1. Accommodation market Activity as it seems from our travels
2. What are addbacks
3. Stamp Duty on the transfer of land or Business
4. Why Buy A Motel Lease?
5. Steps to Purchasing a Motel
6. Tips For Purchasing Motels
| Accommodation Market Activity |
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On the road (In our car office) more often than we are at home, we continually see a large number of motels and holiday unit complex's changing hands throughout Australia. As specialist Resort Brokers, Tourism Brokers continually assess and sell Motel Leases, Motel Freeholds, Motel Investments, Management Rights, Caravan Parks, B&B Facilities and other specialist Tourism Brokers Australia wide opportunities.
Initially starting as as specialist motel business brokers, the business has grown to allow additional service for caravan parks for sale and management rights for sale.
We have seen a slight increase in the number of enquiries especially in our role as QLD, VIC & NSW Motel Brokers and this has allowed us to better service the Management Rights and Caravan Parks for sale markets in NSW, QLD and Victoria.
Motel leases for sale followed by Management Rights for sale are the two most popular segments Certainly well positioned and well priced properties will always sell .
We are currently in a very busy time for buyers and sellers with well positioned and priced properties in high demand.Properties prepared to meet the market sell and we continue to sell a lot of property, especially motel leases, motel freeholds and management rights..
As we continue to grow, a number of enquiries are coming from Victoria QLD and throughout New South Wales, with the occasional enquiries from Overseas and other states.
Market Reviews – Leaseholds, Freeholds, Investments, Management Rights, Caravan Parks
Leasehold Motel Market
A large number of enquiries for leasehold motels, preferably Bed and Breakfast (B&B) have been received for price levels from $150,000 to $1.5 Million Leases that had been available with little interest shown in them , are now seeing some movement with a number inspected by potential purchasers.
Motels with restaurants are taking longer to sell then the standard B&B operations, but that is largely due to the workload required and the property position.
Freehold Motel Market
This market has continued to strengthen since with a genuine shortage of good stock with strong returns. Price is still a main factor for demand with the demand for smaller freeholds remaining strong, and this has now spread to the larger motel market. There has been excellent activity with many sales being successfully negotiated on freehold motels in the past 6 months by Tourism Brokers. Price ranges from $500,000 to $3 Million have been achieved with increasing levels of demand for properties in the higher price brackets upto $6M.
We are even seeig some of the motels being purchased for re-development and higher uses which is starting to alter the industry even more..
Investment Motel Market
Continually a shortage, we have sold a number of properties with Net returns less than 10% with some (few) exceeding. Demand keeps growing and growing for motels that are leased. Supply cannot keep up with demand at present, which has been the case for some time. Long leases with 10% - 11% net returns are proving to be most popular with investors. Good tenants, long leases with good net returns are the investment properties much sought after.
Position position position continues to play a significant factor. Motels do have some maintenance requirements and risks associated that some Commercial properties do not, but these are reflected in the returns. 9% Net is still a solid return after costs for a property with CPI increases and a 30 year agreement as we are seeing in NSW and QLD.
Victoria seems to be a little different with fixed CPI increases for 30 years being illegal and having the need for 5 yearly market reviews as required under the retail tenants legislation.
Management Rights
Demand has increased for Management Rights, and this is very much a growing segment in the Tourism Market. Lifestyle for operators is proving to be the motivation for many, particularly those new to the industry. Some larger complexes with price ranges over $2 Mil have been moving.
The Management Rights sector in Queensland, like many others has slowed over the last 18 months with properties that are well positioned still being in demand and the more marginal property sales rates are slowing.
Recent sales results indicate a wide variation in the sales price multiplier achieved on different properties. Now more than ever the purchaser is looking for value and potential when choosing their next business. High earning properties are still sort after but the multiples generally have dropped with a number of recent sales being recorded at the multiple of 3.9 times in QLD, well below the boom times of the high 5 and 6 times. Certainly some of the quality properties we have seen attract the higher multiples have not been placed into the market so Position, Position Position remain strong.
Recently in Port macquarie, we have seen multipliers in excess of 4 times due to the position and perceived growth. In other areas we have seen 10 year and less agreements go through sub 3 times.
