It’s that time of year again when we book time with the accountant to plan for our financial year-end planning and start thinking about the budget for the year ahead. For the south east corner of the state, most hotels have had a good run over the last year, but quite a few of the regional areas are still finding it tough going as they re-adjust after the mining boom.
The headwinds of change are likely to continue for the next 12 months with a lot of interest focussed on the impact of government policy in the United States under the Trump administration: most notably the impact on international monetary markets and rising interest rates.
At Hanrick Curran we have considered the key changes that we see coming up that are likely to have an impact on our hospitality clients and summarised them as follows :-
- Interest rates : The latest rate increases by the major banks (out of step with the RBA) indicate that the days of low interest rates are now nearing an end. Consensus economic views suggest that we will continue to see rates regularly increase through to 2020, though the timing of these increases differs amongst the experts. We believe it would be prudent to factor in a couple of increases in your budget to ensure that you have adequate margin to cover the increased expense when it occurs. It would also be beneficial to lock in some of the facilities where you can to insulate against any rate increases.
- Wage rates : The recent Fair Work Commission decision to decrease penalty rates on Sundays and holidays is welcome relief for the hotel industry, however recent protestations by the Federal Opposition parties and unions indicate that it still might not be a bankable deal. It is unfortunate that Australia still has the second highest hospitality wage rates in the world and for many operators and accordingly wages present as this biggest overhead cost in running our hotels. We may not have seen the end of the debate; but hopefully the Fair Work Commission decision will stand and we will be able to budget on some savings coming through for the next financial year.
- Energy costs : The cost of energy and recent media around the debacle in South Australia certainly reinforces the dilemma all hotels are facing. Our energy costs are increasing faster than a “lizard drinking”: We had a client recently advise that his costs went up 45% when he renewed his electricity contract a few months ago. Until we get resolution on the national energy market framework and intervention by the Federal Government, hotels will need to factor in their budgets continuing over-and-above increases. If you have a longer term supply agreement that is up for renewal in the next 12 months, then brace yourself for a big increase: shop around if you can, but don’t expect a reduction. Consider also the option of obtaining subsidised solar power installations to augment the cost and look to install energy efficient appliances wherever possible.
- Customer spend : Hoteliers in regional mining centres have already felt the impact that a downturn can have on our customers discretionary spending. The outlook for the next 12 months is a bit hazy and largely dependent on the impact of interest rate increases on household mortgages combined with uneasiness around when the residential housing bubble will burst. When household budgets get squeezed and sentiment turns south, customers spend less on discretionary items such as meals at the pub, gambling and holidays. If your hotel is based in a suburban area that is likely to suffer mortgage stress from increased interest rates, then it would be wise to factor into your budget a contingency for a possible sales decline. If you are fortunate enough to have a hotel in a major tourist area, then this might work in your favour as most pundits are calling an increased number of tourists coming to Australia on the back of a lower exchange rate and also the Commonwealth Games to the Gold Coast early next year.
- Income Tax : The Federal Government is promising some tax relief for businesses with turnover up to $50 million in the upcoming budget. This would be a bonus to the majority of our clients; but as we know, what is “promised” by government and what is actually “delivered” are 2 entirely different things. It’s too early to budget for a saving here, but it might come in as a handy bonus if the Government can get it through.
A few of our clients have been looking at buying or selling hotels this year and pondering the outlook as they strategise their portfolio over the next year. Recent sales in New South Wales and metropolitan Queensland indicate there is still strong demand for well located venues with diversified and proven income streams. However, regional Queensland hotel prices are still subdued and are unlikely to see an improvement until the base earnings start to show a steady increase: this can represent some good buying opportunities for the patient investor. Ultimately the future earnings growth will drive the underlying increase in value of the hotel.
Hanrick Curran are specialist advisers to the hospitality industry and have been supporting independent hotel owners for over 30 years. If we can be of assistance in supporting your decision making to improve the performance of your venue please contact your usual Hanrick Curran advisor or alternatively, Kim Hanrick or Peter Maletz on 07 3218 3900 to discuss your particular circumstances.