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Mixed results in performance and sales
Mixed results in performance and sales

28th March, 2017

Mixed results in performance and sales

"This is probably operating along the same lines as the occupancy rates within the motels themselves being very different from one week to the next with no real consistency being seen throughout the year.” Thus, Andrew Morgan, partner Queensland Tourism & Hospitality Brokers, sums up the current motel market.

 

The downturn in the resources industry has hit many moteliers hard, resulting in a large number of receivership sales in the last 12 months. But those in tourist hotspots are doing well.

“The location of motels has in many cases been the determining factor for the strength of an individual motel business and, therefore, the saleability of that motel. Those motels within central/north Queensland in the Bowen Basin region have been negatively impacted for a number of years by the downturn in the resources sector. This has seen the volume of motel sales decline where investors were not confident to enter the industry in those regions, and this combined with the reduced demand for accommodation led to property and business values declining.  Other areas of the state have seen much stronger activity levels with tourism numbers increasing, the market has been drawn to those regions where the news and media has been far more positive,” Mr Morgan explains.

 

“2016 has been a mixed year but has ended on a positive note. Quality motel stock appears to be moving swiftly, particularly in the entry level freehold investment space. There does however appear to be lingering freehold and leasehold stock, particularly in the regional areas and north Queensland, no doubt influenced by the mining downturn that has hampered growth across all industry types,” Ryan Johnstone, senior associate at Pevy Lawyers told

 

Resort News.

“We have solid transactional history throughout every state and territory in Australia, however, we couldn’t pinpoint a current hotspot. It is noticeable that traditional tourism locales have not experienced the same reduction in transactional volume as more remote and industry/corporate dependent areas.”

 

Michael Philpott, director of Tourism Brokers, concurs: “We have seen a diverse number of sales over the last 12 months with some mining sector leases that were previously sold for millions, either handed back or sold at considerable discounts and for some that were not conscious of the market, some poor commercial decisions as to either enter or remain. We have seen occupancies and related turnover in some areas decline from the high 80 percent or more to as low as 25 percent in some areas. This has created pain for some but opportunities for others.”

 

The Chinchilla Great Western Motor Inn freehold and leasehold recently sold for $980,000 to local business couple Bill and Brenda Rackemann. The auction through Power Jeffrey & Co was under instructions from Worrells Receivers & Managers and attracted a strong inquiry and nine bidders.

 

Power Jeffery partner Peter Power said the sale of the 1.9ha property with 26 units, a restaurant and a three-bedroom private residence on the Warrego Highway underpinned a revival in business confidence from buyers looking for quality properties.

 

“Dalby, Chinchilla, Miles and Roma have all been affected by the downturn in coal and coal seam gas,” he said. “But these areas always had a strong agricultural base and prices are coming back to where they were.”

Mr Power said in the past six months his agency has sold 11 properties comprising five hotels and six motels/caravan parks under receivers’ instructions. He said nine of those properties were in areas affected by the downturn in coal and coal seam gas industries with many of those assets selling at a significant discount compared to their last purchase price.

 

“The Chinchilla sale is typical of the market for quality accommodation venues affected by the mining downtown in country areas such as Miles, Clermont, Capella and Bowen where recent sales have been below $1 million,” Mr Power said.

 

Bernie McGovern converted a caravan park in Chinchilla into a motel at the height of the boom. Its 62 rooms, which once had an occupancy rate of 80 to 90 percent, now sit half empty. “Some of the smaller motels in town would be struggling to have one or two people a night,” he says.

 

McGovern points the finger at temporary accommodation for workers, especially the 990-bed mining camp in the middle of Chinchilla. “Mining camps were needed; we were never going to fill the amount of beds that were required. However, mining camps are temporary and the time has well and truly passed where we need temporary buildings in town.”

(Laws to ban large mining companies from using 100 percent fly-in-fly-out workers have recently been introduced to Queensland parliament.)

Chinchilla’s plight is reflected in regional towns all over Queensland.

 

For the past seven years or so, Bowen has been pinning its hopes on the opening up of the Galilee Basin coal fields, which will see potentially hundreds of millions of tonnes of coal per annum exported through nearby Abbot Point. But the projects associated with the opening up of the basin have been plagued by delays and controversy. The most advanced project is the Carmichael mine, owned by Indian company Adani, which will be back in the courts this year fighting several legal challenges. And those delays have had a devastating effect on Bowen. 

