13 Nov 2013
Words Tim Admin

Brisbane Motel Market Update

2008 to the Present Market The period leading up to 2007 and 2008 was very strong for Brisbane motels. A strong trading environment, coinciding with a property boom, resulted in motels being tightly held and in high demand. This market continued even into the early stages of the GFC. Although motels took a little longer to be affected, in 2009 and 2010 we saw a downturn in trade, and at the same time an increase in motel listings. Vendor and purchaser expectations were not always aligned, and through this period a relatively low volume of activity continued to prevail. However during 2011 many motel operating markets have improved and this has continued into a much more positive market in 2012. By 2010-11, Brisbane’s average motel revenue per room had returned to 2008-2009 levels, and in 2011-12 both occupancy and average daily rate were higher than pre-GFC (with revenue per available room over 11% higher than 2008-09). Following this strong improvement in the trading environment, the sector began attracting new interest from purchasers. This renewed interest, combined with a number of vendors who had been awaiting improvement in the market for an opportunity to sell, has lead to an increase in the number of transactions of motels at all price points; in metropolitan and regional locations; and of going concern, freehold investment and leasehold interests. The going concern market has had a number of recent sales, which have mostly been in the lower price range (sub-$3 million). Yields on recent going concern sales have generally ranged from 12% to 14%, with yields below this range for entry-priced ‘lifestyle’ investments, and yields at the upper end of the range being for secondary motels or those in difficult operating markets. Demand has been particularly strong for going concern motels in the lower price ranges. Demand still exists in the higher price range (say $5 million-plus), although there are a number of recent examples where larger motels have achieved a stronger result being ‘split’ with the freehold and leasehold interests sold separately. The leased investment market has been strong, although this is the sector with the fewest opportunities available. The appeal of leased motel investments is based around the long lease term as well as secure tenants who have made a substantial commitment to the premises in acquiring or setting up their business. In the current market, purchasers are actively seeking quality motels leased to good operators, where the business has a solid trading history, and the rent is at an affordable level. Our analysis reveals that over the past two years, yields for investment motels have ranged from 8.25% (for high quality properties) to 9.75%. High quality Brisbane motels in strongly performing precincts are currently at the lower end of that range, and it would be a lesser quality asset or one with lease security issues (such as a short remaining term or high rent) at the upper end of the range. As usual, the leasehold business market has been the most active, in part due to going concern vendors choosing to sell their business and retain the remaining freehold subject to lease (including for retiring moteliers). Current yields are generally in the 25% to 30% range (or exceeding 30% in less desirable markets or where significant food and beverage operations are included). The improving trading environment has proven appealing and there is currently strong demand. However, we find potential lessees are unwilling to make a commitment without paying attention to the fundamentals of a consistent trading history, a long remaining lease term, reasonable lease conditions and an affordable rent. In circumstances where there have been trading issues, we have seen vendors of new leasehold interests offering creative solutions such as lower commencing rents to allow the new business operator to rebuild trade. Outlook Although strength has returned to the trading environment, we are still unlikely to see significant new development in the near future. The limited scope for new competition is a positive feature of this market for existing owners. Demand is currently strong, but purchasers are still taking a considered approach. Buyers are paying attention to the fundamentals of location, asset quality and proven trading history. In this market, it is important that vendors are properly prepared for sale, as purchasers expect good quality information to make their decision. For lessors and lessees, both parties are looking for a long remaining lease with reasonable conditions and an affordable rent. Properties that don’t meet these criteria will still attract a buyer, but only when priced accordingly. In our opinion, the most likely outlook is for a continuation of the current market. A good level of transaction activity is occurring, as a result of vendors with realistic expectations meeting with good demand from purchasers drawn to the solid performance of the motel market. If you have any questions about this article, or if there is a topic you would be interested in hearing the viewpoint of a valuer in a future article, please contact Owen Barbeler.