Throughout the COVID-19 pandemic, the performance of the Australian hospitality industry has been diverse, with each state or territory experiencing different challenges.

Despite these challenges, the sector has remained resilient with strong national transaction volumes after the initial 2020 lockdown period. There has generally been increased interest in regional assets following the uplift in domestic travel as a result of the international travel ban. The majority of venues in CBD locations are only now starting to recover following the return of office workers and students.

The industry is facing ongoing challenges from cost pressures on margins from both rising input costs, wage pressures, and energy costs. It is also expected many venues will continue to experience a shortage of employees as the workforce consists of short-term international individuals like backpackers and students.

HOSPITALITY MARKET UPDATE

The pub, bars, nightclub industry is a key sector within Australia and consists of approximately 6,750 running businesses and provides employment for over 80,000 people. The COVID-19 pandemic resulted in a decline in annual growth of 1.9% for the pub, bars and nightclub industry with current revenue sitting at $17.4 billion as at February 2022. Strong domestic tourism has generally boosted performance, although profitability continues to be impacted by cost pressures and a decline in per capita alcohol consumption on premises.

On a micro level, the pubs, bars and nightclub industry saw mixed performance over the pandemic, with each of the states and territories reacting differently. Victoria and New South Wales experienced a decline in on-premises trade, particularly CBD venues currently struggling to bounce back due to low foot traffic. The states and territories that operated through harsh capacity restrictions have experienced greater revenue growth since the easement of restrictions.

Gaming facilities have also faced intense pressure with online gambling platforms becoming more prevalent, although it is considered this may have been offset to some extent by increased government stimulus throughout the pandemic. Public investors continue to dominate the market. The Endeavour Group Limited remains the top industry player with the largest market share in the country, whilst Australian Venues Co (AVC) and Redcape Hotel Group also hold a significant share.

In addition, experienced private hoteliers and long-term family operators continue to add to their extensive portfolios when an opportunity arises.  Transactions tend to be confidential in nature, as property is purchased in line with businesses. The 2021 Calendar year saw a $1.6 billion turnover in pub sales, with a drastic increase in regional sales.

WHAT’S NEXT FOR PUBS AND HOSPITALITY PROPERTY IN 2022?

Capital city venues that rely heavily on office workers and students have been slower to recover with office occupancy remaining generally subdued. A societal shift towards remote learning for university students is evident, with the situation further compounded by the slow return of international students.

The shortage of labor, gross margin pressures and rising energy costs are expected to dampen what could have been a regional tourist boom.  It is hoped that labor shortages will be eased by the 28,000 Working Holiday Maker (WHM) visas and over 50,000 international students which are forecast to enter Australia over the coming months.

Many operators are using this period as an opportunity to upgrade venues and particularly gaming fleets in markets such as South Australia and the Northern Territory, which have seen the introduction of Bank Note Acceptor (BNA) and Ticket in Ticket Out (TITO) technology.  Overall, the hospitality industry is experiencing a weight of capital looking for assets while at the same time coming under pressure from lower turnover, gross marginal and labor costs.

HOSPITALITY TRENDS

Initial yields  

  • There has been a genuine yield compression across all capital city markets, with some states experiencing up to 2% firming.
  • Notable yield compression is in line with the lowering of interest rates over recent years, particularly evident in the raft of market activity over 2021 and early 2022.
  • When considering the road ahead, it is hard to envisage further yield compression, or even maintenance of such keen yields, with rising interest rates.

Regional vs CBD   

  • International travel remains a leading indicator to increase market activity and reduce labor shortages in the regional and CBD markets.
  • Strong regional travel has spiked demand for pubs and accommodation.
  • International students and migrant workers are displaying a positive return for the CBD markets.
  • There has been a noticeable increase in larger hotel groups acquiring smaller groups, as the traditional hotel owners reach retirement and are looking to sell out.

Leasehold, Freehold and Going Concern sales  

  • There has been a rise in going concern interest transactions due to a high barrier to entry and a promising growth in net income, with compression of property yields the key driver to some notable results.
  • Australian Venue Co has demonstrated its continued appetite for expansion, picking up the leasehold interests at Anglers Tavern in Maribyrnong, Village Belle in St Kilda and the regional Apollo Bay Hotel, as well as the leasehold interests of the ‘Booze Brothers’ groups in South Australia.
  • Large investment funds are looking and buying heavily in the leasehold market. This has driven yields lower, particularly shown in national tenants.

VICTORIAN PUB AND HOSPITALITY PROPERTY INSIGHTS

Hannah Rose, Senior Valuer, Knight Frank Valuation & Advisory Victoria, shares her insights on Victoria’s pub and hospitality industry.

How has the Melbourne CBD hospitality industry recovered from COVID-19? Is the industry experiencing cost pressures and shortages in labour? 

The Melbourne CBD hospitality market recovery story is varied. On one end of the spectrum, we have seen a resident population that has bounced back to life post what felt like two years of lockdowns. Pent-up demand for social interaction saw a new normal of booked-out restaurants and higher spend per head. CBD destination restaurants, or hotels in close proximity to entertainment facilities such as theatres and stadiums, were the best placed to capture this trading revival.

Venues that rely heavily on office workers and students have been slower to recover. Melbourne office occupancy remains flat at about 36%, according to Property Council of Australia data. A societal shift towards remote learning for university students is evident, with the situation further compounded by the slow return of international students.

Labour shortages are still having a major impact on trading capacity, with many venues trading reduced hours or at reduced covers. Ongoing high local infection rates of COVID-19, and what is dubbed to be a horror flu season, are continuing to put pressure on the local labour force. The industry holds hope that with the return of international students and migrant workers these pressures will begin to ease, however the actual take up of international travel is proving to be gradual.

Has the industry seen any change or particular trends in leasehold, freehold and going concern transactions since the pandemic? / Any notable transactions that have recently occurred? 

After a hiatus of activity during the extended 2020 lockdowns, the Victorian pub market has been active and heated. We have seen notable yield compression in line with the lowering of interest rates over recent years, particularly evident in the raft of freehold investment sales over 2021 and early 2022.

Transactions of ALH (Endeavour Group) tenanted properties achieved the strongest results, demonstrating a circa 1.5-2.0 basis point compression from pre-COVID-19 levels. A key trend in the Victorian pub market has been the separation of business and investment interests in realising the freehold going concern value, with the compression of property yields the key driver to some notable results.

Australian Venue Co has demonstrated its continued appetite for expansion, picking up the leasehold interests at Anglers Tavern in Maribyrnong, Village Belle in St Kilda and the regional Apollo Bay Hotel. The deals were struck on new long-term leases, with the investment interest separately transacting.

These transactions, together with the recent sale of Sarah Sands Hotel, Brunswick indicate a market preference to these KKR-backed Australian Venue Co lease covenants. When considering the road ahead, it is hard to envisage further yield compression, or even maintenance of such keen yields, with rising interest rates.

 

This article is part of our valuer insight series, where valuers from across Australia share their insights on different valuation specialties. If you want to share your valuation insights, email [email protected] for more information.