New Zealand has some of the most spectacular tourist destinations in the world, but anyone contemplating buying into a motel there would do well to purchase where they will make the most money rather than the place with the best views.
That’s the advice from leading Kiwi broker Kelvyn Coffey from Coffeys Tourism Property Brokers, who has specialised in the sale of motels, motor inns and tourist hotels since 1984.
“The principles of buying into an accommodation business in New Zealand are pretty much the same as in Australia,” Mr Coffey said.
“Location has a lot to do with it, but since COVID, banks are looking very carefully at the clientele of the motels during COVID and they have preferred funding businesses in the provincial towns that have a steadier trade from a corporate base.
“They haven’t been so keen if the motels were tourist oriented.”
About 80 per cent of motels in New Zealand operate by lease, with the landlord owning the building and land underneath it.
But under the lease, the businesses can be highly profitable.
Mr Coffey said he always advised clients to buy in an area where they could make the most money to fund their lifestyle holidays, rather than overpay for a property in a holiday destination where the returns weren’t as great.
He said buying into an iconic area such as Queenstown which was very much tourist-driven was more expensive than other areas of New Zealand but that didn’t mean that returns were better. Often they were worse.
And he said potential buyers needed to assess from a motel’s books whether high occupancy rates might have been affected by recent infrastructure projects in an area such as new bridges and highways.
His recommendations were endorsed by Wayne Keene, the National Director Hotels, Tourism & Leisure for Bayleys Real Estate.
Mr Keene said as a general rule returns on investment for leased motels in New Zealand ranged between 20 to 25 percent for accommodation properties.
“If you throw food and beverage into the equation say for a building with 40 units and food and beverage facilities then your turn is getting close to 30 per cent,” Mr Keene said.
“There are a lot of aspects of course around those returns regarding the length of the lease, so the tenure has a big part to play.
“Anyone contemplating buying into a motel in New Zealand really has to study the terms of the lease very closely and a lot of people come into the business not really knowing everything that’s involved.”
Christchurch-based lawyer Seaton Read agrees.
Mr Read became a partner at the law firm Harmans Lawyers way back in 1976 and his special interest and expertise is advising clients in the hospitality industry. He is also a national board member of Hospitality NZ.
Mr Read said that before COVID the churn rate for new motel owners in New Zealand was 2.7 years, largely because many new operators were totally inexperienced in hospitality and had no experience with the demands of long-term leases.
“There are a lot of people who don't know what they're doing coming into the motel business,” Mr Read said.
“I've been long in my arguments that it’s a problem that should be addressed.
“People buying motels might have been policemen or farmers and they totally underestimate the difficulties of the job.
“On the other side, the people who know what they're doing, who have experience in motels, tend to do pretty well provided that they buy in the right areas that will always have large visitor numbers.”
Mr Read said the quality of investments in the sector of leased motels “come in a huge range from bloody awful to quite profitable.”
“In my opinion the model on which some leases are constructed are unduly biased towards the landlord,” he said, “and that’s something that people coming into the industry really need to watch.
“But if you take your time, do you research, choose the right area and negotiate a fair lease, motels can be extremely profitable. Unfortunately not as many people manage to get it right as we would hope.”
Alan Robertson, a director of Auckland-based Strata Funding, has almost 40 years in his industry, and says that historical trading figures, location, condition of property, length of time to run on the lease, and the conditions of the lease are all key factors in the value of a New Zealand motel business.
“And the big question is if a successful operation can be maintained,” Mr Robertson said. “It’s always a case of ‘eyes wide open’ and we always direct potential buyers to their accountant and solicitor
“We certainly look at the effect of COVID on a business and we look back to see what it did in the year ending March 2020.
“We've had a period when some properties have had a significant upturn since COVID because people have not been able to holiday overseas for some time and are holidaying at home.
“People can make good money in motels in New Zealand but buyers have to look at the source of the revenue for that motel very closely because some of the motels have been used fully or partly for social housing by the Government, and it is not the property’s core business.
“That will come to an end but when we don't know, and it skews the numbers quite a bit.”
John Pryor, a Christchurch-based valuer with Colliers, said properties on New Zealand’s North Island with a strong domestic component to their visitor profile were prized assets in the Kiwi motel sector.
“As overseas destinations become more available, the local domestic leisure travel might drop away a wee bit and that has to be a consideration,” Mr Pryor said.
“In the metropolitan centres Christchurch is having a tough time with motels generally ever since the earthquakes and the only transactions I've seen recently have been semi fire sales.
“The land and buildings of motels in Christchurch are obviously valuable but leaseholders with a big rent bill hanging over their heads find it tough.”
Mr Pryor said most investors in New Zealand accommodation were taking a long term view of domestic markets and he felt the picture was “fairly rosy”.
“But we do have issues with social housing moving into motels at the moment,” he said.
“It’s been the saviour for some operators but how long will that last?”
Mr Pryor said another consideration for potential buyers in New Zealand was the aggressive expansion of companies such as Quest with their serviced apartments.
“Those strongly branded serviced apartments mean that independent motels in locations where there is strong corporate trade now, really have to keep an eye on that level of competition.”
Mr Pryor said the price of New Zealand real estate stopped many operators from buying freehold motels.
“Anything above 20 units is quite a big motel operation to buy,” Mr Pryor said. “It would be at least $3 million, so who with $3 million wants to buy a motel where they’re going to have to work seven days a week?
“I've actually operated a motel and its bloody full on. You work every day.
“The other way to look at it, though, is that by buying freehold you’re getting valuable real estate, a house, you’re buying a job, you're probably making 10 per cent on your investment, and you’re the master of your own destiny.”
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