Inflation is falling across the globe, including in Australia, which could transform the environment for both tourism and hospitality. For the Defender Tourism and Hospitality Fund, which invests in a range of properties such as resorts, this presents both challenges and opportunities. In this article, we explore three primary implications of falling inflation on the fund, including Average Daily Rates (ADRs), improved operational cost management, and increased consumer spending power.
Stabilisation of Average Daily Rates (ADRs)
The metric known as Average Daily Rate (ADR) is a critical performance indicator in the hospitality industry that reflects the average rental income per paid occupied room over a specific period. It is used as a benchmark for revenue performance and is essential for forecasting future income streams. As inflation falls, the pressure to continuously raise prices diminishes, and this stabilisation allows hotels in the Defender portfolio to maintain competitive pricing. For context, the Defender Tourism and Hospitality Fund reports consistent distribution growth exceeding 10% per annum, showing how well the fund adapts to market conditions.
As the average ADR in Australia has shown resilience, the increase in occupancy rates is driven by prices stabilising due to falling inflation. This will benefit the Defender Tourism and Hospitality Fund in the following ways:
- Predictable Revenue: A stable ADR environment supports better forecasting, allowing locations to plan for seasonal fluctuations and implement targeted marketing strategies during peak times.
- Improved Competitiveness: With lower inflation rates, properties can reduce prices without compromising on quality, benefiting budget-conscious travellers who avoided travel during inflationary periods.
- Long-Term Contracts: Stabilising rates may encourage more long-term contracts with corporate clients or travel agencies, providing further assurance of steady income.
The stabilisation of ADRs stemming from falling inflation improves the predictability of the Defender Fund’s investments, which can lead to increased investor confidence and potentially higher valuations for properties within the portfolio.
Improved Operational Cost Management
Historically, the hospitality sector has faced high operational cost pressures driven by rising labour costs, energy prices, and supply chain issues, all exacerbated by inflation. As inflation moderates, increases in operational costs—such as utilities and supplies—are likely to abate significantly. This will provide relief for hotel locations that have been grappling with high inflation. Improved operational cost management will enable them to enhance their profit margins.
The Defender Fund will enjoy increased profitability driven by lower operational costs and stable revenues from ADRs. Properties can achieve higher profit margins, which could translate into increased distributions to investors, presenting the fund as one that demonstrates effective cost management alongside revenue growth. The Hotels & Tourism industry achieved a return on investment (ROI) of 4.31% in Q2 2024, indicating a recovery trend as costs stabilise. These metrics indicate that enhanced operational efficiencies and a focus on cost management are benefiting the Defender Fund and are emerging across the sector, favouring funds that prioritise cost control like Defender.
Increased Consumer Spending Power
Falling inflation generally leads to greater consumer confidence and higher spending power. As prices stabilize or decrease slightly, consumers are more likely to spend on discretionary items such as travel or experiences. This trend benefits hospitality businesses and the fund by increasing occupancy rates across properties. Meanwhile, higher disposable income allows consumers to spend more on upgrades during their stays—such as premium rooms or additional services like spa treatments and dining experiences.
The increase in consumer spending power due to falling inflation presents a significant opportunity for growth within the Defender Fund’s portfolio. By capitalizing on this trend through effective marketing and enhanced guest experiences, properties can drive occupancy rates and revenue growth.
The impacts of falling inflation on the Defender Tourism and Hospitality Fund are varied, as falling prices will affect both operational expenses and revenues. The stabilization of Average Daily Rates ensures predictable revenue streams, while improved operational cost management enhances profitability. Additionally, increased consumer spending power creates opportunities for growth through higher occupancy rates and better guest experiences. The outlook is optimistic as the fund adapts to these changes within its operational framework. By focusing on stability, efficiency, and customer engagement, the Defender Fund is well-positioned to navigate the current environment of falling inflation.
