29 Jun 2021
Words Craig Francis Australian Property Investor Magazine

Investors cashing in on country hospitality

Australia’s classic country pubs are emerging as some of this year’s hottest commercial property assets, with experienced operators as well as sophisticated and first-time investors looking to capitalise on a surge of domestic tourism by investing in regional pubs, hotels and motels.

Much of the demand has been driven by strong investor appetite for quality venues in New South Wales and Queensland, while several hospitality assets in Western Australia’s South West have also changed hands in recent months.

In NSW, regional centres such as Wagga Wagga, Newcastle, Tamworth and Byron Bay have been highly sought after, along with Townsville and Cairns in Queensland, according to Paul Fraser, CBRE Hotels National Pubs Director.

The demand comes despite the hospitality industry being so hard hit by COVID-19, albeit less acutely in regional areas.

But regional areas are being seen as the new travel destination of choice for city dwellers deprived of international holidays.

“There is risk, and of course Victoria has been the hardest hit with COVID-19 and lockdowns, which has had an adverse effect on sentiment in the industry and, as such, transaction rates are down and instability remains in the region,” Mr Fraser said.

“Sentiment is strong in NSW and Queensland, with gaming venues bouncing back incredibly strongly following lockdowns.

“Most gaming venues have literally never traded more strongly than in the past 12 months and added to this, publicans have been able to reset their business, significantly improving profit as a percentage of turnover by stripping costs out. 

“In a lot of cases happy hours and discounting has been minimal, if not non-existent, over the past 12 months.”

The move into regional hospitality and accommodation assets was being driven by a mix of sea- and tree-changers leaving the capitals to start a new venture as well as major developers and commercial entities looking to add strong-performing assets to their portfolios.

Savills Australia Hotels national director Leon Alaban said vendors were witnessing amazing results being achieved in the market, with many deeming it an appropriate time to sell.

“In the past two months, there has been a flurry of recent freehold sales with four ALH leased pubs in Queensland and one in Victoria selling with yields ranging from 4.15 - 4.98 per cent,” he said. 

“These include the Noosa Reef Hotel in Noosa for $13.8 million, the Pelican Water Tavern in Caloundra for $10.8 million, the Kedron Park Hotel in Kedron Park for $4.6 million, the Edinburgh Castle Hotel in Kedron for $7.5 million and the Morwell Hotel in Morwell (Victoria) for $3.06 million. 

ALH Group operates more than 300 licensed venues and 550 retail liquor outlets across Australia, including iconic hotels and neighbourhood pubs.

But many of the purchases are being made by first-time investors from the state capitals looking for a life change.

Leonard Bongiovanni, director of brokerage business Manenti Quinlan and Associates, said regional restaurants, pubs, hotels and bars are positioned in town centres on generous blocks of land, “with incomparable opportunity coursing through their woodwork”. 

“People are now wanting to get out of city corporate life and are looking for new opportunities in the country or on the coast,” he said.“If they buy a restaurant, pub, hotel or bar business, they can run it too, so they’ll still have an income.

“The latest in a rush of hotels, motels and liquor stores that have sold, have seen sales for record prices.”

“We’ve got a lot of people visiting venues all over the country, and people can see the long-term value in these regional properties and are paying the price for them up and down the coast.

Mr Bongiovanni said the larger, more expensive properties generally have bigger profits that will enable a purchaser to redirect a portion of that profit into hiring a manager to oversee the venue. 

With smaller, less profitable venues, hiring a manager would erode profits and as such, would generally be run by the owner, he said. 

“The smaller price-point hotels are generally viewed as ‘entry-level’ where a new entrant to the market will purchase the hotel and learn on the job, whereas in the higher price brackets the properties are generally purchased by experienced operators,” Mr Bongiovanni said.

He identified Orange, Bathurst, Dubbo, Armidale, Tamworth and coastal assets along the eastern seaboard of NSW as being in particularly high demand.

