Pub Investment News - JLL Pub Investment News... · Cover: FOR SALE: Patonga Beach Hotel, Patonga...

Pub Investment News

Hotels & Hospitality Group | May 2014

FOR SALE: Royal Inn Hotel, Waratah NSW

Cover: FOR SALE: Patonga Beach Hotel, Patonga NSW

JLL’s Hotels & Hospitality Group serves as the hospitality industry’s global leader in real estate services for luxury, upscale, select service and budget hotels; management rights; convention centers; mixed-use developments and other hospitality properties. The firm’s 300 dedicated hotel and hospitality experts partner with investors and owner/operators around the globe to support and shape investment strategies that deliver maximum value throughout the entire lifecycle of an asset.

In the last five years, the team completed more transactions than any other hotels and hospitality real estate advisor in the world totaling nearly US$36 billion, while also completing approximately 4,000 advisory and valuation assignments. The group’s hotels and hospitality specialists provide independent and expert advice to clients, backed by industry-leading research.

For more news, videos and research from JLL’s Hotels & Hospitality Group, please visit: www.jll.com/hospitality or download the Hotels & Hospitality Group’s iPhone app or iPad app from the App Store.

In this issue

Queensland

Under the spotlight – Compliance13

New South Wales

National transaction overview04

05

07

10Victoria

4 Pub Investment News | May 2014

Transaction volumes rally

Australia’s pub sector kicked into gear once again in 2013 with transaction volumes increasing 50% compared to 2012 to total $775 million. Receivership sales dominated activity during the first half of the year but there was a notable shift towards aggressive expansion over the latter six months as investor confidence cemented.

In a marked change to 2012, investment activity was concentrated in the $10-$20 million bracket with 24 assets exchanging hands and a combined total volume of $349 million. The higher average deal size indicates further growing confidence in sector.

Whilst New South Wales dominated transaction activity during the first half of the year, Queensland saw greater deal flow in H2. Investment activity in Victoria continues to remain steady due to changes to the gaming tax structures which took effect in August 2012 and the pending decision around gaming entitlement security. Overall, NSW recorded the lion’s share of transaction volume ($378 million), followed by Queensland ($215 million), Victoria ($144 million) and South Australia ($22 million).

Easing liquidity and record low debt were the primary drivers of increased activity with a raft of buyers attracted to the sector. Active groups included retailers, private publicans and private equity funds. Cross border acquisitions also came to the fore as a number of Sydney based groups made their first foray into the Queensland pub market with large-scale strategic investments. Assets in Queensland generally have strong intrinsic value with gaming authorities rising and state legislation ensuring off premise income streams are only permitted with a commercial licence.

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Numb

er of

Tra

nsac

tions

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e ($M

)

Single Asset ($M) Portfolio ($M) Number of Transactions

Source: JLL

Australian Pub Transaction Volumes 2004 to 2013

Yields expected to compress in 2014

Amped by plentiful equity and increasingly proactive debt, the only drag on the Australian pub investment market in 2014 will be a lack of quality stock with the availability of assets expected to tighten during the second half of the year as sellers become increasingly reluctant to relinquish assets in a generally rising market.

Limited investment opportunities in first-choice markets and increased competition, implies some yield compression in 2014, with a flow-on impact to other locations and markets.

Wide yield spreads between real estate markets (e.g. CBD and non-CBD) and sectors also offer generous incentives to migrate along the risk curve and contemplate alternative locations and sectors. With large Freehold Going Concern assets attracting yields in the order of 11%, Australian pub real estate offers an attractive positive yield spread (to the cost of debt) and this is likely to attract new sources of equity to the sector. Indeed we are already seeing the emergence of offshore capital, notably from China in the global hunt for yield. Investments are prefaced by a sound management company with buyers targeting assets with a robust underlying property value.

Deal structuring is also becoming more commonplace. This trend is being led by the operators as they look to reposition assets to capitalise on the latest consumer trends or legislative changes, as outlined later in this report. This can include a delayed settlement or lease-to-buy for example.

Established operating groups are successfully resuscitating stale pub assets, breathing life into them with their marketing machine and use of social media platforms. Many of these groups have established brand loyalty and access to deeply connected customer networks which can be transported into a new venue upon opening. Banks recognise this and leverage levels for proven operators are increasing with gearing nudging upwards from 50% to around 60%-65%.