For mid size properties where all the variables such as size of residence, time left to run on agreements, workload, location etc. are favorable, the multiplier is strong as peope, are still after good properties.
Owners of smaller properties are finding their businesses are on the market for a longer period than may have been the case in the past. Most of these properties are listed at around 5 times so supply and demand tells us that 5 times is now at the high end of expectations.
We are seeing some resistance from buyers to the higher valuations most residences are now attracting. Purchasers are now looking at the total cost of the business and the residence and the resultant lower yield as the residence price increases.
We would predict that whilst ever interest rates remain firm, demand will continue to be strong for well positioned properties for some time in the medium to long term future.
Management Rights are inpprimarily new coastal or CBD developments where Motels are not viable or where many have been removed to make way for units. Management Rights are the way of the future, but some are also having a reality check.
We are aware of some complex's in QLD where agreements have been sold with the exectation of automatic top ups. These are not a requirement and are subject to the contract being granted by the Body Corporate. In these instances they purchased on high multiples and when they asked for the 5 year topups, they were rejected. Management rights are a contract and the term is the term.
In NSW:
For new agreements, we are where possible seperating the caretaking and the letting agreements. The letting agreements can be 25 years, but the caretaking agreements under the legislation can only be for a maximum of 10 years, usually a 3+4+3 year term.
Agreements prior to 10 February 2003, you may have the opportunity to top up your caretaking agreement, seek professional assistance before doing so, if the correct procedure is not followed you may forfeit that right.
Agreements after the 10 February 2003, if contemplating selling, to maximise your position and minimise the risk for the incoming purchasers, you should top up the agreements to 10 years for the incoming purchaser.
Again the timing is crucial. The ability of the broker to establish a market price in NSW will depend upon past sales in certain areas and “apples for apples”.
The Multiplier explained;
There can be huge variations in multipliers even between buildings located next door to each other. Even your more common residential property markets produce similar disparity - pick virtually any street in any suburb and all the houses in that street will not be the same price!
With real estate and in this case management rights substantial price variations occur as they do with cars, boats and holidays. The industry is not a case of comparing apples with apples and there are a vast number of variables to consider with each purchase, the same applies to management rights.
Over the last decade we have experienced an unprecedented period of economic stability and growth. This, coupled with historically low interest rates and the public listed tourism companies like Break Free, MFS, Octavia, S8 and others scrambling for market share, created a fertile market for management rights in the top end. This competition pushed more people to the middle and lower end and increased the level of competition. The dynamics started to change when interest rates began to rise, owners wanted better service and greater returns and that was quickly followed by the sub prime mortgage fiasco and general stock market correction in late 2008.
The old saying no one ever rings a bell at the top or at the bottom of the market also applies to the real estate and management rights market. It is only with the benefit of hindsight that we can look at a graph or line chart to see where the high and low points of the economic cycle occurred. If we could pick it prior whoever did would be very very wealthy.
There are factors that determine the sales multiplier of management rights: Perhaps the most important in the free world is supply and demand. Supply and demand in any market, determines the price of virtually everything we consume. Competition of more buyers, less stock equals higher prices and a seller’s market. The converse, fewer buyers, more stock equals lower prices and a buyer’s market.
The big variable that plays a key component in the equation is interest rates! Most business’s need debt and use equity to increase the internal rate of return for the funds invested. When interest rates increase more of the business profit is eroded to service debt. The result is a dampening affect on the buyer’s ability to borrow funds and in turn places downward pressure on the multiplier as less people have the available funds and competition reducdes.
The WIFM, (What is in it for me) too much importance is placed on the multiplier by buyers and sellers alike. It is already established that supply, demand, interest rates and general market sentiment will ultimately determine what the multiplier and sale price is for any given property at any point of the economical cycle, so as a buyer or seller all we can do is decide when we wish to enter or exit the market.
Unfortunately we can not stop all the motivating factors for change such as health or stress place sellers in the market at a time when few buyers are active this creates opportunity for some to grab that elusive bargain (Life is like this unfortunately). There will always be willing sellers and willing buyers at a price acceptable to both parties. Conversely there will always be unrealistic sellers and buyers who wish they had heard that imaginary bell for the property cycle ring. What managers and prospective buyers should be focused on is growing the business as growth is good for any business. An example but remember we have no control over the multiplier and we don’t have a crystal ball that shows us a graph with the peaks and troughs before the event but we can improve the all important net profit by growing the business and adding value.
