2011 The Year of Decisions
What a start to 2011; flood events through the eastern states to replace droughts, record value of the $A against the $US and Australian cricket lost the Ashes.
The hotel industry was targeted with front page Daily Telegraph Headline "Last drinks at 300 struggling pubs".
Here an AHA NSW Secretary told the Daily Telegraph that up to 20% of the state hotels could be placed on the market this year by banks/receivers.
Well this certainly caught the eye of many associated in the industry ...
Similar stories were being propagated in late 2009: SMH 17-8-09 The pubs with no buyer: hotel values in the cellar http://business.smh.com.au/business/the-pubs-with-no-buyer-hotel-values-in-the-cellar-20090816-embm.html ) or Slump in pub values pushes ING Property Fund to the brink ( http://business.smh.com.au/business/slump-in-pub-values-pushes-ing-property-fund-to-the-brink-20090830-f40q.html)
2010 did not see many sales occur in the hotel market.
Rumours continue that many hotel owners are now trading outside their lending covenants - so how did this happen?
The hotel market place in 2007 & 2008 was artificially inflated above traditional levels with unprecedented demand for hotels based on the opinion that poker machine profits were going to continue to increase. Coinciding with this increase in hotel buyer demand, completion from bankers for hotel properties saw Loan to Value ratio's increased from the traditional 60% to 80% on Freeholds and 30% to 80% on leasehold properties:
TRADITIONAL MARKET
|
Profit |
Hotel Value |
Bank Loan |
|
$100,000 pa |
$500,000 |
$300,000 |
|
|
20% ROI |
60% LVR |
PEAK OF MARKET
|
Profit |
Hotel Value |
Bank Loan |
|
$100,000 pa |
$665,000 |
$532,000 |
|
|
15% ROI |
80% LVR |
As you can see above with the market place returning to traditional levels there are hoteliers who find themselves with negative equity.
Many of these hoteliers have met their repayments and fail due to LVR. The industry is aware of bank requests for updated valuations.
The problem is how to manage those hoteliers outside their banking covenants.
We feel the answer will always be the same for those who do not have the ability to repay and don't meet their mortgage payments - Receivership and forced sale!
For those meeting their payments - The result most likely will be the same, however self managed they might escape with their dignity.
So where to now?
To an extent the hotel market is "dying the death of 1,000 cuts" - many hotels are for sale at unrealistic prices, buyers are waiting for the "bottom of the market" before committing and no one knows what the real value of a hotel is today.
For the market to recommence "normal" trade there needs to be a clear signal indicating the bottom has been reached.
I feel the end answer rests not with the industry but with the bankers and their patience for clients who continue to make payments yet find themselves outside LVR.
It will be an interesting year ahead.
Further comments made: http://www.smartcompany.com.au/property/20110104-experts-play-down-fears-banks-could-put-300-pubs-into-receivership.html
