Coffeys - Tourism Property Brokers ltd. | LREA

30 years in business. 1984 - 2014

Freehold Going Concerns Financial Returns

What should be expected?


A freehold accommodation business is made up of two main components.  One is the land and buildings (the real estate), the other is the business.  The business is comprised of the plant, chattels and goodwill.  (The goodwill is sometimes referred to as the benefit of the lease or the intangible asset.)  Even if the complex is owned and operated as one entity, known as the freehold going concern, the distinction still applies.  This is relevant, because the returns from these two main components are quite different.

The land and buildings, if owned and leased out as a separate commercial investment, would normally show a return of between 6% and 7% at this time.  The business (lease), will usually achieve a return of around 20% to 25%.  This business return is based on earnings before interest, depreciation, taxation and drawings for the operators, often referred to in accounting terms as EBIDTA.

Because around 65% to 70% of the total value usually lies in the land and buildings, which are showing the lower return of the two components, the overall return for a freehold going is often between 8.75% and 11%.  (Some recent sales have evidenced considerably lower yields.)  Naturally the more desirable the property and its location, the lower a yield is more likely to be acceptable. The 8.75% return suggested is based on a 6.5% return for the land and buildings component (at 65% of total value), and a 25% return for the business/lease component (at 35% of total value).

We believe that most freehold operations in this industry are currently being sold at well below replacement cost, which could suggest that now is a good time to be entering the market.  In the last decade we have seen a huge increase in building, consenting and compliance costs and in many cases land costs.  During the same period in many locations, there has been significantly less increase in accommodation tariffs, which is now probably overdue.  Whilst there is some construction of new accommodation property in parts of New Zealand, the amount of new supply coming online is unlikely to be enough to cater to existing and growing demand.

Any questions or comments on this subject would be very welcome.

Kelvyn Coffey
© 2019


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