Australian pubs shake up the closing blues

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Highlighting how sharply stocks have risen and the weight of capital raising assets, the yields of blue-chip metro pubs have fallen to well below 5% at the institutional level. In the smaller end of town, private investors have been willing to buy at even higher rates – the sale of the Tudor Inn hotel in Melbourne at a cap rate of just 3.8% is a prime example. .

“There is a lot of money from private investors looking for housing in new assets. Pubs, with their quality tenants and long-term leases, have become an investable asset class like childcare, ”said Don Smith, who manages the HPI-listed pub owner and his growing portfolio. $ 1 billion comprised primarily of Queensland pubs leased primarily from the large operator Australian Venue Co.

Containment resilience

“Most people have seen through the short term stuff. We did not see any pub owner coming to tell us he was in distress. The returns reflect this. They are always tight, ”he said.

Senior Ad Broker and Managing Director of HTL Property Andrew Jolliffe estimated estimated property values ​​in the sector had doubled since the dark days of the GFC, when banks demanded loans from over-indebted homeowners, sending many to the Wall.

“Back then, the ads were trading on 7% yields, which was the same as the cost of debt. Now [even with yields tightening], you have a 300 to 500 basis point spread between the yields and the cost of debt, ”Jolliffe said.

This means pub owners and investors were able to overcome the bottlenecks and profit from the rebound that resulted from the reopening.

When asked what was behind the surge in investment, Mr Jolliffe said it was the “holy trinity” of an imbalance in the supply and demand of A-grade assets, the weight of capital washing – as an example, nine bids were made for the Vineyard hotel in western Sydney. , which HTL sold for $ 70 million this month – and companies aggregating and consolidating one of the most fragmented real estate sectors.

“The top five players have at most 10 percent of the market – I don’t know of any other asset class where it exists.

“It’s an asset class that has yet to be consolidated and sophisticated money has figured that out and is in a race with established money,” Jolliffe said.

Thirsty investors

He said investors now made up around 30 percent of buyers, down from just 10 percent five years ago.

“This statistic indicates the determined increase in investor capital that enters the market and grows rapidly once a footprint is established,” he said.

Investors also looked past the short-term pain of lockdowns and trusted the strong rebound in trading (as shown by the rally in Redcape Hotel Group earnings), while taking a longer-term view.

Harvest Hotels paid $ 32 million for the Woy Woy hotel on the central NSW coast.

“The first weeks of trading in Sydney were very promising, even the [poor] time has not taken people away, ”said Sam Arnaout, whose Iris Capital owns and operates one of the largest private portfolios of pubs in the country, including Manly’s Steyne Hotel and Bourbon at Potts Point.

Along with a host of new entrants, including first-time Asian investors, historical players such as owner-operators of Rich Lister, the Laundys and Justin Hemmes’ Merivale group, have expanded their portfolios to markets booming regions such as Byron Bay.

Also very active are fund managers Charter Hall and Moelis, which are respectively taking listed investor ALE Property Group and operator Redcape and their more than $ 2.3 billion private sites.

The emergence of major operators such as ASX-listed Endeavor (backed by Woolworths) and privately-backed AVC has added to the industry’s brilliance and stability.

“They are quality operators. Renter businesses know how to run ads. There is depth and skill in their management, ”said Mr. Smith of HPI.

Sea breeze and tail winds

The boom is not limited to large pubs in large capitals, investments are also flowing into regional centers, which benefit from major infrastructure projects and an influx of city dwellers.

Fund manager and pub operator Harvest Hotels, run by Chris Cornforth and Fraser Haughton and backed by wealthy investors, has acquired its sixth NSW regional hotel, the Woy Woy Hotel on the Central Coast, for $ 32 million.

“We really like to operate in regional towns, where we see good buying opportunities and good tailwinds,” said Mr Cornforth. The Australian Financial Review.

Those favorable winds include $ 93 billion in infrastructure projects, which he says are attracting people to the area and creating busy pubs, hotels and cafes.

“Ceiling rates [yields] are higher and there are better buying opportunities in regional cities, where assets are often poorly valued.

In addition, he said, consolidation was occurring in regional centers as smaller pub families sold out and larger groups moved in, a trend that worked in Harvest Hotels’ favor given the local population growth and economies of scale.

“We are looking for pubs in high growth areas with good underlying earnings and where we can create additional value through group buying or investment work,” said Cornforth.


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