Goodbye 2014: The year that was
I know I say this every year but where did 2014 go?
I am sure that as you get older time compresses! Either that or dementia is setting in and I am losing the plot. Anyway, as we do each year a quick look back hopefully helps to illuminate the future and perhaps provide some lessons.
For us the single biggest trends in the management rights industry in 2014 has been the influx of Chinese buyers and the upward demand on multiples. It seems to me that we are back at pre-GFC levels with confidence in the industry never higher.
The recent introduction of the property occupations legislation looks to contain pretty much nothing but good news (thanks ARAMA) and the banks continue to have plenty of money to lend. Our leisure and holiday based clients are reporting the best November/December they have seen for years and vacancy rates in permanent complexes remain low. There has been some drop in occupancy demand for corporate short stay serviced apartments in Brisbane although yields still look very encouraging.
Happily none of our clients went broke in 2014 and indeed none missed a loan payment or fell into arrears. Sadly we did see some management rights operators go under during the year although I suspect in most cases the underlying reasons may have had little to do with management rights as a business model.
Most of our motel clients have enjoyed a good year thanks largely to hard work, good advice, manageable finance packages and planning. Sadly I can’t say the same across the entire motel industry with some of the concerns around mining sector demand coming home to roost. Leasees who bought at the top of the mining boom on the back of high occupancies and tariffs have really suffered in some regions as the miners either cut back demand or move to worker camps rather than motel accommodation.
The obvious solution of renegotiating rent remains a vexed question as the landlords asset value is directly impacted by the yield on rental so, if the rent is reduced, then so too does the asset value. If the landlord is geared up then his bank won’t be too keen on seeing the asset value fall on reduced rent. The leasee is left to wonder if it is better to walk away and the landlord faces the possibility of having to start operating his motel in very challenging circumstances.
The result of this dynamic has been what appears to be some very good buying with leasees prepared to take a hit to move on albeit the incoming operator potentially takes on the same problem that the vendor is trying to escape. My view is that these opportunities are for the highly experienced motel operator only with upside predicated almost entirely on the acumen of the new leasee who can broaden the demand base of the motel and stem reliance on the miners. Not an easy gig but not impossible as a number of canny purchases have proven over the past year.
I suspect 2015 will continue to prove a strong motel operating environment in regions with a diversified demand base and challenging for those with single industry reliance. Certainly the lenders remain supportive of new and experienced operators albeit a first timer buying a distressed asset in a predominantly mining driven economic area will find funding a challenge, as have we.
Interest rates look set to stay at historic lows for the medium term with at least one analyst suggesting that rates could fall in 2015. Given that the average return on a leasehold motel is something like four times the cost of debt you would have to think that these assets will continue to find favour with business people despite some the challenges I have outlined.
On a personal note we welcomed Simone Cuthbertson to the business as operations manager and settled a record number of management rights, motels and caravan park deals. We also assisted a number of syndicate groups to raise finance and grew our interstate business significantly. Our push into home, property and investment finance is paying off and our biggest challenge for 2015 will be staying on top of the business volumes. What a great problem to have!
Many thanks to our loyal clients and all the industry professionals who recommend and support us. We are making every effort to reinvest in the industry through sponsorships, seminars and financial support for any event that promotes the industry.
On behalf of Simone, Paul and I all the best for 2015.
