Market Update - Leasehold Hotels July 2009

Halfway through 2009 and the hotel industry is experiencing major shockwaves with a number of high profile receivership's occurring in the industry. It is our opinion that the hotel market has moved close (but not quite all the way yet) to "traditional" levels of return.

This value correction combined with a return to "traditional" lending ratios by lenders will place stress on a number of properties that have transacted in recent years.

Leasehold hotels have their own separate marketplace. There are a number of factors affecting the value of a leasehold hotel; such as Term and Rental. Recent years have seen the "traditional" hotel lease varied with bonded leases, high rent-no premium, 30 yr, 50 yr and even perpetual lease terms.

Assets owned by the tenant vary occasionally and we have seen some lease's where the tenant owns the Poker Machine Entitlements.

Variations from the "traditional" cause confusion in the market and can lead to strange results.

With the tightening of bank lending criteria a number of lease purchasers have had to down grade their expectations. Supply of leasehold properties (particularly CBD Sydney) has increased as pressure is placed on a number of lessees's to reduce their lending exposure and lower debt levels to inside today's new lending parameters. Many of these leasehold properties were freshly created in recent years and have rentals well outside "traditional" levels which are causing them to be rejected by the market.

Latest results show that leasehold properties with rental, lease terms and conditions and terms as expected in the "traditional" leasehold marketplace are far more saleable than properties that are outside expectations.

Leasehold hotels are traditionally valued by applying a capitalisation rate to the Broker devised business profit (earnings before interest, taxation, depreciation, amortisation and exceptional items - EBITDAE).

The leasehold marketplace has been in a state of confusion with so many variations from the "traditional" hotel lease. Conflicting "expert" opinions and un-realistic expectations by landlords and lessee's have seen a number of lessee's walk away from their obligations.

Genuine leasehold vendors need to carefully select the price portrayed to potential purchasers.