The macroeconomic climate of Australia is seen to be broadly improving on almost all fronts.

With the most recent monthly inflation figures showing a sharp drop, and its peak being well behind us and most of the rest of the world, expectations are for a return closer to the upper end of the Reserve Bank’s (RBA) target range (of 2-3%) by the end of 2024.

However, Stage 3 tax cuts may have some diluting impact on this.

Cash rate futures are currently tipping declines in the cash rate target in the last few months of the year, with steady expectations for the first half held by most. A slight uptick in unemployment to the mid-4% range is anticipated due to an increase in labour force participation, not necessarily job losses.

For the first half of the year, a broader continued slow rate of growth across the economy is probable, with previously similar but steadily improving conditions expected to prevail.

This will be supported by an underlying population boom given the recent record net overseas migration record of 518,000 in FY22/23, and a further large increase is anticipated.

Brisbane’s Olympic run continues to grow, having been featured in TIME’s world’s greatest places for 2023, and then The New York Times’ 2024 travel list.

What does this mean for accommodation & tourism?

A strengthening Australian dollar may soften tourism markets domestically, particularly into the second half of 2024 where expectations for the dollar are generally stronger, as overseas travel becomes more attractive to Aussies over domestic travel.

With that said, the exposure of Australia’s rich spectrum of destinations on the global stage continues to grow. Brisbane’s Olympic run continues to grow, having been featured in TIME’s World’s Greatest Places for 2023, and then The New York Times’ 2024 travel list alongside Tasmania.

More broadly, the recovery of international tourism nationally is expected to continue regardless of currency shifts. Tourism Research Australia anticipates annual international arrivals to exceed 9.25 million visitors in 2024, a 26.4% increase from last year.

This would represent a return to just below pre-pandemic levels, with further growth anticipated to surpass this threshold in 2025.

The expected ongoing slowdown in the rate of inflation nationally will offer positive news to operators, as it suggests steadier input costs.

Good news for operators

The expected ongoing slowdown in the rate of inflation nationally will offer positive news to operators, as it suggests steadier input costs.

Common to the accommodation industry are CPI-linked clauses for annual rent reviews, meaning rental growths are set to return to more normal historic rates of change.

A relaxation in labour market conditions is also set to help operators, with any slight increase in unemployment expected to decrease challenges in sourcing labour.

The year ahead also promises an improvement in working holidaymakers into Australia, with new exemptions from 1 January allowing such visa holders to work for more than 6 months for a single employer without obtaining special permission from the Department of Home Affairs.

This represents a huge opportunity, particularly for those operators in idyllic tourist destinations where holidaymakers represent a significant chunk of the workforce.

Labour costs may see a real increase, however, as wage growth expectations for 2024 generally sit above that of inflation.

Real wage growth will create a net positive for tourism overall as it will improve household discretionary income, and in turn, holiday budgets.

The current national rental crisis will constrain supply of new short-term accommodation.

What happened in 2023?

From a transactional perspective, 2023 saw cap rates [aka the approximate annual operating cash flow or yield] tighten to record highs nationally, and particularly regionally.

Transaction numbers were also much higher than expected due to a domestic tourism boom supporting strong occupancy as well as elevated ADRs (average daily rates).

While the tightness of these yields has since softened somewhat, there are still superior returns on offer for investors over other asset classes which are still tighter than pre-covid.

These substantially lifted ADRs appear to be holding despite some softening in occupancy.

The unique nature of Australia’s accommodation sector as being underpinned largely by strata titled residential stock means that short-term letting is typically more profitable in development. However, the current national rental crisis will constrain supply of new short-term accommodation.

Elevated construction costs will also challenge new development, further reducing supply.

Compounding this challenge is the transformation of some accommodation assets for other purposes; whether demolition for alternative use, conversion to government housing, or businesses purchasing to repurpose as staff accommodation, there are increasing supply challenges on the ground.

2024 outlook

For these reasons we fully expect 2024 to be a strong year for the accommodation sector.

ResortBrokers typically conducts over 200 accommodation transactions annually, and we are coming off a hot year of buyer enquiry with a fast start to 2024 already.

High price-per-key rates [total construction or acquisition cost ÷ total rooms] are anticipated to continue to be achieved due to supply constraints paired with a healthily growing population that loves to holiday.

Strong investor appetite is also expected to remain undeterred given the promising healthy economic outlook for 2024, as well as the superior returns offered by the industry.

Some factors also lie outside of purely economic territory.

Localised impacts of climate disasters such as hailstorms, tornados, floods, and bushfires pose risks to domestic tourism markets.

These have created increased insurance risk for some assets; a reality that many operators and investors will have to face heading into the new year.

Inflation data suggests this is already the case, with the insurance index having risen by over 16% in the last 12 months already, an exceptionally strong uptick.

Joshua Mangleson is a Property Economist for ResortBrokers, a specialist agency in the accommodation property sector. He is the principal author of ResortBrokers Research Management Rights’ Report which examines the impact of the management rights industry across Australia.

Image: Brisbane’s Olympic run continues to grow, having been featured in TIME’s World’s Greatest Places for 2023 and then The New York Times’ 2024 travel list.