Why Invest in Motels?
Overview
The motel industry in Australia is a significant part of the country's tourism sector.
Motels are resilient with growing demand and a long history of providing affordable and convenient accommodation to travellers around Australia.
The Australian motel industry has experienced steady growth over the past decade, with industry revenue growing at an annual growth rate of 3.3% over the past five years (source: IBISWorld).
There are several factors that make motels an attractive investment opportunity:
1. Stable Business Model
Motels have historically proven to be very stable and resilient businesses due to several factors including:
-
more diversified mix of business and tourism customers
-
limited exposure to overseas tourism and movements in currency
-
more affordable
Compared to traditional hotels and resorts, motels tend to be less cyclical and have historically demonstrated less variance in occupancy and average day rate over multiple time periods.
2. Performance Upside
Motels are dynamic businesses, with lots of levers to improve performance, given the right manager.
The adjacent example shows the revenue outcomes of two 40 room motels:
-
Motel 1 - 62% occupancy and $145 nightly rate
-
Motel 2 - 72% occupancy and $165 nightly rate
While driving higher occupancy is often the easiest way to improve performance there are a myriad of ways for a seasoned operator to improve profits, including centralising costs, better purchasing, better lease negotiations, dynamic pricing, cost management, and optimisation of contract staff.
3. Limited New Supply
Despite the growth in demand, there has been little to no growth in the number of Motels in Australia over the past few decades.
New motel and hotel developments have become increasingly difficult due to rising construction costs, labour shortages, elevated interest rates, and tighter development feasibility. Construction costs across Australia have risen materially since 2020, significantly increasing the replacement cost of accommodation assets.
4. Attractive Yields
Motels offer attractive cash flow yields relative to other types of commercial property.
With yields being dependant on the type of ownership structue as follows:
-
Leasehold Motels = 6-8%
-
Freehold Going Concearn = 8-12%
-
Freehold Only = 20-30%
The adjacent table depicts recent transactional evidence for leasehold motels in Australia.
5. Tourism Demand
Regional tourism continues to perform strongly due continued support from various state government initiatives, aimed at stimulating demand.
The recent lockdowns during the COVID-19 pandemic also reintroduced Australians to the many natural and cultural attractions regional travel has to offer.
Some of the trends that are driving that are the increased demand include nature-based experiences, growing popularity of Indigenous tourism, and the increased demand for food and wine experiences.