Private equity players are also more experienced, having bought a supply of distressed assets over the past few years. These groups are now better equipped to identify opportunities and use their scale, financial wizardry and knowledge for opportunistic plays.

Despite these drivers, portfolio sales will remain limited with few exit options available for owners, particularly those with larger or gaming assets. Whilst the weight of capital is increasing, there are few groups who have sufficiently sized balance sheet to fund large-scale acquisitions. Coles have sold down two thirds of their operating hotels in New South Wales and are churning equity back into their retail business, whereas ALH is already well represented. Against this backdrop, transaction volumes are unlikely to return to 2005-07 peak levels when portfolio sales dominated the Australian pub investment landscape.

“In a marked change to 2012, investment activity was concentrated in the $10-$20 million bracket with 24 assets exchanging hands

and a combined total volume of $349 million.”John Musca

National Director – Investment Sales

May 2014 | Pub Investment News 5

New South Wales

The New South Wales pub market enjoyed a buoyant year in 2013 with 54 assets transacting with a total transaction volume of $377 million, up 59% on 2012. The average deal size also increased to $7 million.

Food and beverage assets dominated activity during the first half of the year, but gaming venues stole the limelight during H2 2013, underpinned by strong supply and demand fundamentals.

Whilst the number of poker machines in New South Wales has diminished over the past few years, demand has increased with strong growth in resident populations and visitors who are predisposed to gaming as a form of entertainment. Local Environment Plan’s (LEP) are being revisited and master plans devised. This is resulting in some area re-zonings with organic growth expected along residential corridors and transport nodes. In areas where gaming and wagering is a popular activity, this is putting large-scale gaming pubs back on the acquisition agenda. The impending announcement of a second airport at Badgery’s Creek could also see renewed investor interest in Sydney’s west.

SOLD: Jacksons on George, Sydney NSW


Food-led venues continue to be the focus in Sydney city and the city fringe, particularly those in good locations which are deemed to be under-performing and therefore offer the opportunity for repositioning. Global street food trends are increasingly being incorporated into venues with operators taking their cues from London and the U.S. This has spawned a raft of new ‘drink and dine’ concepts which is fuelling consumer demand trends.

Offsetting these positives has been the introduction of legislation in early 2014 aimed at curbing alcohol-fuelled violence. This has squarely put the sustainability of earnings back into the acquisition decision. This umbrella legislation has had wide-ranging impacts beyond the liquor-led entertainment venues it sought to restrict with gaming, wagering and food-led businesses some of the hardest hit.

These changes are likely to impact Sydney’s night economy over the coming years as residents and visitors seek out alternative entertainment options. Naturally, venues which fall outside of the lock out areas stand to benefit the most and we are already seeing the first manifestations of this with the opening of Casablanca nightclub in Double Bay (formerly Bluebeat). Whilst Double Bay has been experiencing the early signs of revitalisation, this may well gain pace as lock outs are enforced across the Sydney CBD entertainment precinct (as shown on page 15). The beachside suburb of Bondi is also expected to be reinvigorated as an all-night destination with new small bars popping up, celebrity chefs and an expectant public eagerly awaiting the announcement of the bar operator for the Pacific Bondi development.

Whilst the near term trading environment is somewhat challenging, the city landscape is undergoing a fundamental shift with some of the most significant infrastructure investments for over a decade. Major development projects include Barangaroo, Sydney Convention Exhibition and Entertainment Centre (SICEEP), upgrade of the Overseas Passenger Terminal, CBD and South East Light Rail, Chinatown public domain plan, the Green Square transformation project as well as the proposed Central & Eveleigh project.

Against this backdrop, it is hard to say where yields are at with deals ranging between 0% and 12% across the Sydney metropolitan area. Overall the barriers to entry remain high, with few new liquor licences granted in recent years and a continued focus on compliance. However, now more than ever it is apparent that transactions are bespoke to the parties involved and it is the mechanics of the deal which dictate the yield profile. Business profile, location, price point and buyer strategy are all factors to be considered.

