Pub yields continue to tighten

Pub yields continue to tighten

15 March 2019

Pub yields are continuing to tighten across most Australian states as buyers seek out quality assets and value-add opportunities, says real estate heavyweight CBRE.

In CBRE’s latest Pub Trends report, Senior Research Manager Danny Lee said improved trading conditions and a relatively stable legislative landscape had underpinned a healthy volume of transactions in Australia’s eastern states.

“Tighter yields in NSW and Victoria have led investors to cross geographical boundaries and seek upside potential through more strategic site selection and asset enhancement to improve returns,” Mr Lee said.

Sydney metropolitan pubs assets, for example, are now trading at pre-GFC yields of 7.5 to 8 per cent.

Advertising entrepreneur John Singleton and his partners are cashing in on their Sydney pub, affectionately called “The Drain,” which they bought for $27 million in November 2010 and expect to sell for around $70 million, notes The Sydney Morning Herald.

The NSW coastal hotel markets have also garnered high-interest, driving key sales and pushing yields lower.

Continued interest in Newcastle saw its largest pub deal completed in 2018 with the portfolio sale of Rogers’ Hotels. This competition for assets is fuelling further cap rate compression with coastal pub yields ranging from 8.5 to 10.5 per cent.

“We are still seeing top tier, A-grade performing gaming hotels as the most in demand property on the eastern seaboard,” said CBRE Hotels Director Paul Fraser.

“Solid performing hotels outside key metropolitan areas with sound fundamentals are also still attracting strong interest, including assets in resource-centric areas such as Gladstone and Mackay and in key coastal markets such as the Central Coast,” he added.

Limited stock in metropolitan Melbourne has resulted in tighter yields. The Montague Hotel, South Melbourne, sold earlier last year on a yield of just 3.25 per cent and the Park Hotel Abbotsford sold on a yield of 2.88 per cent.

Freehold vacant possession opportunities also continue to attract significant interest from investors as do leasehold opportunities, as highlighted by the sale of the Royal Saxon Hotel, Richmond, to a new entrant to the Melbourne market.

“The South East Queensland pub market has also been performing strongly,” said Mr Lee, “however limited stock available for sale has pushed some investors to expand their portfolios elsewhere.”

Meanwhile, in Queensland, the demand for pubs remains centred around South East Queensland, particularly for A-grade gaming pubs of considerable size, however stock remains limited.

Potential hurdles on the horizon include the 2019 Federal Election and the tightening of lending practices following the Banking Royal Commission—both of which have the potential to slow transaction activity.

Looking ahead, JLL’s John Musca expects continued transactional appetite, legislative certainty, unrelenting pursuit of aggregation models, re-emergence of leasehold hotel opportunities nationally and the reengineering of the two national hotel behemoths—Coles and ALH.

“Nevertheless, we expect sales volumes in 2019 to remain healthy, as investors remain keen to expand their portfolios,” said CBRE’s Mr Lee.