Market Update Sep 08

The Country Freehold Hotel market place has broken into a number of sub-markets with each having their own determinants of price.

These markets can be roughly described as follows:

a)Hotels without gaming machines

b)Freehold hotels to $2.5m with Poker Machine entitlements underpinning the value. (property = asset value NOT business value)

c)Freehold Hotels to $4.5m where value is directly related to Business Profitability. (Gaming machine numbers are still important yet price is determined by overall hotel profitability)

d)Premium freehold properties (generally in excess of $5m) sought after by corporate style purchasers.

During the last 18 months there have been a number of properties placed on the market at levels above their achievable price. The market place is rejecting these properties and in fact damaging the perception of these properties even when a price reduction has occurred.

Hotels with no gaming are proving difficult to sell (Category A) - certainly price is the major marketing tool. A purchaser who has the opportunity to compare a "hotel with gaming" V a "hotel without pokies" where the price is within $50,000 - invariably selects the hotel with gaming.

Demand for hotels in the (b) and (c) markets has slowed from a rush in 2007 to a trickle in 2008. Many purchasers are waiting to see the effect of the No-Smoking Legislation and feel that other factors such as local economy will provide for "bargain" properties.

Few properties have been genuinely placed on the market in the Premium Country Hotel sector. Demand appears to have slowed with most corporate purchasers ensuring positive trade results for hotels currently contained in their portfolio's.

The country leasehold market appears to have fallen away from the thoughts of many in the industry. The traditional entry level for many career hoteliers the leasehold market has seen some major changes of late.

It is difficult to pin-point a "standard" lease setup today as recent years have seen premium, rental and terms experimented with as investors attempted to gain traditional returns for their property.

The introduction of gaming income and subsequent reduction in Capitalisation Rates has resulted in a mathematical impossibility for the creating of "traditional standard leases".

For leasehold properties that are close to the tradition: I.e. Rental within 10% of sales and Term approx. 10 yrs to 15 yrs - price appears to be calculated by a return on the (EBITDA - Earnings before income tax and depreciation) income. Based on these lease terms returns indicate approx 2 to 3 times earnings.

For properties outside these parameters - sales are difficult.

Overall the hotel market appears to be entering a new phase.

We have seen the first few "Receivership" sales (freeholds selling - leaseholds not) and whilst only a trickle of properties offered for sale appear forced, many industry watchers are nervous.