STAR Ratings Out of Touch With Reality

STAR Ratings Out of Touch With Reality Image

In light of the changes being made to ratings exactly how does this new regime relate to tariffs and costs?

Do STAR ratings have any notion of how a property should set prices in relation to the rating? For example, consumer expectations of a downgrade from 3.5 to 3 will surely be to pay less when staying at a lower rated property.

Obviously tariffs and pricing is a very complex subject but the basic principle is easily understood. Take an actual example of a 3.5 STAR rated property in Port Douglas, Australia where average nightly tariff over 12 months is $115.79 with 44.42% occupancy. this shows what people have proven they are prepared to pay for a 3.5 STAR rated property. If all of a sudden the rating is only 3 STAR would you not agree that consumer expectations of price will fall?

So on the one hand we see forced down average tariffs thus reducing revenue and ROI for owners yet on the other hand we see expected increases in costs from refurbishments and improvements required to maintain the 3.5 STAR rate this is a no win situation.

Owners of holiday rental properties in this Australia are already dealing with years of negative growth and spiralling costs that have reversed property prices and decimated investment objectives.

Surely the role of a rating system should be to guide the consumer as to the correlation between price and quality.

For example, if a destination has 3 hotels of which one is 3, one is 4 and one is 5 star and market forces dictate that the 5 star can charge an average of X per night, the 4 star Y and the 3 STAR Z, then the benefit to the consumer of the rating is to alert them if the 3 STAR property was charging Y instead of Z or any similar combination.

Is this how people see the rating system being used? If so, then why do the rating agencies not suggest an acceptable price range that relates to their assessment? without it what is the point of the rating? By just saying a property is 3 or 4 STAR seems meaningless unless there is something tangible to relate it to such as price. But not just price alone, it would need to be price X relative to price Y etc.

So where exactly do rating agencies fits into the scheme of things by making the assessment in the first place?

Think about this scenario.

An investor buys a holiday unit for $150,000 with a debt ratio of 80% paying interest only at 6%. the building has an average nightly tariff of $115.79 and annual occupancy in the first year of 44.42% and revenue is $18,773. From this operating costs must be met including management fees, advertising levies, cleaning and linen hire, repairs and maintenance etc which average about 42% of revenue. this leaves $10,888 to cover interest ($7,200), council rates ($2,000) and body corporate levies ($5,000). the net result is the investor is out of pocket to the tune of $3,311. oh, and the units are now selling for $140,000 instead of $150,000

The reality in 2012 is that thousands of investors all over Australia and especially here in North Queensland are sitting on properties just like the example above only in many cases they paid more than $150,000 and even borrowed the full amount so what does this investor say when asked to inject even more capital into their investment to maintain a STAR rating?

The reality is that the properties determined to be not up to standard are in fact quite sufficient to justify the revenue they earn when one considers the cost of owning the investment. the truth is many ought to be awarded a higher rating to attract a higher tariff because the economic reality of holiday accommodation is that the consumer does not pay enough to avail themselves of the service provided.

So what is it that the official rating agency here in Australia is really trying to achieve? Does the tourism sector need the lower end of the market squeezed out of existence? Surely not because at the end of the day economics will prevail and market forces will dictate price and supply regardless of what rating anybody allocates. There will always be a lower end of any market no matter what the price range.

So, if a property is to be down rated with consumer expectations of a lesser tariff does it still charge the same nightly tariff or does it charge less? the example above clearly shows why the charge can't be any less. so accommodation providers must continue to market and manage their properties irrespective of ratings. trying to generate a ROI for their owners and hopefully keep their heads above water.

So why pay $450 for a license to receive a meaningless rating?

In fact, many are finding it very difficult to justify renewing their investment in a rating agency licenses that are clearly so out of touch with reality.

Ratings totally disregard the cost of providing the service and changing that is where the rating agencies need to direct their attention.

Perhaps there is an ulterior motive to further drive down the average nightly tariff for the benefit of their members who would obviously benefit from lower accommodation prices.

STAR Ratings Out of Touch With Reality

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