0

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Volum

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$20M plus $10.1M-$20M $5.1M-$10M $1.1M-$5M <$1M

Source: JLL

Pub Investment Trends 2004 to 2013 by Transaction Price

SOLD: Beach Palace Hotel, Coogee NSW

“The New South Wales pub market enjoyed a buoyant year in 2013 with

54 assets transacting with a total transaction volume of $377 million,

up 59% on 2012.”Sam Handy

Manager – Investment Sales

SOLD: Palms Hotel, Chullora NSW


Queensland

The Queensland pub investment market experienced a year of two halves in 2013; the first half being dominated by receivership sales as the hangover from the global financial crisis cleared and the second half showing a return to more normal buying patterns with some aggressive acquisition plays. As a result, JLL recorded 22 pub sales in Queensland in 2013 with a total volume of $225 million, up 46% on 2012 and a high average deal size of $10.2 million.

Higher activity was underpinned by improving consumer sentiment and a depth of investor confidence, boosted by greater access to reasonably priced debt.

Legislation changes have also benefited in Queensland with the passing of the Liquor and Gaming (Red Tape Reduction) and Other Legislation Amendment Bill 2013. This represents a marked change to the proposed national pre-commitments scheme under Andrew Wilkie. This has bolstered confidence among owner operators with many believing that revenue gains are possible as a result.

FOR SALE: Plough Inn South Bank QLD


A good barometer for the Queensland pub investment market is the value of gaming authorities which are administered across the state under a blind tender system. Authorities in South East Queensland were at $107,000 in March 2014 which represents an increase of 60% compared to the low point. Higher demand in the South East and Coastal Regions coupled with a decrease in supply resulted in strong growth in values as at the last tender, increasing 18% in the South East and 13% on the Coast. Demand in the Western Region seems to have fallen away with only two authorities trading and at 23% lower than the last tender.

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South East Coastal Western

Source: JLL

Queensland Operating Authorities by Tender

Whilst South East Queensland continues to be the primary focus for investors, opportunistic acquisitions are also being considered in Tropical North Queensland. Tourism is one of the key drivers for the Queensland state and local economies and whilst the industry focus had shifted to regional mining markets in recent years, marketing initiatives to promote the region and provide prospects for future tourism growth are yielding results and the sunshine state’s key leisure markets are clearly back en vogue.

Moving forward, growth will be underpinned by the recent reduction in the Australian dollar and improvements in the Queensland state economy, as well as inbound tourism from Asia. Investments in infrastructure are also reigniting investor interest, for example, the completion of the light rail and proposed ocean liner terminal on the Gold Coast. Many investors believe that the market has now troughed and that the residential market is exhibiting the early signs of recovery. Consumer preferences are also shifting and those who have funded capital expenditure in the right areas will do well.

The issue for Queensland’s pub investment market in 2014 (and beyond) will be a lack of quality stock with a quality Freehold Going Concern asset still hard to find. Transactions volumes are therefore expected to moderate with 90% of receivership sales now complete. Banks are lending again and confidence is back as people have more money in their pocket, although competition has increased.

Queensland Liquor and Gaming (Red Tape Reduction) and Other Legislation Amendment Bill 2013 Outlines a range of changes to the legislation affecting the liquor and gaming industry:

• From 1 January 2014, licensed premises (including detached bottle shops) will not be required to advertise new applications in newspapers and in the Government Gazette, however signage will remain on-site and published on the OLGR website;

• Licensees who have an approved principal activity of entertainment (i.e. nightclubs) can now serve liquor with either meals or entertainment during approved trading to 5pm daily. After 5pm, the licensee must provide entertainment;

• Licensed venues will no longer be required to keep an Approved Manager Register which records the approved manager on duty and their availability during trading hours;

• Rather than the current three months, casinos, clubs and hotels will now have 12 months to remit unclaimed winnings/monies to OLGR;

• Ticket-in ticket-out technology which allows cashless gaming through the use of tickets in gaming machines will be allowed in Queensland casinos, clubs and hotels;

• Gaming Machines in Queensland will be able to accept bets of any full cent denominations up to and including $1.00;

• Clubs and hotel licensees will not be required to renew their gaming machines licences;

• After a gaming machine licence has been granted or there is an increase in the number of gaming machines a licensee holds, the machines will no longer have to be installed by a set date; and

• Clubs and hotels no longer have to seek the Commissioner’s approval to acquire or replace gaming machines.


