Why pubs are a (liquid) gold investment

Hotels, or pubs as they are commonly called, are an integral part of the local communities in which they operate.

As investments, they are high volume, defensive and cash generative businesses underpinned by diverse earning profiles and resilient earnings streams.

Because of this, investing in hotels offers resilient and sustainable income through the potential for regular and growing distributions, capital growth over the investment term and the potential for refurbishment or redevelopment of the venues themselves to increase land utilisation.

Key fundamentals driving demand

Pubs have always served as a central meeting point for local communities in Australia.

The post-COVID-19 recovery has reinforced the deep sense of connection that customers and communities have towards their local pub. We saw this evidenced through the uptick in Redcape’s operating EBITDA¹ upon re-opening following the COVID-19 shutdown.

Pub assets, specifically those owned by operators that also own the associated land, buildings and business are in high demand due to favourable consumer sentiment, attractive growth in earnings and high barriers to entry.

Quality hotel operators are those able to invest and drive cash flow and improvements over time.

COVID-19 and the future of pubs

With continuing record low interest rates, institutional demand for real estate across most subsectors and in particular industrial, logistics and retail, has been strong as investors seek to acquire assets that provide consistent, defensible income with long-lease provisions.

Consistent with this broader sector demand, pubs have likewise been seen as attractive assets for not only wealthy families, but corporate and institutional asset owners. And while COVID-19 has undoubtedly provided a disruption to the pub and hospitality sector more broadly, this hasn’t diminished demand.

Though the COVID-19 pandemic, we have seen huge and growing support for hotel and leisure-focused assets underpinned by land ownership. In particular, venues that make a positive impact on their local communities by offering a bespoke, relevant and enhanced customer experience.

Demand pouring in

In 2021, a record $2 billion of pub assets traded in Australia off the back of positive sentiment following 2020s extensive lockdowns.²

Demand for assets, particularly in regions such as Byron Bay, has been strong with investors in the hospitality sector focused on the development of under-utilised sites to meet the accommodation shortages and mixed food and beverage offers³.

An independent valuation of MA Hotel Management’s Beach Hotel in Byron Bay was undertaken in December 2021, which has valued the asset at $135 million, a 29.8% increase from the Freehold Going Concern valuation of $104m at the time of acquisition in February 2020.

This same trend is supported by the demand for coastal lifestyle locations including Byron Bay, which have led the way as NSW residential land values surged 25% to $1.8 trillion in the 12 months to July 2021⁴.

Demand for Sydney metropolitan pubs, particularly those with gaming, has continued to increase in recent years. This has been amplified in areas where hospitality assets have been tightly held and there is a lack of supply. Yields are broadly in the range of 6.0% - 8.0%, trending below their 2007 peak which is typical in a buoyant market, with future value performance tied to asset performance and management.

We believe quality assets managed by hotel operators with strong balance sheets, well-established cultures, agile responsiveness to changing conditions and who truly understand their people, customers and investors will perform well into the future.

Access a diversified portfolio of high-quality Australian hotels

Hotels are high volume, defensive and cash generative businesses underpinned by diverse earnings profiles, offering investors the potential for regular and growing distributions and capital growth.

To learn more about our hospitality capabilities and solutions click follow or visit our website.

1. Operating EBITDA of $17.6m in Q2FY22 versus $16.8m in the prior year despite NSW venues only re-opening 2 weeks into the period being from 11 October 2021. These metrics are unaudited and non-IFRS measure

2. Australian Financial Review, 2021

3. Recent transactions include Shaws Bay Hotel and Fenwick House – 6500sqm site located at 3 Bright Street Ballina (sold for $31million in November 2021), Lennox Hotel – located at Pacific Parade and Byron Street, Lennox Head (sold for $40million in February 2021), Cheeky Monkey’s backpackers bar – located at 16 Lawson Street, Byron Bay (sold for $13 million in May 2021) and Great Northern Hotel – located at 35/43 Jonson St, Byron Bay (sold for circa $80 million in July 2021)

4. NSW Valuer-General’s annual report

5. MAHM’s portfolio consists of 38 Freehold Going Concerns and 2 Leasehold Going Concerns

6. FY21 revenue includes Redcape Hotel Group, Beach Hotel Byron Bay and Taylor Square Fund from acquisition at February 2021.