It seems appropriate based on the strength of the current market for this tenure of motel ownership to revisit it and consider the many reasons for the current and continued strong attraction in owning and operating a freehold motel.
Not having to answer to anyone or having anyone else involved in the business is the goal of many. This is no different to renting a house but ultimately wanting to buy one’s own home, own castle.
All the decisions made are the owners, with no one looking over their shoulder and questioning why. Any decisions made in the owner’s opinion that are the best for the business and property going forward, are their own. Backing oneself and thriving via the decisions one makes provides a lot of personal satisfaction.
Leasehold ownership has been popular for the last 25 years or so, due to the lower capital outlay required to enter the industry and the higher returns on investment available. The demand for passive investment motel ownership has been strong for many reasons, but it has also benefited from those investors outside the industry seeing the benefits available, thereby increasing the demand for an asset short on supply.
The freehold going concern operation has been largely left to those wanting to operate the business themselves, however this has been evolving more recently, with many accumulating more than one motel and operating them under management, whilst they play the role of overseeing each. This provides a higher level of flexibility and lifestyle options.
As a result of the popularity and growth of the leasehold tenure over time, freehold operations that have been available on the market have diminished. Lower levels of supply mean that inevitably pressure will be placed on values to go up. Capitalisation rates have largely held steady over many years, however good quality properties and businesses will always achieve lower yields. The return on investment expected for coastal freehold going concerns has been anywhere between 13 to 16 percent depending on location, clientele, standard of presentation and so on. Inland going concern capitalisation rates have been slightly higher.
Opportunities are available, particularly where properties have been run down over time by either lessees, owners, or passive owners, where each has been reluctant to maintain their assets and not spend on maintenance and/or refurbishment, as a result damaging the value of the asset. In recent times, savvy buyers have been able to take advantage and ultimately buy a lower priced freehold going concern that has much upside potential with renovation. Other opportunities include those where the business is operated on a ‘caretaking’ basis rather than a professionally managed one. Working day to day at the business rather than working on how to gain increased market share has, and is, providing some great buying opportunities for those investors who can then buy low and work on growing the business thereafter. Investing funds and time back into the property is a major benefit to the freehold asset owner, and strong rewards can be achieved within a short time frame. It would have to be said with the recent increase in demand for tradespeople this has probably been a bit more difficult to achieve in the past twelve months. The benefits of owning a freehold property outright are attractive, therefore the demand grows, with an ever-changing market. The pride of ownership in the property, the ability to do whatever one likes with the land and buildings without question or requiring permission, the ability to expand the size of the complex, the taxation benefits available and the ultimate right to lease the business at any time in the future is helping fuel the increased demand.
Changing dynamics in any industry force attitudes and therefore behaviours to change. These dynamics can be major events or a number of more minor things. A dominant freehold going concern market can force change where a Lessee wants to sell and a Lessor wish to sell, but one or both markets may be a little soft. The best way forward may then be to offer a package of both, to attract this dominant freehold market by amalgamating the two. Market demand drives the supply and changes invariably occur and the industry starts to change and evolve again.
Finally, when the time comes for the owner operator to make a change and move on, the options available include putting management into place or selling the leasehold business. Both provide their own benefits and burdens, depending how involved one wants to be.