 

JJ Graham is a retired farmer who invested his life savings in a motel in 2008 when optimism around the coal projects was high. He says a number of Bowen motels have closed their doors in recent years as occupancy rates plunged from about 90 percent to about 40 percent.

 

Bruce Hedditch, the chairman of the Bowen Chamber of Commerce, runs the Larrikin Hotel, formerly the Club Hotel. He believes Bowen is suffering a crisis of confidence.

“In the last 36 months, there would be over 30 businesses that have closed in Bowen - maybe even more,” he says. “Small business is doing it tough and a lot of it has to do with the economy but particularly with Bowen, it's confidence. A lot of the lack of confidence comes from the delays attributed to Abbot Point, and the coal mines and the Galilee Basin.”

 

About 200km down the coast, lies Mackay; a city also hoping to benefit from development of the Galilee Basin coalfields. The community has been in dire straits economically since the abrupt end of the mining boom a few years ago. To stimulate the local economy, Mackay Regional Council has developed a $3 million community building scheme. It's put a freeze on rate rises and is pruning operating costs instead. Mayor Deidre Comerford says the effects of the downturn have been felt across the community.

 

“We rode that wave for a good 10 years. That has never been seen before in Australia. When it went off the boil it really was like a tap being turned off,” she says.

The mayor can't say how many businesses have closed down over the past few years, but there's been a steady stream of company closures.

 

The complete antithesis of the mining-reliant motel industry is the tourism orientated accommodation providers.

“Good, well positioned property in solid population based areas are often not affected by the mining sectors and are continuing to grow with occupancies increasing,” Michael Philpott, director of Tourism Brokers told

 

ResortNews.

“We see a number of these in NSW, SE Queensland and Victoria. The growth areas in Queensland have been the tourism areas, especially SE Queensland where we are also seeing billions of dollars in capital works and development projects. Unfortunately, a lot of the infrastructure and rooms needed for the mining sector are now in the wrong place and tourists are not replacing the demand in most mining locations but want the facilities in others (tourist locations).”

 

Philpott says: “If properties are well located and we can highlight the opportunities, it is possible to achieve sales above bank valuations. These are traditionally very rare but recently we have achieved this with a number of sales and in one instance the variation was in excess of $200,000, so some good sales remain in the market. It is essential that we work together with owners to highlight the benefits for the purchasers as that is important in the decision process - the ‘what is in it for me and where can I add value’ for the purchasers in the sale/decision process.”

 

“We have seen the Australian dollar from US$0.50 in 2001, soared to a new 28-year high, approaching $US1.11 (Jul 27, 2011) which hurt the tourism sectors and we have seen it decline to the current levels of US$0.75 in current terms. This has seen an escalation of the tourism market but a decline in the returns from commodities. The commodity prices may benefit from China and USA going through building booms as they reposition the economies but this may not translate to country infrastructure works and related employment,” Philpott warns.

 

“Motel sales throughout Australia have altered over the last 12 months as we have seen a number of corrections in the Australian economy. Primarily a contraction in the mining sector as we have come off the highs of the mining boom infrastructure requirements and associated spinoffs of resources including contractors. The commodity price was one component; it was the related need for construction of vital infrastructure that came to a predicted end that affected the market and a large portion of this happened in Queensland,” he said.

 

“In some Queensland mining sector locations, we are treating them very differently to the rest of the Australian market. Once again: position, position, position becomes a key as does the immediate access to population and demand. With some lease calculations, we suggest owners go back to the turnover in 2002, look at the rooms then, the available rooms now and make a calculation of the market for long-term returns. The boom times should not be counted as they are a once in a lifetime for many locations,” Philpott says.

 

“In relation to the transactions, especially in the mining sectors and that includes the likes of Mackay, Townsville, Gladstone as well as Chinchilla, just to name a few, we have seen operators sell at a significant loss but with others attempting to ride the storm. Debt levels and servicing of the debt are critical factors at present.  Townsville has seen the storm on a number of fronts from the declining mining infrastructure sectors and the declining defence expenditure, both have had an effect,” Philpott adds.

 

“Across the industry, we still see a large portion of lease transactions where the operators are unable to finance the purchase of the freehold motels but are prepared to do the work. If the splits are done well between the investment property and the business creating the lease, this is an area where you can get the biggest bang for your buck and do well, but if you are not informed, you should check the information prior.”

