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‘Less is more’ – the battle between luxury and economy hotels

‘Less is more’ – the battle between luxury and economy hotels

Back in April 2013, Savills released its first ever online blog titled ‘No room at the inn’. As part of the article, we highlighted the opportunity that no frills hotels offer to the consumer in terms of affordability and to owners in terms of returns. Now, more than five years later, what has changed? Very little. 

During the past five years, the residential boom gained immense momentum. This meant that competition for land was fierce and residential development beat hotels to the post more times than not. Despite rising RevPAR and yield compression, hotel use simply could not compete.

However, this did not stop the hotel development boom in its tracks. Hotel supply increased on average 10.4% per annum between 2013 and 2017 in Brisbane, 5.4% in Perth and 3.7% in Melbourne, but less than 1.0% per annum in Sydney. Competition for sites meant hotels needed to be upscale or luxury to justify land prices, which left economy hotels in the cold.

Overall, approximately 70% of existing supply sits in the upscale to luxury segment with less than a third in the economy and midscale segment. Our research reveals that economy and midscale hotels will shrink as a proportion of total supply between 2018 and 2022 from 30% to less than a quarter, with economy representing less than 10% and midscale less than 15%. The real winner will be the upscale sector, especially as the larger hotel groups seek to expand their ‘lifestyle’ and ‘boutique’ offerings. 

The chart below demonstrates the class supply shift for select locations. For simplicity, we have combined upper upscale and luxury into one class.

Future Supply By Class – select locations

Future Supply By Class: select locations

Investors and developers seeking to capitalise on the prospect of a supply and demand destabilisation at the lower end that brands such as Breakfree, Hampton by Hilton, Holiday Inn Express, Ibis, Travelodge and Tribe offer, may need to target more affordable metropolitan and city fringe locations. Failing that, they may need to look at sitting alongside upscale hotels, such as SB&G’s plans for a 250-room Holiday Inn Express next to their existing Crowne Plaza in Canberra.

Savills hotel benchmark shows that economy hotels operate at close to 40% GOP margins compared to less than 35% for luxury hotels across the country. No frills hotels provide minimal expense to operate food and beverage outlets, fewer employees resulting in lower labour costs, efficient design reducing the maintenance and utility bills and more rooms per square metre.  

The positives are numerous, before we even consider the fact that economy hotels present lower volatility in comparison to luxury hotels during a market downturn. 

As the saying goes, sometimes less is more.

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Adrian Archer

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