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Navigating the tourism property industry during unprecedented times
Having been involved with the sale of accommodation businesses since 1984, we’ve seen many challenges and some seemingly serious threats that the tourism/accommodation industry has faced in the past.
A few come to mind — previous pandemics such as SARS, the Gulf War, the global financial crisis (GFC), soaring aviation fuel prices, and the carbon footprint disincentive to long distance air travel. However, the COVID-19 pandemic has posed a new significant challenge for the industry.
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When the accommodation industry is going well, the tourism property industry goes well, which is driven by several factors, not necessarily in sync with elements driving the residential or commercial real estate markets. For instance, the timing could have it that the residential market is not overly buoyant; however, record visitor numbers from overseas tourists are driving sector demand and consequently prices achievable for accommodation properties and businesses.
COVID-19 and tourism/ accommodation
What happened over the months following the first lockdown in March 2020 was rather interesting. A report from the ANZ bank economists pointed out that overseas departures exceeded foreign arrivals from late April to mid-October 2020. In other words, there were more people in New Zealand than usual during those winter months.
It turned out that tourist and holiday destinations, particularly in North Island locations close to population centres, had the best winter months ever. Certain South Island destinations also did quite well, but it has been challenging for those more reliant on the international visitor and more remotely located.
Another factor in several localities has been the pandemic’s effect on supply and demand. A significant number of hotels elected to close and are unable to be opened again quickly. Many hotel rooms are now MIQ facilities. Social housing is absorbing a lot of motel accommodation, reducing the supply of rooms available to the market. Some peer-to-peer listings, such as Airbnb, have been taken out of the market and leased as a residential tenancy. With the no cause termination regulations now in place, many of these won’t be able to return to the short-term accommodation market quickly.
Impacts on tourism property sales
In the tourism property industry, between 70% and 80% of motels in New Zealand operate through a long-term registered lease. Our sales mix nationally usually reflects that, with many of our transactions being for leasehold/business sales. While we have not been breaking any records since the COVID-19 outbreak, our volumes have been surprisingly good and certainly better than one would have expected back in March 2020, when uncertainty around the economy was significant.
The ratios have changed over the past 18 months, with more freehold real estate transactions taking place, either as the sale of leased land and building investments or freehold going concerns where the business and real estate are sold to the same buyer. This increase in freehold sales may be partly due to the confidence in other sectors of the real estate market, combined with low interest rates.
The limiting factor for us achieving sales for freeholds has generally been the low level of listings. The current environment has brought about more willingness to sell the assets (for a variety of different reasons), so more freehold listings lead to more sales.
The potential of easing restrictions
As alert level restrictions ease in Auckland and New Zealand as a whole reaches its vaccination targets and transitions to the COVID-19 Protection Framework, it is expected that border restrictions too will ease. With this comes the potential return of some overseas tourists and greater freedom of movement for domestic tourists.
As a result, many in the tourism property industry anticipate a sharp increase in activity in response to pent-up demand. It will be interesting to watch this space as we step foot into a more hopeful 2022.
Kelvyn Coffey
Principal, Coffeys Tourism Property Brokers Ltd
