14 Jul 2021
Words Martin Kelly Australian Financial Review

Companies target motels to ride domestic tourism wave

Australia’s regional motel industry is riding the domestic tourism wave – when border openings permit – with growing investor demand pushing asset prices up 20 per cent or more over the past two years.

Yields have fallen by a similar amount but are still fat compared with other commercial property investments at about 10 per cent for a quality asset, attracting an unprecedented level of corporate interest.

Groups like Mandala, Moelis, Elanor Investors Group,  Redhill Hospitality and Southern Cross are starting to make their presence felt, while members of Australia’s Indian community are also extremely active.

Ray Larkin, director at Manenti Quinlan & Associates, said the regional freehold motel investment market was booming.

“The regional centres have sold beyond anything we’ve ever seen before, but the biggest trouble at the moment is trying to find stock,” he said.

“There is enormous demand for anything with water views, enormous..

“You’re seeing groups out there like Mandala, Redhill [Hospitality], Southern Cross, these guys, they are all starting to buy in all the major regional towns.

“What happened in the liquor store industry, and what is happening in the pub industry, it’s now happening in the motel industry.”

Mr Larkin said pricing was very strong, with yields down to 11 per cent to 12 per cent in inland towns, while on the coast “it’s closer to 10 per cent”.

“A couple of years ago it would have been at least 12 to 12½ per cent on the coast and 15 per cent inland,” he said.

Trudy Crooks, managing director of ResortBrokers, which sells about 100 motels a year, is seeing similar trends.

“There’s a whole new group of asset buyers, like Moelis, starting to come in and buy, who have never looked at it before,” she said.

She compared it to the corporate tsunami that hit caravan parks a decade ago when “all of a sudden they went from a mum and dad industry to being commercialised”.

“We are right in the middle of that and the savvy investors are seeing that it’s a good time. Obviously the key to it being successful is you’ve got to have a good operator. ”

Ms Crooks said prices for freehold properties had increased by 20 per cent in the past two years.

“I would say yield on a going [freehold] concern now sits at between 10 and 12 per cent whereas it used to be 12 to 15. I would say an investment has gone from being around 9 to 7 to 8 per cent.”

But leases have not tightened in the same way. “It’s an exciting time. There’s a little bit of a spotlight on the industry but there’s still a lot of opportunity for people to get in, but I do think [yields] will sharpen,” she said.

Chinese investors overtaken

All brokers interviewed said Australian Indian families dominated the small investor market, supplanting Chinese.

“A couple of years ago, as soon as you put up a freehold it was snapped up by either an Aussie Chinese or an overseas Chinese,” Kevin Connolly, director at CRE Brokers, said.

“But that market has dried up and we’re seeing a huge influx of Australian Indians entering the hospitality market. They’re moving into hospitality in great waves.”

One of the biggest motel investors and operators is John Zeckendorf, co-founder of Mandala Asset Solutions, who runs three funds with $50 million in regional tourism accommodation assets under management.

He said properties within a three- or four-hour drive of capital cities, such as in Orange and Bathurst in NSW, were doing extremely well but others in more distant locations were sometimes struggling.

Mandala targets properties like these as turnaround opportunities, and is also looking at destinations such as Cairns that are hurting without international tourists but will thrive when borders open.

“Yields have gone from 12 per cent to 10 per cent over the last two and a bit years,” Mr Zeckendorf said.

“It has compressed, and there is probably further compression to come, but over the longer term I’d expect it to decompress.”

One reason is that he expects domestic tourism demand to ease once international borders reopen.

“Yes, it’s going gangbusters at the moment, but I don’t think that will last long term,” he said.

“I think, enjoy the sugar rush. It pays off the problems of last year but I think in most cases it’s not going to be a long-term fix.”