June – Hotel Investment
adam | 19th June, 2012
Market update: is it now just Woollies vs the rest?
Nothing has changed the dynamics of the hotel market in NSW more than Woolworths’ recent acquisition drive.
Here we look at what’s driven these changes and what this new ‘two-tier’ market means for investors.
It’s all about control…
There are two main reasons why Woolies have been snapping up large hotels with existing retail outlets or land on which to put them: to increase their market share and to shut out the competition.
It’s pretty clear from the prices paid that these deals were not driven by conventional hotel yields; rather it’s the licence approvals and entitlements first, and the pub second.
As a result, Woolies is now Australia’s biggest owner and operator of poker machines, while its growing bottle shop network further tightens its stranglehold over the retail liquor sector.
There were some huge sales and a handful of publicans have profited superbly from selling out to Woolworths. Some in the industry believe that independent operators are unfairly being squeezed out by what’s seen as anti-competitive behaviour.
So where to from here?
While Woolies’ buying spree helped drive hotel prices to record highs in 2007, lower yields and more difficult trading conditions since then have resulted in lower prices across the industry, with prices down over 50% in some cases.
Woolies’ plan to operate, not own, its hotels has seen a number of its hotel buildings being sold to private investors, most recently in Newcastle where yields close to 8% were achieved.
What does it mean for investors?
Despite Woolies’ buying spree having skewed recent sales data, there are still a number of high quality hotels at attractive prices currently on the market.
Some of the benefits you get from investing in a hotel, compared to other property, are:
- Longer leases, with 15-20 years being the minimum
- Greater income certainty, as ratchet clauses prevent rents going down
- Diverse asset base, poker machine entitlements are an asset class of their own
- Ability to re-sell the business, there are always operators looking to lease
Plus you just can’t go past the emotional appeal of owning your own pub.
To find out more about the benefits of owning a hotel, email us today, as we currently have a number of very well-presented investment properties available for sale.
And next month we’ll continue looking at how the ownership profile of hotels has changed and who else, apart from Woolies, is currently buying pubs.