01 Jan 2014
Words Tim Admin

New Motels Needed to Satisfy Demand

Demand for accommodation in some areas of Australia, particularly in towns and cities servicing the mining and resources sector, far outstrips supply. Property developers frustrated with a sluggish residential market might do well to turn their attention to building new motels. Australia’s first modern American-style motel opened in Bathurst in 1954. Today there are roughly 3,800 motels across the country. But I’d say we would be lucky if 100 of these have been built during the last 15 to 20 years. In my opinion, if ever there was a time to build new motels, it is now. The critical driver, of course, is occupancy. According to the latest tourist accommodation figures from the Australian Bureau of Statistics, the national room occupancy rate for motels (15 rooms or more) for the December quarter 2010, was 59.2 per cent. What these figures don’t show are the pockets where occupancy consistently tops 80 or 90 per cent and where new beds are desperately needed. Queensland’s fast-growing central coastal city of Mackay is a prime example. With a regional population approaching 120,000, it is the gateway to the rich coal deposits of the Bowen Basin. For the calendar year 2010, Mackay achieved 89 per cent occupancy. On many nights, you simply cannot find a bed. Some studies suggest there is an immediate need for another 200-300 rooms to meet current demand. Many of the ‘hotspot’ centres tipped in this edition’s cover story tell a similar story. And, wherever that story is told, the common denominator is mining. The resource industry’s powerful, positive economic influence extends into many areas, one of which is certainly the accommodation sector. In fact, so much so that there is somewhat of a symbiotic relationship, with each relying to some extent on the other. Accommodation Shortage Bad for Business This relationship has recently been highlighted when Tourism Western Australia released an Access Economics study that suggested WA stands to lose almost half a billion dollars by 2020 if its shortage of accommodation is not addressed. The study found Perth’s critical shortage of short-stay accommodation is looming as a significant barrier to economic growth – not just for the tourism sector, for the wider economy. The same can be assumed for other cities and towns. Lack of accommodation is an economic disadvantage. Development of new motels will not only benefit the developers and operators, but the wider business sectors and communities in general. This is not just about tourism. It is about supporting and attracting business at every level. In many areas, and not just in mining areas, various levels of government are actively encouraging new accommodation development. Earlier this year, the Lismore City Council (northern NSW) proudly boasted about a new $5 million, four-star motel development, an investment by the Gold Coast-based Strand Group. “Business brings business,” council’s business facilitator, Mark Batten, told the local newspaper. “(This motel) will help meet the need for business beds. There has been a shortage for some time and this investment in our city will go a long way in providing quality accommodation for visitors,” he said. Consistently Profitable Prospective developers and operators can be confident the motel model, born in the 1950s out of the rise in motor vehicle travel, is still relevant, viable and indeed very profitable. Proof is seen in the consistent success of the properties. In 25 years of operating, Resort Brokers Australia has handled only four mortgagee sales of motels. Compare that to other hospitality businesses – pubs, for example, which come up as forced sales with monotonous regularity. Also an advantage is that motel development costs have diminished substantially in recent years. New high tech building materials and specialised construction systems mean significant time and cost savings. Construction of a new quality standard motel today, on a turn-key basis (excluding land), can be achieved for approximately $80,000 per unit. The developer then has several attractive options – to retain and operate the property, sell it in one line, sell the leasehold operation of the property and retain the freehold as a passive investment, or sell the two components individually. And there is no need to wait for the project to be completed before going to the market. Resort Brokers Australia has recently sold a couple of new motels off-the-plan, and the demand for good businesses and strong investments remains very strong. Little wonder, when you consider the financial appeal. An off-the-plan buyer of a new motel lease can expect to make a 30% return on the purchase price after all operating costs and rent are paid. The freehold investment in the same property, depending on location, can be expected to make between 9.0 and 9.5% net return. Some Important Advice Of course there are ways to ensure all this is achieved more quickly and easily. Here are some important tips for those considering a motel development: - once you have decided on a region or location with strong prospects , make sure the site is correctly priced, ie. the land content of your development should be no more than $25,000 - $30,000 per unit; - pay careful attention to planning and attractive design; - have cash-flow projections professionally prepared by a recognised specialist motel accountant; and - always engage a proven industry expert to professionally market and sell your property.