 

Ryan Johnstone, senior associate at Pevy Lawyers told Resort News: “There is no doubt that some buyers with greater appetites for risk have seen opportunities to seek out a bargain. This has created a small drive in freehold going concern sales where landlords have retaken possession from failed tenants. As you would expect, there is additional work involved in preparing these properties for market.

 

“This year has seen a clear rise in buyers expecting accountant-certified sales figures, and for leases to better reflect industry standards, particularly with regards to longevity of lease-term and rent review. 2017 will likely see this trend continue.

 

“The election coinciding with end of financial year produced a very short mid-year lull; however, the increase in sales late in this year easily made up for the slightly slower period,” Johnstone says. “Throughout 2017, we expect freehold, leasehold and freehold going concern sales to continue at a steady rather than breakneck pace, with continued demand for entry level freehold investments. We also expect to see new younger couples buying leases from older couples looking to exit the industry, particularly given the struggle some operators have had in recent years.”

 

Is food and beverage an advantage when it comes to selling? Johnstone says: “Opinions are mixed on the inclusion of food and beverage in a motel – it is fair to say this has probably always been the case. Most buyers will welcome the ability to serve liquor but we have found the inclusion of a restaurant or requirement to serve meals splits the crowd.

 

Older buyers tend to avoid providing meals where possible (save for a simple continental breakfast), whereas more dynamic buyers seem happy to take on the challenge for growth via ancillary channels. Given that the standard of cuisine throughout the country has significantly increased, motel operators may find it more challenging to keep up with customer dining expectations.”

 

Philpott told Resort News: “Restaurants are service centres of motels, they are often loss leaders in the industry as, unless they are done well, they are often difficult to make a profit from and motels with restaurants are traditionally in fringe areas, not necessarily convenient to other food options. Restaurants are provided for dining facilities and primarily in house guests with the spaces often a multi-function area for breakfast rooms, conferences and a number of other meetings.

 

“B&B motels are traditionally better placed than a number of properties with restaurants as they frequently offer chargeback facilities for guests and the convenience of a CBD location with ease of access to restaurants, pubs and other dining options.”

 

“The continuing trend over recent years has been an increase in the demand for bed and breakfast motels.  Many first-time entrants to the motel industry have not wanted to operate a restaurant and therefore have focused on seeking motels without restaurants.  There are definitely motel operators who prefer to have a restaurant however, particularly in the corporate sector and those who prefer a restaurant do enjoy this side of the industry.

 

The reason being that a restaurant offers an excellent way to be able to get to know one’s clients better and therefore build an ongoing relationship to increase return customers and referrals to new customers,” Mr Morgan says.

Philpott enthuses: “The motel sector is a fantastic sector that offers a number of opportunities for you to capitalise upon and make some serious money but, like any sector and business, the purchasers need to consider the risks involved and make educated decisions.

 

We often refer to the opportunities in the industry, in some instances as buying a job and a lifestyle for some. Yes, the work can be hard but if the correct opportunity is chosen, it can be very financially rewarding and set you up for life’s journey. This is a business sector driven by returns, often the properties are sold below replacement value but they are opportunities to optimise returns for the purchaser’s dollars relative to the financial constraints and the opportunity to make money.

 

If you have an outgoing personality and are people orientated, you can do well in the sector and often through those skills, may be able to transform a business and increase the value.

“The Queensland economy is currently transitioning from the record peak of a ‘once in a generation’ investment boom and it rests on strong fundamental economic drivers: our growing involvement with fast growing Asian economies, our abundant natural resources, and rising demand for infrastructure to satisfy a growing, skilled, population,” Mr Philpott says.

 

“Over the past decade, annual construction work done in Queensland has grown from $22 billion to $58 billion in real terms and the industry directly employs around 230,000 people. Within this, engineering construction activity has experienced an unprecedented expansion, booming more than fivefold from $8 billion in 2004 to $42 billion in 2014 down to just $6.3 billion in 2015/16, this happened in a number of areas, but Queensland is the feature. Developments create jobs and populations create opportunity. The coast is now getting the majority of infrastructure spend for the Commonwealth Games, related tourism and, most importantly, population growth,” Mr Philpott says.

