Jones Lang LaSalle Hotels ’ most recent Pub Investor Sentiment Survey, whilst investment activity has been impacted by the knock on effect of the global financial crisis, pub investors remain relatively upbeat.
The Survey is Australia’s only national pub survey reflecting investor opinion on a range of key issues currently affecting the industry, providing a benchmark to identify future investment opportunities.
Investor expectations for initial yields for freehold pubs across Australia now averaged around 10.1 per cent, up 60 basis points from 9.5 per cent in April 2007.
“Freehold yields ranged from 9.1 per cent in Melbourne metro to 14.0 per cent in regional WA – a spread of 490 basis points,” said Tony Bargwanna, senior vice president, Jones Lang LaSalle Hotels.
He added, “This indicates that the intense competition witnessed in the sector up to 2007 has now subsided and that investors are reaffirming the ‘flight to quality’ that has been witnessed across most property sectors throughout 2008.”
Unique properties will always sell at lower yields as there are still investors with capital who are keen to acquire if a particular pub suits their strategic requirements.
“But for pubs in secondary locations, with poor smoking solutions or an undesirable business mix, yields have obviously retracted,” said Mr John Musca, senior vice president, Jones Lang LaSalle Hotels.
Leasehold pub businesses, on the other hand, recorded the smallest retraction however investor yield requirements remain considerably higher at 17.7 per cent. Investor expectations for yields in non-gaming freehold hotels averaged 15.6 per cent.
Investor expectations for initial yields therefore point to a softening trend through 2008 indicating downward pressure on capital values.
“However a lack of transactions across sufficient properties and/or locations means that it is difficult to call exactly where pricing is at,” said Bargwanna.
Positive trading through 2008 means that owners are not motivated to sell, which when combined with the more cautious buying approach, is resulting in a gap in pricing expectations.
“The majority of buyers and sellers estimated that the current pricing gap was between 10 per cent and 15 per cent - reflecting a simple calculation of matching required debt interest rate coverage and lower LVR’s to sustainable EBITDA,” said Musca.
Investors reported a significant upward swing in short term hold sentiment, with 41.2 per cent of investors now looking to hold.
“With only 19 per cent looking to sell and a further 30 per cent looking to buy, investors can expect there still to be at least three buyers for every asset that comes to market,” said Bargwanna.
Cashed-up private investors have been the ones who have been actively seeking deals. “Private investors have to an extent prepared for this part of the cycle, anticipated the change in yields and are taking advantage of the turmoil with a renewed incidence of structured transactions also appearing,” said Musca.
Across Australia, gaming pubs in metro Melbourne are considered the “hottest buy” with 63.6 per cent of investors looking to acquire. This is despite the State Government’s announcement in April 2008 that the Tattersalls and Tabcorp licences would not be extended beyond 2012 which created widespread uncertainty in this market segment. The sale of the Boundary Hotel in East Bentleigh in May 2008 for $17 million at a yield of 7.07 per cent confirmed continued interest in the sector.
Other hot markets across Australia where investors are keen to acquire include Victorian regional non-gaming, regional WA and Hobart, Coastal Queensland, Coastal NSW, Melbourne metro non-gaming and Sydney. Sydney and South East Queensland topped the scale to offer the best opportunity for capital growth.
Current trends affecting the Australian pub industry today?
"Our survey highlights a preoccupation with the macro-economic outlook,” said Musca
“Concerns include availability / cost of financing, softer consumer sentiment and in some instances the risk of foreclosure.”
Industry consolidation was still a concern but is now largely regarded as a positive impact for the future growth and development of the industry.