Assume you buy a building that was netting $100k at a 5x multiplier, you keep it for five years, you are a good operator and you manage to increase your net profit by 10% p/a $10k per year – an extra $50k over five years x 5 – that’s $250k capital gain with zero change to the multiplier. With the benefit of debt and gearing with borrowed funds, if we use the same formula on a business that nets $300k and the gain is three quarters of a million dollars (not too shabby indeed). 10% p/a $30k per year – an extra $150k over five years x 5 – that’s $750k capital gain
Management rights are a unique business in that they can’t be sold independently to the manager’s apartment and ancillary real estate. Likewise the manager’s apartment can’t be sold without the business. This creates one of the major problems in determining the sale price of the business and in particular the multiplier. While, in theory, you can borrow up to 75% of the total purchase price for management rights, in practice there are very few buildings that will have enough profit to service that level of debt due to high real estate values.
A good rule of thumb is that most buyers and bankers will be looking for a business where the real estate value is no more than 30% of the total purchase price (25% or less is ideal). This is one of the main reasons why buildings with net profits over $500k P/A are able to consistently achieve 6x plus multipliers; low ratio real estate value enables higher gearing levels.
Management Rights sales where the manager’s apartment is 50% or more of the total purchase are rare and the multipliers for these types of properties have been comparatively low. This is the main reason that the multipliers in QLD have seen alterations as the growth to a large extent has been with the Real Estate and with people borrowing, yes they wish to have a nice home, but they need the income to be able to service the debt.
The industry will continue to grow as motels and alternative forms of accommodation are either not suitable for the location as the demand is for residential units or they are not viable. Motels are regularly being demolished for higher and better use and people need accommodation. Management Rights form part of the future and the solution.
In permanent complexes, management rights complexes are often achieving better capital appreciation for purchasers as an owner will take the extra step and has more at stake than a normal employee who just has a job.
In Queensland:
Queensland management rights are sold off an accepted multiplier; currently NSW management rights still attract an individual ‘market price’ for each complex, dependent upon agreements, location, nett profit and anticipated growth.
Caravan Parks
The season for most Caravan Park owners is well underway . As parks combat the continuing hike in fuel prices, that appears to be with us for some time in the future, we are seeing a number install ensuite cabin style accommodation and enhanced services.
As the number of Coastal Motel diminish for redevelopment and management Rights increase, we are seeing a strengthening of some parks as they are re-vitalised with new amenities blocks, upgraded cabins and better facilities.
Enquiry levels and sales of Caravan Parks over the last 12 months has been extremely buoyant. Most buyers have been from New South Wales, Victoria, Tasmania, New Zealand etc and have been chasing a lifestyle change, are generally over 50 years of age. We are seeing a lot of first time operators enter the market.
In addition to the starter market, the Corporate purchasers are also looking as we have been working very closely with a few major Groups that are looking to buy a number of Caravan Parks. The most common request has been for parks located on or near the coast and showing reasonable returns under management.
Yields have been strong for the larger parks over the last 12 months with a number selling in the 13% -14% net return range. The simple fact is there are many more Buyers wanting to buy than there are Sellers wanting to sell at the moment. With the cost of funds exceeding 10% the required returns have increased
Often when we sell businesses, we as agents or preferably through Accountants are required to quantify a number of “Add Backs” for a property to bring the accounts back to a format that can be qualified and measured against comparable property.
Most people in business minimise through their accountants the operational profits of a business and optimise the costs of operating the business to have amend result of minimal taxation.
Addbacks take a property back the true profit / loss position of the business, with personal costs such as borrowings interest, depreciation, financing costs etc that are not related to the business removed.
Once we have a confidentiality agreement in place, we are happy to provide the financial details and addbacks schedule for any property that we may have available for the market unless particular circumstances prevail.
| Stamp Duty on the transfer of land or Business |
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How duty is calculated as provided on the NSW Government Web Site June 2007 for NSW.
For new leases in Business sales no Stamp duty is applicable and this is why we are now seeing 30 year straight agreements rather than the 10+5+5+5+5 year agreements of the past.
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