New Zealand’s tourism slogan – 100% Pure New Zealand – sums up its appeal quite accurately. The country is a pristine natural paradise that draws visitors in increasing numbers to enjoy spectacular scenery and outdoor activities. However, despite New Zealand’s obvious appeal, annual arrivals for 2018 reached only 3.86 million, with almost 40% of those coming from nearby Australia. Other major source markets include China, with numbers almost doubling over the past five years, the USA, and the UK, whose newspaper readers regularly vote New Zealand among their favorite destinations. However, forecasts for Chinese growth in 2019 have been scaled back from 11% to just 3%, while the overall growth rate in arrivals is expected to weaken over the coming five years.

The biggest challenge for Tourism Industry Aotearoa (TIA – the New Zealand tourism authority) is probably the country’s location. It is a long way to New Zealand, and any moves to encourage tourism will inevitably increase the country’s carbon footprint because the vast majority of visitors must arrive by air. On a positive note, the recent terrorist incident in Christchurch did not appear to have a significant impact on tourism. One approach taken by TIA has been to aggressively promote New Zealand overseas, while seeking to increase both tourist spending and length of stay – effectively making more from those tourists who do make the journey. The scenic role played by New Zealand in the Lord of the Rings movies helped to raise awareness and attract visitors, while sporting events such as the recent cricket and rugby world cups have also provided hoteliers with a short-term boost.

The outlook for the near future is for continuing growth, but at perhaps a reduced rate; forecasts made this year by the Ministry of Business, Innovation and Employment are still positive, but not to the extent of previous years, while the OECD anticipates GDP growth to be pegged back to the range of 2.5 – 3%, which is barely above the global average.

For hoteliers, recent years have been a story of steady progress, with a growing supply of rooms matching increasing arrival numbers; however, the trend seems about to encounter turbulence as visitor numbers growth slows. This has already been seen in a slight decline in occupancy rates, ADR, and RevPAR for the country’s hotels as a whole. However, some secondary regions have benefitted from evolving patterns of tourist behavior which have seen more visitors shunning the expensive tourist centers of Auckland or Queenstown and instead heading off the beaten track, leading to increased occupancy rates in destinations such as Rotorua and Nelson/Marlborough.

At present, the national data appear to be heavily influenced by Auckland, which accounts for around one third of all hotel room nights in the country, and which is currently facing an oversupply of available rooms, causing the average indicators for the whole country to sink. This problem is unlikely to be resolved in the near future as Auckland is also the prime location targeted by the hotel development pipeline, with 13 new properties set to add around 1,500 rooms by 2020, of which half will be 5-star, representing an increase in capacity of around 16%. A further 1,580 rooms are to be added during the same period across other urban centers, with Christchurch, Queenstown and Wellington the main locations.

While oversupply is one potential difficulty, especially for Auckland, another obstacle is taxation. Accommodation providers in Auckland, including Airbnb, are still required to pay targeted property rates although a judicial review is pending. Meanwhile there have been calls from local governments for permission to impose a bed tax on accommodation providers, with a Queenstown referendum indicating that the idea may be gathering popular support. TIA rightly sees these measures as a potential threat, and is instead seeking a policy whereby a portion of the GST paid by visitors could be allocated to local governments to fund improvements to visitor infrastructure, thus alleviating the taxation burden on hoteliers. However, with the government also considering an additional tourist tax payable by all foreign visitors with the exception of Australians, it seems that even if the hoteliers can avoid taking the hit, the tourism sector in general might not be so fortunate.

For New Zealand’s hoteliers, then, the outlook can be one of caution. Continuing growth is expected, and with good reason, but supply must be managed carefully if strong results are to be maintained. Those who have invested already can take heart from the idea that tightening bank lending, increasing prices for premium land plots, and rising construction costs may soon slap the brakes on the supply pipeline. If TIA can simultaneously find the events to bring in off-season visitors – new conference centers in Auckland, Wellington and Christchurch will help, as well as rugby visits in the austral winter from the heavily-supported British and Irish Lions – then the situation looks increasingly positive. But for those investors on the outside looking in, successfully navigating the current market dynamics will not be a task for the ill-informed.