 

Mr Morgan told Resort News: “The types of motels currently selling or receiving the most activity is most certainly the freehold going concern market. Investors have identified excellent buying opportunities within various regions and wanting to enter this market, have headed for the safety that freehold property offers. As a result, activity within the leasehold sector has been more subdued. The supply of leasehold motels to the market has declined along with the demand for leases. There has been some recent increase in enquiries for leases; however, freehold enquiries remain much stronger at this point.”

 

Morgan proffers some advice on selling: “Often motels are taken to the market without the necessary preparation and often there is little interest as a result or if there is, a sale does not progress to settlement because basic documentation is incorrect or not available.

 

If there are outstanding issues that have not been resolved before going to the market (hoping no one will notice), a sale will no doubt fail at some point as a result. Preparation is paramount and having all documents available and well-presented is paramount. Some examples include a fully signed lease, accountant-prepared abridged profit and loss statements, monthly income and occupancy data, tariff information, a list of recent refurbishment items, rates notice, insurance policy and much more.” 

 

Mr Morgan stresses: “A picture tells a thousand words. Therefore, good quality photos that show the property in its best light, without being digitally enhanced or falsified in any way are vital. All this being said, the financial data being properly presented and able to stand up to a full due diligence is the most important matter when selling any business.”

 

“The last 12 months saw a slow start to the year with a low number of motel sales being recorded. This has changed as the year wore on with the second half of the year improving with the number of motel sales increasing quite rapidly. Good buying opportunities have been identified by savvy buyers in the market and this created a lot of the increase in sales activity. It is expected that 2017 will continue on from where 2016 has finished off with an increased appetite from buyers looking to acquire quality motel assets. Also with the expectation that there is much upside potential in these assets as economic confidence and investment in many regions starts to build,” Mr Morgan says.

 

However, Mr Philpott warns: “The issue for Australia, in particular Queensland, is that with the current trends, we are starting to get concerned that, despite Wellcamp and the Sunshine Coast coming on as international airports and Brisbane having another runway, Sydney will be at capacity soon and the federal government needs to bring forward Badgerys Creek and other infrastructure investment.

 

We have the rooms and the infrastructure by way of accommodation, the private sector is happy to create more to meet the demands and the tourists want to come to Australia; the poor planning and lack of essential infrastructure is the real storm on the horizon for the Australian market so we can realise the opportunities that are being presented from the rising Asian and international markets.

 

The start of a boom

Michael Philpott, director of Tourism Brokers is enthusiastic about the future of motels. “The Australian Tourism market is in the start of a boom period and Queensland will get the lion’s share because of the climate, infrastructure and geographic attributes. He cites:

 

- Chinese market up 32 percent and accounts for 28 percent of the total international visitors up from 24 percent in the 12 months prior

- 2015-2016 capacity China to Australia grew by 31 percent and Japan 24.5 percent. The forecast for 2016 - 2017 is 20.6 percent and 10 percent at this stage in 2017-2018

- The tourism on the Sunshine Coast is a $2.5 billion a year economy

- Australian international visitors in 2015-16 numbered 7.8 million, up 9.3 percent on 2014-15. Gold Coast international visitors for the same period were up 11 percent

- The Gold Coast is once again on another wave of international tourism success with a 15.4 percent increase in visitor expenditure to $1.2 billion for the 12 months to March 2016

- Sunshine Coast’s education, healthcare and professional services are all growing

- More permanents will experience increased owner occupiers coming from interstate as the baby boomer markets start to roll in

- Current estimates show in the next five years 20 percent of the travelling population will be Asian/Chinese and by 2025 estimate is two million visitors from China with $140 billion impact for Australia. The 12 months from July 1, 2015 to June 30, 2016 saw 964,362 passengers use Sunshine Coast Airport – a 13 percent increase YOY and the highest recorded passenger numbers for a 12-month period

 

Sunshine Coast Airport’s domestic airline partners have added more than 65,000 extra seats to their Sunshine Coast services for the upcoming summer period.

 

Chinchilla’s plight is reflected in regional towns all over Queensland

 

Is food and beverage an advantage when it comes to selling?

 

We have seen the Australian dollar from US$0.50 in 2001, soared to a new 28-year high, approaching $US1.11 (Jul 27, 2011) which hurt the tourism sectors and we have seen it decline to the current levels of US$0.75 in current terms

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