Thursday, September 22, 2011

Motel Broker Speaks Out

I see that Malcolm Teesdale, a budding hospitality broker based in Cambridge has written an advertorial piece in last night's Waikato Times and has touched upon the state of play within the motel industry.

According to Teesdale "tough economic times have brought a switch of focus for the motel industry from a preoccupation with luring overseas tourists to the needs of repeat Kiwi visitors". I personally can't remember a time when the motel industry were targeting the overseas market and it's comical to think that motels within Teesdale's Waikato patch were once supposedly focused on overseas tourists as the domestic market has always remained dominant.
Property brokers often avoid disclosing "rules of thumb" as most commercial properties have unique qualities and regions can differ substantially. There is also the risk of raising unrealistic buyer expectations. 

I have to question some of the "averages" that Teesdale has published and wonder about the quality and scale of the data that was used. Throughout the article, it is often not clear to the reader if Teesdale is discussing nationwide trends or specific micro data occurring within his own region. While the article may stimulate buyer interest and some debate, I suspect that moteliers with property listings for sale may not be so happy. 

When Teesdale comments about the length of time for a motel property to sell, I wonder just how many "very good motel properties" have sold in "around three months" and how many "good" properties have taken six months?
I also wonder if the Teesdale's claimed return on the purchase of a motel lease of "25 per cent to 30 per cent" is rather optimistic if this is to be used as a general guide?  
The return to the landlord of between 6 per cent to 8 per cent on investment would appear to be close enough, however landlords are probably of the expectation that this should be marginally higher.

Teesdale repeats the old adage that often gets repeated within the motel industry; the third/third/third rule of thumb. This is when a motel's revenue is allocated - one third of for rent, one third for maintenance and expenses, and one third for operator income. This formula seems to have held reasonably true for many years.

A formula that gives an indication of a motel lease valuation is given by a calculation of multiples between three and five of the operating surplus, depending on location, economic climate and the desirability of the property.

Comments that "contractors were looking for room rates under $100 a night and the travelling public resisted prices of more than $115 to $120 a night" were an interesting perspective that would appear to be more specific to the region that Teesdale may operate in.

Teesdale does offer some comforting words that would appease some motel clients listing property:
The leasehold market was improving daily through a combination of the banks "cleaning up their books and perhaps getting a little realism into the vendor market at the same time".
"But the reality is a lot of people have recognised, particularly over the past two years, that having a lot of capital invested in a residential property, which is earning nothing, may be not wise."
Leasing a motel offered a combined home and business, often for not much more than they would realise on the sale of their house, he says.
"Most of your living expenses are covered by the business and a good motel provides a very good income."
I suggest that you read the article HERE, as there are many good points that are open for discussion.

Overall the article has to be taken positively and we should appreciate that someone that dabbles in the motel industry is willing to share his opinions and observations.

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