In Uncertain Times
- Posted By Andrew Morgan
In uncertain times people look for security. Whether that means where to park money, what to invest in or where do they want to live that will make them feel secure. Secure in their personal wellbeing or secure in their financial position.
The reasons for the strong attraction in owning and operating a freehold motel are many. Not having to answer to anyone is a big plus. All the decisions being made are your own, with no one looking over your shoulder and questioning why. Any decisions made in the owner’s opinion that are the best for the business and property going forward, are their own. They back themselves and thrive by the decisions they themselves make.
For different reasons, the leasehold and passive investment tenures achieve the majority of the press, however the silent achiever is the going concern tenure. Leasehold ownership has been popular due to the lower capital outlay required to enter the industry and the higher returns on investment available. The demand for passive investment motel ownership has been strong for many reasons but it has also benefited from those investors outside the industry seeing the benefits available. The freehold going concern operation has been largely left to those wanting to operate the business themselves, however this has been evolving in more recent times with many starting to accumulate more than one motel and operating them under management, whilst they play the role of overseeing each one.
As a result of the popularity and growth of the leasehold tenure over time, freehold operations that have been available on the market have diminished. Lower levels of supply mean that inevitably pressure will be placed on values to go up. Capitalisation rates have largely held steady over many years however good quality properties and businesses will always achieve lower yields than others. The return on investment expected for coastal freehold going concerns have been anywhere between 13% - 16% depending on location, clientele, standard of presentation, etc. Inland going concern capitalisation rates have been slightly higher depending on similar factors.
Opportunities are available now particularly where properties have been run down over time by either lessees, owners, or passive owners, where each may have been reluctant to maintain their assets and not spend on maintenance and/or refurbishment, as a result damaging the value of their asset. In recent times, savvy buyers have been able to take advantage and ultimately buy a lower priced freehold going concern that has much upside potential following renovation. Other opportunities include those where the business is operated on a “caretaking” basis rather than a professionally managed one. Working day to day at the business rather than working on how to gain increased market share has and is providing some great buying opportunities for those investors who can then buy low and work on growing the business thereafter. Investing funds and time back into the property is a major benefit to their freehold asset, and they reap the rewards within a short time frame.
Many leasehold motel investors have taken the leasehold route because of the high yields available and the ability for a smaller sized property to be able to absorb the costs of management, whilst still offering a solid yield and high income to the business owner. The capital cost of purchasing the land and buildings has not been of interest to this market. The benefits of owning a freehold property outright still exists and the demand is growing, with the changing market. The pride of ownership in the property, the ability to do whatever one likes with the land and buildings without question or requiring anyone else’s permission, the ability to expand the size of the complex, the taxation benefits available and the ultimate right to lease the business at any time in the future is fuelling the increased demand.
The industry is probably starting to come around full circle from where it was in the early 1990’s and prior to where the number of freehold owned and operated motels was the dominant tenure. Market demand drives the supply and changes invariably occur. Where leases and passive investments start to sell together and amalgamate on the back of demand for freehold going concerns the industry starts to change and evolve again.
There does come a point for any business owner when it is time for a change in lifestyle or a search for new challenges and 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 will still exist, if operating under management does not check all the boxes.
Photo Credit: Tourism & Events Queensland