Coffeys - Tourism Property Brokers ltd. | LREA

30 years in business. 1984 - 2014

What You Get Is Where You Buy

It may come as a surprise to hear that the rates of return on investment for motel and accommodation businesses can be quite different throughout the country.  So, where you buy may largely determine the return you could expect.

Using motels as an example, purchasing a long lease for a good business in most parts the South Island will usually yield a net return of around 20% on ingoing price, with slightly higher returns likely to be found on the West Coast.  Go to the lower North Island and the returns are commonly 23 - 25% and further north the ROI can be up to 30% or more.  (Higher yields mean lower prices relative to profit.)  While the South Island seems to have the same rate applied almost throughout, the North Island tends to vary depending on location.  So how did this come about and why does it continue?

The best explanation that we can come up with, is that it is simply because the markets have evolved separately and independently.  As with most aspects of real estate and business sales, values are assessed by way of comparison with relevant sales evidence and, the precedents set in various localities have been different.  When registered valuers produce their reports, most seldom if ever use sales evidence from the other Island and, it could be argued that such distant evidence may be less than relevant.

Apart from valuers looking at the history, it is possible that the motel brokers at the coalface might have a bit to do with this.  Ours is a specialised industry and perhaps it can be influenced by a smaller number of people who are most active in this particular niche.  Motel leasing only really started in the 1980’s and the few brokers who have been around since that time had not substantially and successfully ventured inter-island with their activities.  Apart from pricing, we can also observe how different aspects of the actual lease document have developed in slightly different ways in different regions.  Coffeys has been operating in the South Island since 1984 and never really seriously looked north until 2009.  Now that we are operating successfully New Zealand wide, we are in a position to observe this apparent anomaly on more than just a casual basis.

By way of further illustration, Australia’s (eastern) market has developed quite differently to New Zealand.  There will no doubt be a number of factors at play here, but in Australia they seem to get far better returns on their motel leases and freeholds, however they pay more for management rights, i.e. lower returns than ours.  Motel leasehold returns can be seen advertised at up around 28 - 30% (depending on how close to the coast they are) and freehold going concerns show considerably better returns than ours do as well.  Looking then at management rights, it seems that the Aussie’s are being asked to buy at around 20% return on purchase price for the management rights themselves, (five times net profit or more) plus they usually have to buy their apartment on top of that.  Return on total investment can end up being 11% to 13%.

We don’t see any reason for this situation to change to drastically in the near future.  If that is the case then it should be borne in mind that whatever price one pays in any given locality, there is a reasonably good chance that the business will be bought and sold in the future under similar market conditions.

Kelvyn Coffey
Principal
© 2018

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