Motel Market Update

by Matt Davidson 13th of May, 2024

Motel Market Update

Three years ago I penned an article discussing the state of the motel market coming out of Covid-19.

In summary – at that time, regional accommodation asset values were very strong, owing to:

A lack of properties for sale. Vendors moreover opted to hold, given a lack of alternatives - the “what else would I do with my money” scenario. Extremely low yields. Term deposit rates were below 1% and freehold motels looked attractive at 5% and 6% (owner operated). A post-Covid increased willingness to invest further away from capital cities. We felt this was also related to a “chase for yield”.

At that time, Covid restrictions were ending and the domestic leisure boom (sometimes called “revenge travel”) was in full swing across Australia.

I suggested that travel boom would not last long term, once Australians returned to cruising and outbound international travel.

The last point from the November 2020 article that I’ll repeat was a fairly obvious forecast on interest rates and the likely effect:

“the next cycle for interest rates has to be upward. Perhaps not in a hurry, but likely once economic recovery and inflation kicks in. Along with increasing interest rates, investment yields will also move upward – higher yields will mean lower prices for tourism assets”.

18 months went by and then interest rates certainly did move upwards. 13 interest rate rises to take official rates from 0.1% in April 2022 to 4.35% in November 2023. I doubt anyone forecasted anything like what we’ve seen - the most rapid change of the cash rate in Australia’s history.

The second part of that statement asserts that (in simple terms) when interest rates go up – commercial property values have to drop. This is not only due to the increased cost of debt, which is obvious, but also allowing for a “risk margin”. When you can readily earn above 5.0% on Cash (essentially risk-free), many investors expect higher returns for the increased risk of any other type of investment.

Of course it’s far more complicated than this alone. Many motels for example have strong underlying land values and particularly with residential zoning, re-development potential creates an entirely different valuation outcome.

So, three years on, what I’m seeing is a commercial and business property market that doesn’t quite know how to respond to this rapid and vast change in circumstances.

Our assessment is a continued very low level of completed transactions is holding up motel values at the moment. Valuation yields (broadly) haven’t caught up to real market values and the volume of sales remains extremely low.

Hotels (pubs) are a different scenario again. There are a huge number of variables for assigning value – particularly with policy setting around gaming, yet perhaps just as critical is the number of assets currently on offer. Broadly speaking, pub transaction values went crazy in 2022, given the lack of available assets. The second half of 2023 has seen a considerable increase in assets for sale (on and off the market) and values have without doubt dropped back from a lofty peak.

In motels, we feel there remains a lack of comparable sales as sufficient evidence of what should be a shift upwards in capitalisation rates. While in pubs, it has been far more evident as deals flow through.

Does the domestic travel boom continue?

With a constant news stream and daily sounds bites referencing the “cost of living crisis”, the domestic travel market could well become shaky.

Ironically perhaps, one frequent travelling sector could well continue holding up the strength of domestic travel – the “grey nomads”. While the RBA rapidly demolished the hopes and dreams of first home buyers and mortgage holders, they simultaneously pumped more money into the pockets of retirees and those with nett positive bank balances.

What’s next for motel values?

Remembering that accommodation assets are very much valued on profit - most regional motels have just completed 2 full years of strong trading after the mess that was Covid-19 lockdowns and travel restrictions.

We should see an increased volume of motel sales in 2024 and I think yields will start to better reflect the state of the market.

So is it a buyers market or a sellers market?

I’d call it a balanced market currently. The very low volume of deals created saw some big prices achieved in 2022 and current values most likely reflect very strong recent trading and slightly higher cap rates. I do think we’ve seen the top of the market though. As trading starts to drop back from the peaks and more assets come up for sale, we’ll see yields start to better reflect the investment environment. While buyers might start to feel an advantage short term, competition for quality assets assures a fairly balanced market long term.