Massive Shortage of Vendors in Tourism Sector
It’s a good time to sell - that’s what real estate agents always say, right? We often hear “it’s always the right time to buy and sell”. Here is a more sophisticated answer.
Despite everything 2020 has thrown at us in the tourism industry, it’s actually a really good time to sell a tourism asset. Here’s why.
Firstly, yields are exceptionally low on all investment and property classes. Quite simply, low yield means high sale price. Starting with less than 1% interest on offer from banks and continuing through to historically low yields for anything you care to look at. All this is causing a “chase for yield” from investors and driving new participants into the tourism industry. Because of this, currently there’s no shortage of buyers for accommodation assets. What we have got is a massive shortage of vendors - there’s been nothing much on the market all year. This in itself tips the scales in favour of the vendor, as buyers have a distinct lack of opportunity.
You’d be forgiven for thinking the reason for a lack of tourism asset sales in 2020 is the assumption that buyers would never pay a fair price for a tourism business after the happenings of this year. We honestly aren’t seeing that. Instead, buyers are hungry for tourism assets and rather than being overly opportunistic, buyers broadly accept that this has been “a rough six months in the scheme of the past 3 years”. Currently at least, asset values haven’t been affected. We’ve written some good deals this year and while vendors have needed to be flexible, achieved values have held up.
So rather than just “Covid19”, what is actually causing the limited flow of deals is most vendors still have, quite rightly, strong expectations for their asset value. Every week we hear the same thing, “what else would I do with my money when I sell?” This is a completely fair question and an absolutely valid argument. Suppose we sell a freehold motel for $5 million at a 7.0% yield – good luck finding any investment to replace that level of return in type of investment for the next few months at least. I’ve given this a huge amount of thought in the past six months and have come to the conclusion that trying to find the next comparable investment for a seller is perhaps not as critical as assessing current asset value against the immediate forecast. The conversations we’re having with vendors are along the lines of “will your asset be worth more or less in 12 months from now”?
Remembering that tourism assets are valued almost entirely on profit, a prolonged period of depressed profit will absolutely have an impact on asset value. Buyers and valuers can smooth out six months of pain across the long term performance of the business, but 12 or 18 months is a very different story.
At Tourism Property this year, we’ve had a number of assets on the market getting genuine, unconditional written offers that are not overly opportunistic - they represent fair value. Buyers are not discounting the value of a property based on its last six months.
There is no doubt that some regions have recovered on the back of domestic travel. The pent up demand and “cabin fever” has seen short break leisure travel booming of late. It’s brilliant to see, but ask yourself what happens to this sector when Australians are allowed to again leave our shores and head to New Zealand, Europe, USA, Pacific Islands etc
Many other Australian tourism regions have not seen anything like a recovery yet. Accommodation businesses relying on travel from inbound, groups, corporate, government, conferencing and weddings have sadly got a long wait ahead of them. Particularly with JobKeeper ending, that’s an awfully large number of accommodation properties that are sadly going to have prolonged profit challenges. For those businesses, if the “six months of pain”, becomes 18 months, then there is no doubt that buyers and valuers will then be getting the red pens out.
So, while values for tourism assets are currently holding up, we see two key challenges that will change this. First, a prolonged period of reduced trading performance across many markets, leading to multi-year lower profits and lower true asset values. Second, an increased number of those affected businesses coming to market under distress and transacting at lower than today’s values.
I’m very pleased to say that there’s not huge levels of debt across the accommodation sector and this has prevented a catastrophic flood of forced sales. During and post-GFC, the accommodation industry had very high leverage and there were numerous receivership sales. We’ve barely seen any type of urgent sale yet, which is great – but there will absolutely be distressed sales in 2021.
As a final point, the next cycle for interest rates has to be upward. Perhaps not in a hurry, but likely once economic recovery and inflation kicks in. Along with increasing interest rates, investment yields will also move upward – higher yields will mean lower prices for tourism assets.
Is it possible that this dreadful year 2020 could be the top of the market cycle for accommodation asset values? I’d say in some markets, very much yes.
Best of luck out there, please reach out if you’d like to talk.