional areas, leading to an increased demand for development in these areas.
The rise of remote work has also led to a decline in office demand, creating an oversupply of office space, particularly in B and C-grade buildings. This presents an opportunity for Veriu to acquire underutilised assets at potentially more favourable prices.
Office conversions offer significant cost and time advantages compared to new construction projects. This allows for faster project completion and quicker returns on investment. Punthill Tuggeranong was our first office conversion hotel that opened in 2024 and now we have started construction on another office conversion in Adelaide.
Despite the challenges in the current market, we anticipate 2025 being a year where we see construction commence or continue on six new projects which span from the suburbs of Melbourne and Sydney to regional NSW and Adelaide CBD.
We see tremendous opportunities in 2025 trading conditions with the anticipated continuation of international arrivals with the onset of the weaker Australian Dollar, which (combined with cost-of-living pressures) will likely drive further growth in domestic leisure travel as an alternative to the higher cost option of overseas travels. Easing of interest rates should also see an uptick in consumer demand.
From the supply side, there is an increased likelihood that ‘shadow inventory’ through Airbnb etc. will decline on a ‘like for like’ basis as the housing crisis continues in major metropolitan cities and the growth in residential rentals make long term rentals a more compelling proposition than short stay returns. As such, accommodation operators with supply in the market should have the opportunity to grow ADR in most markets in 2025.
To hear from more industry leaders about their market outlook, view HM’s 2025 Industry Leaders Forum here.