Australia’s hotel supply constraints are creating an increasingly compelling outlook for asset values, as visitor demand continues to grow while new room development stalls. Hotel room supply increased by just 0.5% in the year to June 2026, its lowest annual growth in more than a decade, while international visitor arrivals rose 8.3% in FY2025/26. 

With rising construction costs, higher interest rates and lengthy planning processes limiting new development, the industry has little capacity to respond to growing demand. Occupancy is already high in key gateway cities, leaving average daily rate (ADR) as the primary lever for further revenue growth. As rates rise and trading performance strengthens, established hotels are increasingly well positioned to benefit from further growth in asset values. 

For existing owners, this creates an opportunity for asset values to rise as rate-led income growth is capitalised into valuations. For prospective investors, limited competing supply and rising replacement costs are strengthening the appeal of established hotel assets. 

Across Australia, average hotel price per key remains above its long-term average, with further gains expected as constrained supply and sustained trading growth support values. 

“We will likely see hotel assets in Australia's gateway cities increasing in overall value and on a per-key basis, providing an opportunity for outsized returns for existing owners and those entering the market in the short term,” said Niall Kumar, Director of Hotel Capital Markets, Savills APAC. 

Supply has all but stopped growing 

As of June 2026, Australia's hotel room supply increased by only around 0.5% year-on-year, the lowest annual growth rate in over a decade. The number of new rooms added each year has been in steady decline since peaking in 2018, and that decline has accelerated further since 2023.  

Between now and 2029, Australia is forecast to add only a further 6,100 to 7,800 rooms nationally, which is below the pace of additions seen in 2025.  

Across the three key gateway cities, STR forecasts point to continued subdued growth: 

Sydney CBD supply is forecast to grow by just 0.4% in 2026 as development projects face delays. Melbourne CBD’s pipeline is also slowing as the market absorbs developments initiated several years ago. Despite this existing supply, Melbourne CBD ADR grew 2.2% year-on-year in 2025 and occupancy rose 2.9 percentage points, demonstrating the market’s capacity to absorb new rooms. With supply now slowing, further growth is expected. 

Brisbane CBD also has a limited hotel pipeline, unlikely to keep pace with incoming demand ahead of the 2032 Olympics. 

Rising construction costs strengthen the case for existing assets 

Elevated construction costs, higher interest rates and lengthy, costly planning processes are major barriers to new hotel development, despite supportive demand fundamentals. 

Australian building construction prices reached a record high in June 2026, with the ABS Producer Price Index for Building Construction 41% above its pre-pandemic level in December 2019. Labour shortages, productivity challenges and supply chain risks continue to drive costs higher. 

Recent RLB construction cost data puts the build cost for a 3-star hotel in Sydney at between $322,500 and $432,500 per room, excluding FF&E, with costs rising further for 4- and 5-star product. FF&E adds a further $36,000 to $74,000 per key for a 3-star hotel. 

Melbourne's build cost for a 3-star hotel is higher than Sydney's, while Brisbane and the Gold Coast can see construction costs for a 5-star hotel reach at least $1 million per key. 

Recent transactions illustrate the gap between acquisition price and replacement cost. Hotel Indigo Melbourne on Flinders transacted at approximately $350,000 per key in 2026, while a new 4-star hotel in Melbourne today would cost between $527,500 and $712,500 per key to build, excluding FF&E.  

Similarly, the Four Points by Sheraton Sydney, Central Park transacted at approximately $650,000 per key in 2026, again below the average build cost for a comparable 4-star product in Sydney. 

Demand keeps building against a fixed ceiling 

International visitor demand is adding further pressure to Australia’s constrained hotel supply. 

International Visitor Survey results for the March quarter of 2026 showed trips to Australia up 9% year-on-year, nights up 10% and total spend up 15%. Domestic overnight travel remained broadly stable, with overnight spend increasing 3%. 

ABS data shows short-term visitor arrivals reached approximately 9.1 million in FY2025/26, up 8.3% on the previous financial year and ahead of the 5.5% growth recorded in FY2024/25. 

