By Andrew Starke

A new report has found reason for optimism in the Australian pub sector on the back of a modest recovery in investment levels over the past eighteen months.

The national overview from Jones Lang LaSalle Hotels found that transactions reached $700 million in 2010 which although still well below the 2007 peak, still represents almost a 50 percent increase on the subdued levels of both 2008 and 2009.

”Despite lingering concerns regarding prevailing legislative parameters, we expect to see stronger levels of transaction activity throughout 2011,” the report said.

”The current resolution of the capital structure ensuring long term sustainability of the ING/Icon, Redcape/NLG and Compass hotel assets is expected to provide a floor for industry recovery in Q3 and Q4 2012.

”The trend until then is likely to be underpinned by a peak in receivership sales, the ongoing presence of opportunistic capital and a gradual thawing in the debt market for select investors.”

After two years of stagnation, 2010 was characterised as a year of consolidation and improving investor sentiment, although the absence of significant portfolio sales -which averaged $650 million each year between 2005 and 2007 – was largely responsible for this shortfall.

This golden era for the pub sector, which earned it the title of fastest growing property asset class, was underpinned by the aggressive expansion of retailers, looking to secure market share, and private buyers, supported by strong balance sheets.

While the investment landscape in 2011 is markedly different, JLL Hotels expects to see higher levels of activity throughout the year as experienced operators look to continue to capitalise on displaced market conditions.

”Concerns regarding alcohol-fuelled violence and problem gambling is likely to result in further legislative changes over the coming years, creating opportunity for some,” said the report.

“But it will be the response of Australian banks who largely determine how these events will play out.”

Over the past two years, formal receivership sales have accounted for around 20 percent of the total pub transaction volume, a characteristic not shared by most other property sectors where this type of activity has been limited.

Receivership sales have been second highest in the accommodation hotel sector, accounting for 12.8 percent of the total transaction volume in 2010.

The exception in the pub sector has been freehold pubs which are sold subject to tenancies.

”In many instances purchasers are effectively buying an annuity or bond income to a long term AAA-rated tenant such as Woolworths,” said the report.

”These asset sales have been a primary driver of transaction activity over the past two years, but have little bearing on the going concern hotel investment market, as often it is the tenant who holds the liquor licence and gaming machine entitlements.

”The exception is where a tenant is rumoured to be distressed resulting in such assets being highly sought by sophisticated pub investors, prepared to take on tenancy risk, in the hope of a beneficial reversionary outcome.

”These opportunities are expected to moderate through 2011 as this process is well underway for many tenanted groups.”

Nationally, receivership sales are expected to peak in the second half of the year as debt acquired at the peak of the cycle rolls over.


The Shout Team

The leading online news service for Australia's beer, wine, spirits and hospitality industries.

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