by Andrew Morgan - QTHB
29th September, 2020
During times of uncertainty…
We all look for security. Whether we are wondering where to park money, what to invest in, or where to live, we want to be secure in our personal wellbeing and finances.
Business acquisition is part of this with investment decisions and attitudes adapting with changing times. Over the past 12 months, what we have been seeing in the motel and caravan park industries is a shift in buying interest to businesses that are seen as more secure long-term investments. This is across all three prime tenures of ownership, freehold going concern, freehold passive investment and leasehold.
Freehold going concerns have seen operators and investors seeking the security of the freehold tenure that such a business offers. The operational side of the business, whether operated by the owner or under management, combined with the solid base of land and buildings underpinning the business operation. The fluctuations of the business’ trading from stronger periods to quieter are not such an issue for the operator with the strength of the business secured by the physical asset. In real terms demand has been growing for this investment vehicle probably over the last few years.
Further down the line, there does come a point for any freehold business owner when it is time for a change in lifestyle or a search for new challenges. Once the freehold going concern operator has had enough of the day-to-day operation (yet is not ready to sell the property), the opportunity to lease the property at any stage is available, if operating under management at that time does not check all the boxes.
The freehold passive investment market is keenly sought after. The demand for this investment option is strong. The land and buildings leased to an operator is in demand by those seeking a passive investment and a place to park their funds in exchange for a yield far in excess of what is being offered by fixed term deposits. The low interest rates for the safe haven of a bank is not what this market is seeking and as a result demand for accommodation properties is high and growing. Depending on location of course, yields above 8.5 percent are very attractive with a solid accommodation business holding a lease over the property.
Recently the leasehold tenure has not been as attractive to investors as freehold unless there is evidence of strong trading performance and a long lease in place. The long lease motels offer is a solid and secure tenure, often argued that such a long lease is almost as good as freehold tenure.
A general shift in market sentiment towards freehold investment has really become more evident over the past nine months or more with enquiry levels increasing for the freehold motel-based business. This may be due to the perceived uncertainty of the economic climate, international political and economic actions, etc. There are many possible explanations, however uncertainty creates a desire for security. What is the safest to invest in and also what suits our individual risk aversion level in such times.
It could easily be perceived that now is not a good time to invest in buying an accommodation business because of the state travel bans in place, etc (at the time of writing). On the surface, that may seem logical. Alternatively, one could argue that the risk level for accommodation businesses going forward is very low due to the amount of increased intra-state travel that is currently occurring and will most likely continue for quite a while. This will be further boosted as state travel restrictions are reduced in the coming weeks or months and travellers from interstate want to get to Queensland either for a holiday or to visit family, and in many cases potentially staying more permanently for their perceived financial and personal security.
This makes the Queensland short-term accommodation industry look quite attractive as a positive industry to invest in going forward.