The Australian economy has the potential to draw on the tourism sector as a long-term driver for both investment and employment. If overseas visitor arrivals continue to grow at a solid pace of 7% per annum, then by 2025 the total number would increase by 100%. This contribution represents a major export industry, but it lacks a corporate focal point – with the exception of our airports, which are straining from growth in demand. At the end of 2013, I wrote an initial note regarding the exchange rate. My outlook was that a sustained depreciation of the AUD would be needed to offset a slowing of the mining construction sector. Export-oriented service sectors become key growth drivers, and the focus for this note is the prospects for international and domestic tourism activity.
From previous article:
The Australian dollar has been buoyed by the extremities of monetary policy in the U.S. and Europe. A sustained reversal of cheap money in the U.S. should lead to a substantial depreciation of the Australian dollar. Our view is that US$0.80 is a reasonable prospect for the end of 2014.
This exchange rate depreciation did occur, and the US$0.80 threshold was breached in the middle of January 2015. This note considers the broader economic and property market effects of the AUD decline (focusing on the exchange rate against the USD) – in particular, the medium-term prospects for the local tourism sector.
For starters, my view is that a low point for the AUD might occur towards the middle of 2016. This point in time appears to have three domestic forces at work in alignment:
- Completion of LNG projects in Queensland and Western Australia, with consequential softness in employment.
- A trough in population growth, following a lag to the flattening out in the national temporary resident numbers (although we expect a medium term recovery in population growth beyond 2016).
- Early closures of auto manufacturing - the majors and supplier businesses.
I will leave the outlook for US monetary policy to others to divine, but the residential building activity in that country seems likely to reach some sort of peak in 2016. A gradual tightening of U.S. monetary policy would then develop during 2015 and 2016.
In this environment, a shift to US$0.70 is anticipated by the end of 2015, and then remaining close to steady during 2016. Australia will continue to become a more attractive tourism destination, particularly for Asian countries (assuming that currency pegs remain in place). Overseas arrivals have increased by 4.5% per annum over the five years to 2014, generating a vital spending injection to compensate for a higher savings rate by local households.
In terms of tourism activity, positive momentum in favour of overseas arrivals appears assured:
- A major increase in slots for Chinese airlines was announced last month, expanding the scale of aircraft arrivals by close to 20% by the end of 2016. International airline policy is extending direct flights to new Chinese cities.
- Policy is also being directed to allow an extension of competition for travel into Europe via China. A revival in British tourists is likely, as the GBP cost of flights decreases further.
- The NZ economy has entered a solid recovery phases, which will boost tourism proper (as opposed to temporary residents in Australia).
On average, growth in short-term arrivals might accelerate from 4.5% p.a. to 7% over the next five years. In this event, overseas tourist numbers would rise to 10 million persons by 2020. An interesting target to help crystallise the policy intentions at all levels of government.
The prospect for overseas travel by Australian residents is harder to frame. Competition between airlines is making overseas travel affordable on a long term basis, and lower fuel prices might prove to be a medium term source of discounting. Our view is that some of the group sources of overseas tourism (eg weddings/sporting team holidays) will remain solid, but family trips might wane due to concerns regarding the jobs markets and some loss of overseas spending power on meals and tours.
Altogether, the Australian tourism sector figures prominently as a leading growth industry over the next few years. This outlook appears to be a worthy goal for infrastructure, planning and industrial relations policy. The nation may be letting go of some traditional industries, but there are major opportunities at our hands.
How might tourism activity develop across cities and regional areas? On balance, Sydney and Melbourne might be expected to enjoy the greatest stimulus from overseas tourist markets. Growth in the numbers of arrivals on international flights has been extremely high in Melbourne (see chart below). This impact is already clear in the sale of new apartments, where wealthier Chinese investors have focused their attention.
Number of inbound passengers on international flights (including annual growth for 2009-2014)
Source: Commonwealth Department of Infrastructure, MacroPlan
The set of proposed casinos in Sydney and Queensland provide insight into the scale of commitment towards growth in tourism. There is a clear understanding from project proponents as to their target customer base and the need for complementary entertainment and retail services, to create integrated resorts.
In conjunction with major projects, middle income tour groups are creating pressures in specific property sectors:
- Hotels + accommodation – the fastest growing form of commercial property development
- Food retailing + cafes and restaurants
- Domestic airline travel (movement across capital cities and tourist locations)
The common theme here is mobility – requiring flexibility in perspectives of employment targets (governing planning processes) and overseas workers (with language skills that are scarce amongst Australians).
Growth in overseas tourism should give reason for greater emphasis on cultural and entertainment business in regional areas. Historical attributes of regional tourism provide a motivation to visit, particularly when combined with unique features of the natural environment.
However, there needs to be speculative investors likely to set up the basis for tour groups – new hotels + serviced apartments; fragmentation of retail (e.g. mixed use serviced apartments with tourists + cafes and convenient retail below); and symbolic gestures (statues/artwork) that reflect Asian culture, of varying scale.
Ways forward that appear to be essential:
- Capacity increase in hotels & short-term accommodation.
- Investment in new urban based attractions – including casinos.
- Remove the focus on commercial/retail distinctions in planning rules, and focus on long-term tourism outcomes from mixed use projects.
- Decrease car parking and design requirements in planning for hotels and serviced apartments, and relevant mixed-use buildings.
- Address regional airport upgrades, in order to secure potential pipelines of greater tourism.
- Address issues of penalty rates for weekend employment (given the relative burden on tourist services), particularly in regional areas.
The relative importance of tourism is expected to grow rapidly over the next five years. For many regional towns, this source of income will be vital to household growth, and stemming the outflow of young families. In turn, there can be recoveries in housing demand, flowing through as higher turnover and prices (following a decade of underperformance compared to capital cities). There would then be solid upturns in residential building and wider economic growth.
In this sequence, tourism projects represent a distinct catalyst, and require forward planning and region-specific innovations. New tourists to Australia are likely to stay close to iconic destinations; but on a second or third visit, the appetite for broader locations will become apparent.
There are many travel opportunities across Australian towns – bridging the gap between nimble and well-connected investors and flexible planning policies will determine how market share develops over time.