With room numbers difficult to expand and occupancy already high in several key markets, operators have limited scope to grow through additional room nights alone. ADR is therefore becoming increasingly central to the next phase of hotel trading performance. 

With occupancy near capacity, ADR is the lever left to pull 

H1 2025 vs. H1 2026 Growth	RevPAR	ADR	Occupancy
Adelaide	+7.8%	+6.1%	+1.6%
Sydney	+7.6%	+5.5%	+2.0%
Gold Coast	+7.0%	+5.4%	+1.6%
Hobart	+6.4%	+5.9%	+0.4%
Perth	+5.6%	+5.6%	+0.0%
Australia	+4.6%	+3.7%	+0.9%
Melbourne	+3.1%	+2.4%	+0.7%
Cairns Area	+2.7%	+1.8%	+0.9%
Brisbane	+0.5%	+0.1%	+0.4%
Canberra	-0.2%	-0.4%	+0.2%
Darwin	-5.5%	+0.9%	-6.4%

Source: STR

Nationally, RevPAR rose 4.6% for the year to June 2026 to $178, on occupancy of 72% and ADR of $248 – both up on the prior year, but the composition of that growth matters.  

Sydney posted the highest occupancy in the country at 81% (up 2.0 percentage points), leaving very little room to grow through occupancy alone; its 7.6% RevPAR growth to $230 was driven almost entirely by a 5.5% lift in ADR to $285.  

Adelaide recorded the strongest RevPAR growth of any market nationally, up 7.8% to $164, again supported chiefly by a 6.1% increase in ADR. The Gold Coast posted RevPAR growth of 7.0% despite comparatively lower occupancy of 67.0%, underlining that rate, not room-night volume, is doing the work. 

Hobart (RevPAR up 6.4%) and Perth (RevPAR up 5.6%) also posted solid gains for the year to June 2026. Across the board, the pattern is consistent: with occupancy already high in the tightest markets and little new supply coming to absorb demand, rate growth is carrying and will continue to carry the next leg of trading performance. 

Hotel transaction activity remains selective amid higher borrowing costs 

H1 2026 transaction volume reached approximately $932.1 million, up 1% on H1 2025.  

Although the number of transactions has decreased compared to the previous period, the higher volume was mainly driven by activity in Sydney and Melbourne, which together accounted for 10 of the 22 transactions in H1 2026, also lifting the average deal size in Q2 2026 to $62.9 million. 

Hotel transactions in Sydney and Melbourne make up 74% of the total sales volume in H1 2026.  

There have been four interest rate hikes in 2026, most recently in September, lifting the cash rate to 4.60%, the highest since 2011. 

While supply-demand dynamics remain supportive of hotel performance, a high interest rate and inflationary environment remain the primary headwind to hotel transaction activity.  

Hence, investors are becoming more selective in the types of hotels they purchase. However, the strength of current trading performance, together with the positive outlook for key gateway cities, gives investors strong reason to secure core assets. 

“Looking back over the last 15 years, history tells us that hotel capitalisation rates react slowly to interest rate movements. Even in the last 5-years average hotel cap rates have hovered around 6.6%,” said Adrian Archer, National Director of Valuation & Advisory, Savills Australia. 

“Demand for good quality assets, that rarely come to market, remains high and investors generally take a long-term view. Investors that soften cap rates too much could miss out, which may result in a long wait for the same opportunity,“ Archer added. 

A short-term window for owners and new entrants alike 

Strong hotel fundamentals are creating opportunities, but higher interest rates and inflation mean investors must weigh trading potential against the cost of capital and acquisition price. 

With new development increasingly difficult to justify and replacement costs exceeding the acquisition price of some existing hotels, established assets offer exposure to continued rate growth without the expense and risk of new construction. Existing owners may also benefit as stronger income feeds through to valuations. 

With construction economics and planning challenges likely to constrain new supply, established hotels in Australia’s gateway cities are well positioned to benefit in the interim. 

“For investors, this is a window worth paying attention to – occupancy and rates are climbing while supply growth stays historically low, and that combination doesn't tend to last forever,” said Nicholas Lower, Managing Director of Hotel Capital Markets, Savills Australia.