Motel Market

Yielding to pressure

The yield or return on investment (ROI) expected within the market plays no small role in determining the value of any business. This is a dynamic measure of market expectations, ever changing up and down, based on market sentiment. Very similar to the share market, however not as quick to react.

Not by any means. A news report released at 11am that affects people’s beliefs, attitudes, and behaviours will see the share market react almost immediately with shares either skyrocketing or crashing down. The property and business markets are a lot slower to move than this and do not experience the large variances. The return on investment (ROI) that the market requires to invest in a particular asset such as a motel is based on several factors. The combination of these factors decides the resultant return.

In previous articles over the years, we have considered factors such as location/ position of the asset, standard or quality of the presentation of the asset, age of the buildings, the income sources of the business, financial statements, clientele, potential for upside improvement, and so on. These factors are more about the physical asset or business itself. Here we will consider more the external factors that create pressure on yields. Generally, unless there is a catalyst for change, market yields will remain static with only minor variance. Like treading water or holding a position. One will do this until the waves pick up or something external to us causes a reaction to start swimming. It does not have to be something dramatic, simple changes within the economy and/or our lifestyles can change the yield expectations of the market. Interest rates are in the face of everyone who watches the news or reads a newspaper now. The Reserve Bank reacting heavily to an economic situation that has been building for some time. Whether to hold rates or change them is, I guess, a tight rope for those decision makers. I guess you do want to raise them if you don’t have to, then all of a sudden it’s bang, bang, bang. The subtle increases or decreases may not see a big impact or reaction whereas a higher-than-expected rise or fall will see a bigger reaction. Ultimately what was trying to be achieved. How the market reacts to this can be excessive, based on feeling rather than reality. A half of a percent increase may seem like a lot and cause a lot of concern to mortgage holders, however in the scheme of things interest rates could not remain at emergency low levels forever. Therefore, the human reaction, more than the actual event itself causes the size of the upward or downward change. Building costs are another ‘in the current limelight’ external factor that may cause pressure on yields. The demand for established motels has risen recently, thereby putting downward pressure on yields. One reason for this may be the increased costs of construction. If it is believed the cost of construction is too high to warrant building a new motel, the value of established motels will see an increase.

If the cost to build with the land component included is $200,000 a unit site (20 units equates to $4m), then it makes the 20 units in an established motel up for sale at $90,000 a unit site, look very attractive. The developer may decide to hold off on building that new motel and instead divert those funds into an established property where more value for money is available. Some recent motel sales evidence include:

• Sale 1: September 2022, $109,000 per unit site (modern with high quality presentation). • Sale 2: August 2022, $102,000 per unit site (modern with good quality presentation). • Sale 3: July 2022, $48,000 per unit site (dated fit out with below average presentation). Those unable or not willing to build, may look to the next option, buying an established motel as listed above. Hence demand increases, yields come under pressure to move downwards, and the value of motels will increase as a result.

Another factor that we have seen in recent times is how a change in attitude can affect yields and put pressure upwards or downwards on yields. A pandemic such as the one we have all just experienced has played a role. The change in attitudes towards lifestyle has also been playing its part. Investors wanting to look further afield and diversify from previous investment vehicles are now branching out and investing in accommodation businesses around the countryside. Also, those who previously only invested in larger metropolitan centres or capital cities, are now looking to acquire properties and businesses in regional areas as they become aware of the value available, compared to the high city prices. This rolls onto those wanting to make lifestyle changes and therefore investing in places such as regional Queensland. With either the intention to move there or to take the opportunity to travel to and from, while enjoying a profitable business operation. This requires the business to be operated under management and still have some involvement in the business without being there full time. Every motel sells on a different ROI, depending on the many factors that the market deems necessary to consider in its assessment of an individual motel business. Ultimately the person handing over the cheque at the settlement of a contract of sale determines this. A willing buyer and willing seller on a particular given day.

Andrew Morgan,

Queensland Tourism and Hospitality Brokers

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