 Across the country, Ray White Commercial (WA) Hotels, Hospitality and Tourism Agent Phil Zoiti said investors in the port city of Bunbury were also exhibiting increased confidence.

“While there was a temporary setback with COVID-19 back in March 2020, we have seen the hospitality industry stabilise, with investor sentiment for regional pubs positive,” Mr Zoiti said.

“Overall, enquiry levels for regional hotel and tourism assets have increased significantly in the past six months, with investors looking to buy in key regional areas.” 

Motels in total control 

Motels, designed for motorists and usually having each room entered directly from the parking area for motor vehicles rather than through a central lobby, are also experiencing increased regional demand.

ResortBrokers, Australia’s longest established specialist agency operating in the accommodation and hospitality sector, reports that in the current financial year it has sold and settled on 36 regional motels, both freehold and leasehold, for a total of $67 million on the back of greatly increased enquiry levels.  

“We’ve always had the so-called ‘mum and dad’ investors, who usually buy leaseholds on motels as they are more affordable than purchasing a freehold, but since the pandemic we’ve had a far higher enquiry level on people wanting to buy a solid accommodation business in a regional area,” ResortBrokers managing director Trudy Crooks said.  

“These are your classic sea-changers and tree-changers, but their main motivation is that it is a pure investment play.  

“With international travel not possible, many Australians have been forced into shifting their travel preferences to intrastate and interstate visitation, with drive tourism becoming a major contributor to this massive shift in accommodation demand.   

“Investors are now well aware of this and they are actively looking for these regional assets and motels, in particular, are high on their wish list.”  

 Ms Crooks said the cap rates on motels had dropped from 14 to 15 percent to around 9 to 11 percent, depending on the market and the location, which basically means prices of freeholds and leaseholds have risen by approximately 15 to 20 percent.  

“This indicates that prices in the market are rising and that investors perceive investment in these assets as a low-risk, high-reward asset class relative to other options,” she said. 

“These are assets that can be income positive in the short term while remaining solid cash flow businesses in the medium and long term and often these regional motels are sitting on prime real estate as well, which adds to the appeal.”

Ms Crooks said competition for investing in regional assets is also being driven by the fact many economic analysts in Australia are predicting a low interest rate environment for at least the next three years, which means investors have an even more compelling reason to go on the hunt for new businesses.   

Investment returns

As for investment time frames, Ms Crooks said investing in motels carried the same risk/reward potential as any other accommodation property and it’s not often that they can be “flipped” for a quick profit.   

“You need to have at least a two to three-year timeframe,” she said.  

“Generally speaking, if you can show a year on year net profit increase over, say, three years, then you can potentially sell and make a tidy profit, if market conditions hold.  

“We often encourage our clients to have some kind of exit strategy in place even before they buy so they have a defined goal they can aim for with their investment.” 

CBRE’s Mr Fraser said regional pubs were a mixed bag in terms of recouping the original investment outlay. 

“If it is a freehold going concern in a regional area, I would expect the market to be looking at a total pay back of seven or eight years, but if it is a leasehold, that number should be between four and five years if it has gaming in it,” he said. 

“A lot of the regional acquisitions have been to existing operators who have been pushed out of metro areas given the compressed yields across the board.  

“These operators have the intellectual property in the space and are looking for size and scale.  

“Regional assets are appealing as they generally transact at softer yields, and the accretive nature – through economies of scale, supplier agreements and the like – that can be derived from them is obviously enticing for bigger operators.” 

Brokerage specialist Mr Bongiovanni said regional pubs would generally expect a full investment return in seven to ten years. 

“While historically in a regional area a purchaser could expect a return of circa 15 per cent on EBITDA, this has now firmed, and in many cases is sub-10 per cent,” he said. 

“In terms of volumes, we are at an interesting time in the market where regional venues are trading strongly so vendors are reluctant to sell while they are experiencing bumper trade.  

“As a result, the demand for quality businesses is strong, while the supply pipeline is limited.”