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PROPERTY AND INVESTMENT: PUB INVESTMENT PATHWAYS
Pub investment pathways
Amid economic challenges, Molly Nicholas explores the buoyancy of the pub market as acquisitions and renovations capture interest across the country.
CHARACTERISED BY fluctuating inflation rates, the rising cost of living and a dip in discretionary spending, the current economic climate has created a complex environment for hoteliers.
Over the last 12 months, the pub market has felt the effects of economic downturn, with reduced consumer spending causing certain areas of trade to contract and cost pressures squeezing profit margins.
Market intelligence suggests that hoteliers are experiencing revenue slowdown, but Ben McDonald, head of pubs, investment sales at JLL Hotels and Hospitality Group, says some departments are still tracking positively.
“[Slowdown] is being seen primarily through food and beverage revenue channels, with accommodation, gaming and wagering and liquor retail in general showing positive year-on-year revenue performance,” he explains.
For some, investing in stronger operational measures, a diversified offering and refurbishments has helped maintain stable trading patterns.
Speaking about the group’s portfolio, which includes pubs in South Australia and New South Wales, Harvest Hotels managing director Chris Cornforth says: “For us, revenues have remained resilient and similar to what we’ve recorded in previous years; particularly at our pubs that have been recently renovated, which are outperforming our expectations.”
Do pubs remain an attractive purchase?
Not only have economic pressures created a challenging environment for operators, they have also impacted the market for real estate, shaping acquisition strategies, capital expenditure programs and renovation efforts.
Sharing some insight about the buoyancy of the investment cycle, McDonald says: “The resilience of the sector and cashflow performance of pubs more broadly is still drawing investor interest which has been highlighted by the recent run of transactions across the country.”
We spend a lot of time strategically reviewing and selecting locations not only for their population growth but other economic drivers including large infrastructure spending, growing or stable tourism, and multiple industries operating.
Chris Cornforth, Harvest Hotels
In some instances, economic instability can create a buyers’ market for real estate, and investors with capital to deploy have made strong acquisitions at favourable rates, with the potential for significant returns.
Among a multitude of successful transactions this year across the national pub sector, JLL Hotels & Hospitality Group handled a record setting $70m deal in April.
The transaction included the sale of the leasehold of the Criterion Hotel, Sydney and the freehold of the Crescent Hotel, Fairfield, in an exchange between Gallagher Hotels and Redcape, marking JLL’s largest pub deal of the year.
While evolving market conditions might attract new market entrants, McDonald says the majority of buyers are still generational hoteliers and high-profile hotel groups seeking to consolidate their portfolios.
“It’s going to be tough for new entrants to break into the industry at this stage of the cycle unless they are well capitalised and have a known operating partner with a track record of success,” he added.
Key investment traits
In Melbourne, Only Hospitality exercised favourable purchasing conditions in its recent acquisition of The Beehive in Hawthorn, the third pub in its 30-strong hospitality portfolio.
Inheriting his father’s interest in pubs, Only Hospitality director Julien Moussi, has had an affinity for The Beehive for many years, and while the timing felt right, the major attraction was the current demographic.
“I grew up in Hawthorn East and have an intimate understanding of that location. Whilst it’s a very hectic corner, it’s the amount of passing traffic and proximity to a very affluent area,” he stated.
The group doesn’t plan to stop there, having recently acquired South Yarra nightclub Rah Bar, which it will reposition as a pub. Moussi also told Australian Hotelier about his intentions to purchase a fifth pub in Belgrave at the foot of the Dandenong Ranges.
As the group expands its hotel footprint in Victoria, Moussi says foot traffic and local affluency are influential over purchasing decisions.
“We look at the density per square kilometre. The density of hospitality venues, but also the owner-occupier versus renter percentage that suburb has. If you have a high amount of renters, in this environment where the cost of living is so high, that’s half of your disposable income, and it’s something we’re mindful of.
“Really, it’s a balance of everything, and that density factor is really important, you want to have a strong population of people in that area.”
From an investment perspective, Cornforth agrees that region is a primary focus. When looking for potential pubs, he says: “We spend a lot of time strategically reviewing and selecting locations not only for their population growth but other economic drivers including large infrastructure spending, growing or stable tourism, and multiple industries operating.
“A lot of the time it’s the region that helps us attract interest in investments, and these tailwinds are helping offset any downturns.
“When we’ve got comfort around the location, we look for a pub that has a reasonable underlying business
