Duncan Cameron, Director – Specialised & Advisory
A sector hit hard by the pandemic
In the last five years, Opteon has completed 784 hospitality valuations in the sub $50m market. This includes pubs/taverns (30%), hotels/gaming hotels (24%), restaurants (24%), and other hospitality venues (22%) such as small bars, nightclubs, licensed clubs, function centres and casinos. These have involved assets located Australia-wide, in both metropolitan and regional areas, with the highest volumes in NSW, WA, Victoria and Tasmania.
As valuation specialists in the sub $50m hospitality asset class, we saw the COVID-19 pandemic hit the sector extremely hard. The speed at which COVID-19 hit Australia and forced hospitality venue closure was unprecedented, causing significant and widespread financial hardship. During the pandemic period, hospitality venues were forced to contend with significant drops in demand. Unpredictable and wide-ranging lockdown periods, increased and varying trading restrictions and rigid operating protocols caused significant revenue and profitability decline.
The success or failure of businesses during this period was dependent on the size of their pre-pandemic financial resources and cash buffers. During the pandemic, factors such as their scale, impact on revenue, ability to access government funding support (i.e. JobKeeper) and the speed at which they could mitigate operating expenditure all played a role.
While the Omicron variant has also had a negative impact on the sector this year, there are now positive signs of recovery. Profitable trading conditions are starting to return due to high vaccination rates and relaxation of pandemic control measures. Socially, patrons are returning to hospitality venues after lengthy periods of mandatory lockdown and isolation. Most have more disposable income after two years of restricted travel and limited discretionary spending opportunities. For some hospitality businesses, the mandatory closure provided the opportunity to refurbish venues, reassess their service offering and positively restructure their operating model to deliver a more profitable financial outcome.
The impact on the hospitality sector
In a May 2020 story by Hoteliers Australia, Australian Hotels Association (AHA) National President Scott Leach said: “the industry was facing its worst days in over a century”. Leach added: “Our hoteliers and their staff are doing the right thing but they are paying a heavy price. We have to remember too, the industry is not in hibernation… Your typical country pub is losing $25-35,000 a month – again with no money coming in. There really is a limit to how much debt can accumulate before many will be forced to close their doors for good.
In July 2020, an AHA opinion piece published in The West Australian stated: “For nearly every hotel, restaurant, bar, pub and tavern, the Federal Government’s JobKeeper payment scheme is the only reason they have been able to survive.” From a property perspective, other support measures included the National Cabinet’s Mandatory Code of Conduct – SME Commercial Leasing Principles During COVID-19 (and subsequent state-based legislation) that was designed to provide a proportionate and measured framework for landlords and tenants to share the financial risk and cash flow impact during the COVID-19 pandemic period. Other wide-ranging relief and support measures assisted hospitality businesses to ride out the initial pandemic impact, including deferred taxation, deferred commercial and residential bank loan reviews and various state-based financial support measures.
In most capital cities, the sector was crippled by lockdowns and the impact of state and national border closures, which curtailed tourism and corporate travel and, in turn, directly impacted venue revenues. Some States and regions fared better due to an increase in intrastate tourism. However, many regional businesses were also impacted by lockdowns, state border closures, vulnerable community isolations (WA) and, in Victoria, Melbourne’s “ring of steel”.
The Australian Bureau of Statistics (ABS) reported the accommodation and food services sector EBITDA fell by $271m in FY20, or 2.7%, following a period of growth . The impact was also felt acutely by hospitality staff. For example, South Australia’s three-day lockdown in November 2020 resulted in 80% of permanent employees and half of casual employees being stood down. Furthermore, between $7m and $10m worth of food and alcohol was wasted
The pain continued in 2022 with isolation requirements and government capacity restrictions in venues – made to curb the spread of the Omicron variant – further restricting profits for hotels and international entry restrictions causing significant staffing issues. Across the board, the cost of doing business in the accommodation and food services sectors increased by 78% from January 2022 to April 2022 according to the ABS. Businesses with between 20-199 staff were hardest hit by: a) an inability to find suitable staff; and b) supply shortages, caused by logistic disruption as COVID-19 community transmissions spread with the relaxation of containment policies.
Hospitality asset valuations
At the best of times, hospitality asset values can be particularly volatile as they are inherently linked to the trading performance and profitability of the going concern business. In turn, this financial viability is influenced by many external and internal factors, including:
- the economy
- consumer confidence
- disposable income levels
- spending patterns
- seasonal trends
- interest rates
These are combined with the skill and quality of management, trading competition and the revenue mix of the business. Fluctuations in revenue and costs can quickly expose businesses to significant trading and financial risks and asset value volatility. The pandemic period intensified trading volatility as it added a rapidly evolving and unprecedented impact on what can typically be a volatile market sector.
Property markets typically stagnate during periods of uncertainty and, consistent with this market behaviour, investors defer investment decisions until they have greater certainty and clearer market direction returns.
Unsurprisingly, hospitality assets became less attractive to business operators and investors during the pandemic period. The pandemic’s impact on the industry saw fewer transactions. Opteon’s quarterly data shows valuation volumes dropped sharply during 2020. This was due partly to the major banks’ loan review moratorium during the 2020 pandemic period, but also to a decline in market transactional activity.
Currently, recent transactions of prime well-located hospitality venues are lower. They are either owned by:
- corporate and owner operators; or
- investors who have aggregated good quality venues over the years, and tightly hold such hospitality assets.
The general reluctance to sell profitable or securely leased assets is also impacted by the challenge of securing alternative, similar or superior yielding, replacement assets, which are typically in short supply.
Of those considering selling, many are seeking to recoup capital losses or forgone profit during the pandemic period before putting the asset on the market. Prospective vendors are typically seeking to re-establish a profitable history of trading performance to maximise the future potential realisable sale value. There’s evidence of industry-leading operators, who have successfully navigated the pandemic, making opportunistic, counter-cyclical acquisitions of underperforming businesses to expand their portfolios.
Our data indicates hospitality businesses began recovering at the end of 2020. Unfortunately, the emergence of the Delta and Omicron variants imposed further challenges and delays for the sector returning to pre-pandemic levels of trade. There are now signs of recovery and the industry is expected to rebound to pre-pandemic levels in terms of employment and maintain steady growth over the next three years. 
Opteon’s valuation experience indicates that revenue trends dipped in FY20, relative to previous financial years and have shown recovery in FY21 and FY22, as businesses gradually re-open to resume unconstrained trading profiles.
Meet our Hospitality specialists
This material is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax, investment or financial advice.
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