“Whilst South East Queensland continues to be the primary focus for investors, opportunistic acquisitions are also being considered in

Tropical North Queensland.”Paul Fraser

Manager – Investment Sales

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2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

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Various WA VIC SA QLD NT NSW

Source: JLL

Australian Pub Transaction Volumes by State 2004 to 2013

SOLD: The Met, Fortitude Valley QLD

SOLD: Seaview Hotel, Townsville QLD


Further deal flow continues to be hampered by uncertainty around gaming legislation. Whilst gaming profits have generally increased, the government is yet to announce whether gaming entitlements will be issued in perpetuity or another 10 or 20 year licence will be granted. Offsetting this is improved flexibility with operators now able to purchase and sell gaming entitlements across the state. An apparent shortage in pub entitlements has enabled some operators to recoup what they paid during the entitlement auction process.

FOR SALE: The Grand, Richmond VIC

Victoria

The Victorian pub investment market saw an uptick in activity in 2013 with transaction volumes increasing 39% to $144 million and with a high number of deals occurring across the state. Activity was evident across all sectors including gaming venues, food and beverage hotels, passive investments and development grade stock but with a notable jump in regional sales and older unprofitable inner suburban food and beverage pubs. Many of these are being sold for residential conversion which offers a higher and better use. This has resulted in a low average deal size of $2.7 million.


With gaming assets accounting for around 65% of the total market by value in 2013, the resultant impact on Victorian pub investment activity is self-evident. Opportunities to acquire large Freehold Going Concern assets are limited at this stage with the tightly held ownership profile broadly split between three primary groups – ALH Group, a number of corporate groups and several private family groups.

This environment is hampering greater levels of cross border investment activity as investors will typically only cross borders for scale. Existing investors and operators are also reluctant to acquire just to achieve a marginal increase in machine entitlements and a straight yield with no apparent profit growth. Freehold Going Concern gaming assets typically trade at yields of between 10%-12% in metro Melbourne whereas gaming in regional Victoria are 12%-15%.

Victorian leasehold gaming assets are currently trading on yields in the order of 14% to 17% which is not regarded by many investors to be a sufficient level of return for only eight years of certainty. We expect these yields to sharpen following the government announcement about gaming entitlement licences.

Victorian Hotel and Pub Electronic Gaming Machine Tax 2013-14 Budget Update

Changes to the Victorian Hotel and Pub Electronic Gaming Machine Tax were announced in 2013-14 budget which seek to remedy the structure which was introduced in 2012 under the previous Government following a reduction in revenues to the State.

Since the commencement of the new arrangements, the Government’s taxation share reduced to 34% in 2012-13, and without government action is expected to remain at 35% in 2013-14 and the forward estimates. This compares to 36% to 38% previously.

From 1 May: 2014

• The two top tax brackets for hotel and club venue operators will be increased by 4.2 percentage points to restore the Government’s share of electronic gaming machine revenue to previous levels.

• The minimum return to player ratio will be reduced from 87% to 85%, providing greater options for venues in managing their operations and bringing Victoria into line with the ratio currently applied in New South Wales and Queensland.

“The Victorian pub investment market saw an uptick activity in 2013 with

transaction volumes increasing 39% to $144 million and with a high number of

deals occurring across the state.”Mathew George

Vice President – Investment Sales

FOR SALE: The Esplanade Hotel, St Kilda VIC


SOLD: Town Hall Hotel, Richmond

Whilst representing a considerably smaller proportion of the market, there were also very few non-gaming sales in 2013 with little impetus for owners to trade. Experienced operators continue to seek out repositioning opportunities with yields ranging between 33% and 50%, but overall competition is increasing.

Retail shops are increasingly being converted into cafes and bars across Melbourne, underpinned by strong growth in residential apartments. Reportedly more than 83,000 apartments are approved for construction over the next ten years. This is driving the smaller end of the food & beverage market but acting as a drag on Victorian pubs. The resident profile is also changing with apartments increasingly sold offshore and venues will need to re-position to meet the tastes of new residential communities.

