And now for some good news

AccomNews Sunday, October 28, 2012

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It is said that good news doesn’t sell newspapers and I suspect that’s true of the broader non-print media.

I’m told that it is a proven fact that if a media outlet runs a good news story with a positive message that people who are enjoying a comfortable life will switch off. Why is this? The theory goes that the general public want to read about other people in distress. The psychologists would tell us that the reason for this is so we can feel better about our own station in life. We want to feel that others are doing it tougher and our lives are comparatively successful.

The Germans have an expression called Schadenfreude that basically describes a pleasure derived from the misfortunes of others. When I read a bad news story or watch a TV presenter excitedly describing some terrible event I get the distinct impression that the press have a very clear understanding of what sells and it isn’t good news and happiness.

Interestingly, an article in the American Economic Journal in 2008 detailed the fact that many economists and key decision makers come to conclusions based on deep seated personal beliefs rather than hard economic data. Those beliefs were, in many cases, traced back to the impact of good news/bad news events to which the decision maker had been exposed. More broadly there seems to be a focus on downside risk to the point where some very encouraging economic news is simply buried in the stampede toward negativity.

Happily I see light at the end of the tunnel and it’s not a train. Within the accommodation sector there are definitely more buyers out there who have taken the bad news blinkers off and decided all is nowhere near as gloomy as our friends in the media would have us believe. This optimism is starting to be matched by tourism visitor demand while regional motel and city based short stay serviced apartments continue to perform strongly.

At a personal level we’ve just had our busiest eight weeks in three years in terms of both settlements and new buyer enquiry. A quick review of the key drivers reveals some interesting trends. The first thing I am noticing is that while broader consumer confidence is still low there is a renewed optimism within the accommodation sector. In some cases buyers have simply got used to the facts of life as they are now and in others circumstances have improved.

For many buyers of management rights and motels, the sale of a property to help finance the purchase has been a significant challenge. A combination of improving property market conditions in many areas and vendors coming to terms with current values means more cashed up buyers than we have seen for some time. There’s also an improving attitude by the lenders to gearing against property assets rather than having a purchaser needing to sell before buying.

Make no mistake. The banks are super keen to lend and accommodation remains one of the sectors that enjoys substantial confidence within the credit and risk departments that make the rules. The banking profit model is pretty simple. Buy some money and then sell it at a mark-up. Sell a few add-ons like accounts and credit cards (would you like fries with that?) and make a tidy profit. Trouble is that financial institutions are competing hard for the mum and dad savings accounts and term deposits to ensure they are appropriately funded without having to rely too heavily on wholesale funding off-shore. With subdued (but improving) home lending there’s significant pressure on the banks to get the money out the door with business lending being the preferred option. The result is a move toward more flexible lending practices and some very sharp funding packages.

Think about it. Borrowing money is all about what you do with it. If, like me, you have borrowed over the years to invest wisely in speed boats and fast cars then the following will be lost on you. If, on the other hand, you have borrowed to buy a management rights or motel then you are probably doing very nicely unless you paid too much and over geared.

For the purchaser in today’s market the return on investment for a management rights will be roughly twice the debt funding cost while for a motel lease it will be more than three times cost of funds. These are the numbers that excite the banks because with that sort of return to debt-cost ratio there is room for a few speed bumps along the way without things turning ugly.

On the Sunshine Coast where I live, loan default rates on accommodation lending are virtually non-existent. Those few that are in a bit a strife appear to be well supported by their banks with little sign of the shoot first, ask questions later attitudes we’ve seen from lenders in other markets. More broadly the motel sector is enjoying a renewed focus from a couple of the so called big four banks with gearing levels and loan terms reflecting a very positive view of that market.

In closing I thought I’d share some headlines from the last few weeks. These are buried in the economics pages and I suspect won’t be featured on Today Tonight any time soon.

China’s economic growth slows but meets forecasts
China hard landing unlikely: IMF
Local market hits 15-month high
Unemployment up, so too full time jobs
Rio production rises despite falling commodity prices
Regional house prices bouncing back
Reserve cut to stay ahead of the curve
New car sales hit record
Chinese inflation eases, scope for more stimulus
Housing finance rises more than expected

For those of you wishing to wallow in more mostly good news take a look at the Australian Tourism Investment Monitor 2012 which can be found at http://www.tourisminvestment.com.au/.

Makes for very interesting reading.