While pub sales remain topical and front of mind for investors, several market conditions have altered over the course of the last twelve months. The JLL Hotels & Hospitality team share their insights.

Amid a lot of discourse about changing economic conditions, pub assets have remained a secure and sought-after asset class. However, changes in market conditions are being felt, and are having an effect on the type of pub asset that is most in demand.

Several factors are playing into this, including debt liquidity and changing banking requirements such as interest rates, banking assessment rates and interest cover ratios.

“General feedback from both banks and clients has been that the traditional emphasis on LVRs has adjusted, and now a group and or single asset’s ICR is vital to the lending appetite and associated terms,” explains Senior Vice President Tom Gleeson.

This is compounded by shifts in discretionary retail spending; the current cost of redevelopment and construction; and the current legislative environment, particularly around gaming reform.

These factors have seen operators and investors shift their preferences in a pub asset. Here’s what publicans across the country are currently looking for:

Leasehold hotels

Demand for leasehold hotels has risen dramatically of late, as they are high-yielding and offer strong cashflow over the term of the lease.

“We have seen a surge in demand for strong leasehold assets ideally underpinned by ownership of the hotel licence and gaming machines given recent changes in debt market requirements – specifically interest cover ratios,” states Executive Vice President Ben McDonald.

Recent examples of this are Hotel Coronation in Sydney, and the Meadowbrook Hotel in Brisbane, the latter which has been leased until 2026, plus 2 x 15-year options taking the lease to 2056.

Gleeson suggests leaseholds allow operators to decrease risk during tighter lending environments.

“We have seen non-traditional leasehold acquirers show increased interest in the sub-sector. Often this is viewed as a potential ‘risk hedge’ as it provides a greater level of cash flow when compared to asset-heavy acquisitions and can provide an asset diversification with significantly less capital than an asset-heavy hotel.”

Diverse earnings profile

While gaming has always been king when it comes to earnings, with the current tightening of gaming legislation in jurisdictions across the country, publicans are now seeking hotels with a more diverse mix of trade.

One recent sales campaign that has attracted a lot of attention is the Salisbury Hotel in Sydney’s inner-west, which has a balanced mix of trade across food and beverage, retail, gaming, 20 accommodation rooms and a popular beer garden.

Future potential

Pubs with strong underlying land value, strategic long-term development potential or as a store of wealth are also high on the hit-list right now, for investors looking for a longer-term play. In Sydney, the sale of the esteemed Republic Hotel on one of the best corners in the CBD was highly contested, while the Commodore Hotel in North Sydney sold for $29m thanks to high profile location and approved DA for expansion, meaning plenty of growth opportunity. Another recent example is the sale of the Rye Hotel in Victoria.

“Traditionally, pub assets across the country hold strong underlying land value, given the majority are positioned on a dominant corner position, and more often in a suburb’s main thoroughfare or precinct,” states Senior Vice President Will Connolly.

“There is no better example of this than the Rye Hotel in Victoria’s Mornington Peninsula. Offered for the first time in 45 years, the hotel was underpinned by approximately 12,000sqm of beachfront land, with favourable Commercial 1 Zoning in the heart of one of Victoria’s most popular tourism regions.”

Unique assets also don’t come by often, so when these hit the market competition for acquisition is intense.

These changing trends in demand show there’s a wide variety of pub assets to suit different boardroom strategies, business objectives and budgets, so speak to the JLL Hotels & Hospitality team about your hotel acquisition strategy today.

This article was first published in the October issue of Australian Hotelier. Check out the issue below.

Leave a comment

Your email address will not be published. Required fields are marked *