SOLD: The Bridge, South Wharf VIC

SOLD: 439 Docklands Drive, Docklands VIC

Despite the many challenges, the outlook for the Victorian pub market in 2014 is generally positive. Assets of a high quality taken to market are seeing increased enquiry, whereas the major banks and non-traditional lenders are showing a greater willingness to provide debt to approved operators. As a result volumes are expected to remain broadly consistent with last year, underpinned by quality asset sales.


Under the spotlight again – Compliance

Widespread liquor and gaming regulatory reform introduced over the past few years has resulted in a more restrictive trading environment for Australian licensed venues with reduced operating hours and greater regulation surrounding the advertising, placement or sale of certain goods and services, putting liquor revenues under pressure. Meanwhile additional security requirements, health and safety standards and higher penalties for a lower threshold of offences have put the sustainability of future earnings at risk in an era of growing compliance.

Compliance is a key concern for all venues, but especially for larger venues in focus areas. The introduction of the New South Wales ‘Three Strikes’ disciplinary scheme in January 2012 targeted repeat offenders, whilst enforcing tougher sanctions on licensees and venues associated with alcohol-related violence and anti-social behaviour. This has been followed by the well-publicised 1.30am lockouts and 3am last drinks laws which came into effect across a new Sydney CBD Entertainment Precinct in late February 2014. The new precinct stretches from parts of Surry Hills and Darlinghurst to The Rocks, and from Kings Cross to Cockle Bay as shown later in this report.


In the major cities, late trading was always regarded as the panacea however the amplified community voice has made this less desirable and owners/operators are looking for other ways to diversify their offerings and grow revenues at other times throughout the day.

By contrast, Queensland appears to be adopting a more balanced approach with the proposed introduction of 15 Safe Night Precincts across the state. This follows a two year pilot in Surfers Paradise, Fortitude Valley and Townsville. The new law is one plank of a draft action plan aimed at stamping out nightlife violence. Legislation is focussed on making patrons rather businesses responsible for their actions. If passed, this legislation will see penalties for alcohol-fuelled violence increase as well as the introduction of ID scanners in entertainment hot spots and the establishment of a statewide database.

Tighter regulations for pub owners/operators across Australia are bringing new challenges for some while creating opportunities for others who are better equipped. Established operators are building compliance into their operating policies as the traditional role of the licensee has shifted with the focus on risk mitigation and governance. No strike buyers are also being assigned greater value during the acquisition process. This is leading to a more forensic approach to acquisitions and represents a marked change to 2005-07 where investments were dictated by the rush to scale.

New South Wales Sydney CBD Entertainment Precinct New laws include:

• Lock outs and last drinks: 1.30am lockouts and 3am last drinks at hotels, registered clubs, nightclubs and licenced karaoke bars. Small bars (maximum 60 people), most restaurants and tourism accommodation establishments are exempt. Venues currently licensed to stay open after 3am can do so without alcohol service.

• Temporary bans: of 48 hours for troublemakers.

• Takeaway alcohol sales: stop at 10pm for bottle shops, hotels and clubs. This law is NSW-wide.

• Liquor licenses: two year freeze on approvals for new and existing licenses.

• Revoking of Competency cards and disqualifications: (up to 12 months) for bar staff breaching responsible service of alcohol requirements.

• Licensee fines: of up to $11,000 and/or imprisonment of up to 12 months, as well as strikes under the Government’s Three Strikes disciplinary scheme for failure to comply with the new laws.

A new risk-based licence schemeFrom the 2014/15 financial year, every holder of a perpetual liquor licence in NSW will be required to pay an annual risk-based licence fee. The level of fees payable by each venue will be calculated using a risk-based model comprising:

• Base fees, plus

• Risk-based loadings that reflect the level of risk posed by a venue and its operation.

The tiered fee structure recognises that some licensed venues should contribute a greater share of the regulatory cost given the additional risk they pose to the community.

The scheme is designed to provide venues with a financial incentive to adopt and maintain safe, low risk practices, with a renewed focus on the Responsible Service of Alcohol, in return for a lower annual licence fee.

Risk-based loadings will be applied and calculated according to:

• Authorised trading hours;

• Compliance history;

• Patron capacity; and

• Venue location.

SOLD: Paddington Arms Hotel, Paddington NSW

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