The Hotel Marketplace (Country NSW).....
Who knows what price a hotel will sell for?
There are a reasonable number of hotels on the market including
Receivership properties, freehold and leasehold hotels. There is a lack
of "Blue Ribbon" or "A" class provincial city hotels genuinely offered
Precious few sales make it difficult to draw comparisons in the market.
Discussions with other brokers indicate that whilst there appears to be
enquiry for purchasing hotels - there is a lack of purchaser commitment.
Bankers are indicating that they are still interested in financing hotels
- although the lending ratios are closer to traditional levels (50 - 60%
LVR[ loan to value ratio]on Freeholds ... 30% LVR on traditional
Hotel valuers are indicating a drop in values and indeed this perception
is carried through the media (eg. SMH 17-8-09 The pubs with no buyer:
hotel values in the cellar
It has been suggested that the record prices seen through 06-07-08 were an
anomaly (a bubble in the market) fed by the arrival of "corporate" styled
hoteliers who believed that the EBITDAE (earnings before interest,
taxation, depreciation, amortisation and exceptional items) calculated by
Brokers, Valuers and experts would be achievable for a hotel operator - if
not improved by the continued increase in gaming machine revenue. Business
rentals were set on these earnings and have since proven (in the majority
of cases) to be un-sustainable. No allowance was given for capital
expenditure required to minimise the effect of no smoking and other
In the early1990's hotel values fell after rising on the back of card
machines profits - unfortunately the popularity to play these machines
waned so hotel profits fell - hence the decline in Pub values. Today it
is not just the fall in gaming revenue but a number of other factors
affecting the hoteliers business.
The debt burden many hoteliers carry today is well above the 60% LVR.
Often external assets such as a home were used as added security. Many
loans were initially written as interest only - they are now coming to
renewal. Today Banks are now forcing hoteliers to reduce loans to bring
them inside the traditional ratios.
The federal government increases the taxation on alcohol twice a year.
The hotelier tries to pass this on to the consumer with price rises
that are occurring on an exponential basis. The introduction of the
alcopop tax further exasperated this. Each of these increases has
furthered the divide between takeaway and on-premise consumption.
Woolworths and Coles lead the charge in supplying cost price alcohol
for home consumption.
Hoteliers have become complacent whilst they have enjoyed the profits
of poker machines. The traditional hotelier behind the bar has
certainly changed - but what makes a good hotelier today?
Expenses have continued to climb over recent years. The massive
increase by Pay T.V providers a good example from $150 per month to
$1,000 per month! Today there is pressure on staff wages, council rates
and electricity to increase sharply.
So where is the good news? Hotels are still one of the best cash
businesses. In troubled times hotels generally fair better than most
other businesses. Hotels now appeal to a broader cross section of the
public. Thinking hoteliers have retained their gaming income.
So where are hotel prices going?
The 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.
Hotels with no gaming.
Hotels with no gaming machines are a difficult property to sell. The
majority of purchases like the added security of PME (poker machine
entitlements) - a safety net allowing hoteliers sell PME's should all not
go to plan.
Sales for hotels with no gaming are as low as $100,000 whilst others are
on the market at $1m.
The majority of the sales in hotel with no gaming machines are to "local
purchasers". They are people who know and keep in touch with the district
or currently live close by.
Hotels with PME's underpinning value.
Potential purchasers today are attempting to minimise the "goodwill
value". A purchaser would prefer a hotel with 8 PME's and a profit of
$180,000 for $1m (18% ROI) - in comparison to a hotel with 3 PME's and a
profit of $200,000 (20% ROI).
The added security of asset base through PME's, land and building is
having an effect on the overall value of the property.
Occasionally we are seeing properties appear on the market where asset
value is greater than business value. These properties are selling at a
reduced or conservative asset value - the purchaser appears to be
discounting the asset value.
Freehold Hotels where value is related to business
Potential purchasers are establishing the business profitability on a
conservative basis. Whilst vendors and their brokers attempt to present
the business profits in the best light; hotel purchasers are demanding
comparison year figures, reviewing each expense at today's actual level
and closely monitoring gross profit to sales percentages.
As stated above the purchasers will adopt a more conservative
capitalisation rate (ROI) when the "business goodwill" comprises the
majority of the purchase price.
Premium Freehold Properties.
There are few hotels that fall into this category. Demand
certainly exists for "premium hotel" properties from both the corporate
and private purchaser. Currently the corporate purchaser continues to
outbid the private purchaser; however the gap has dramatically closed.
Newspaper articles often feature these properties and choose to base the
market around the sale results for this style of hotel.
Premium hotels will always attract a top price and often defy the general
So what is my hotel worth?
Given that a number of different markets can be identified the selection
of a value also becomes more difficult. It is not possible to compare one
hotel sale with another without knowing the full circumstances including
PME's and profitability. The latent asset value ratio to "business
goodwill" is a further variable that needs to be taken into
Who will buy my hotel?
We continue to be worried by the lack of "new blood" enquiry for the
The majority of affordable hotels (under $2m) have the largest enquiry
coming from the local area. Often these people have little hotel
operational knowledge (yet all know an "expert").
There remain a number of experienced hoteliers sitting on the side line
waiting for hotel opportunities. The majority pedal the line that they
sold at the height of the market and wait for values to return "normal".
Actions and movements continue in the corporate marketplace with a number
of mergers, acquisitions and takeovers occurring. Some of the fragile
corporate purchasers were taken into receivership.
Leasehold Hotelshave 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 lessee'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
We hope this has given some guidance into the hotel market place.
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.
Genuine vendors need to carefully select the method of sale and the price
portrayed to potential purchasers.
Chris Tinning & Company has sold hotels throughout
country N.S.W. for the past 30 years. Our knowledge of the market place
and its history provides us with great skills in the sale of the
If you would like to discuss your hotel then please call Chris, Marie or