With four hot buyers for every pub asset; Australia's pub industry is attracting unparalleled levels of investor interest, and strong consumer demand, in spite of shifting market fundamentals -

According to Jones Lang LaSalle Hotels' inaugural Pub Investor Sentiment Survey, released as the industry undergoes the most seismic shift since the introduction of poker machines, expectations for future trading and investment trends are positive despite the introduction of news anti-smoking laws and competitive pricing. 

The Survey is Australia's only national pub survey reflecting investor opinion on a range of key issues currently affecting the industry, providing a benchmark to identify future investment opportunities.

Smoking Laws Have Pub Investors Concerned

Investors view the introduction of smoking restrictions in Australian pubs as having the biggest impact on the industry in 2007, with one quarter of all respondents believing that this poses the most significant challenge today.  "Almost wholeheartedly, investors view the impact as a negative one with 87% of responses believing legislation has or will have an adverse impact on the industry," said Ms Karen Wales, Vice President Research, Jones Lang LaSalle Hotels.  However survey results also show that the impact is expected to be short-lived.

Investors indicated that on average they expect revenues to decline by 10.6% across Australia, ranging from 11.4% in NSW to 8.1% in Victoria.  Investors in Queensland estimate that revenues have declined by 10.6% since the introduction of smoking legislation around a year ago – possibly the most reliable indication of the impact.

Gaming revenue has been the most significantly impacted as smokers now need to take a break from continuous gaming should they wish to smoke.  Beverage consumption has also suffered a slight decline.  "Legislation is forcing owners to review business models and diversify income streams, which in the long-run could widen appeal beyond traditional source markets," said Ms Wales. 

Yield Compression Commonplace Across All Sectors, Not Just Pubs

Yield compression was highlighted as the second major concern by investors.  Expectations for initial yields in this survey for freehold investment pubs averaged around 9.5% across Australia, "however recent transaction evidence suggests that tighter yields are more commonplace in the major markets," said Mr Troy Craig, Executive Vice President, Jones Lang LaSalle Hotels.  He added, "Investor expectations are lowest for regional properties at close to 10%."

As would be expected, yield expectations for freehold going concerns are slightly higher at 11.6% – ranging from 14.5% in regional NSW and regional QLD to 10.4% in metropolitan Sydney.  With industry consolidation bringing about changes in ownership structures, leasehold pub interests are now viewed more favourably by investors however initial yields have also compressed in line with the industry trend to average 17.2% across Australia. 

Going concern yields have tightened considerably from the 14-20% range which they traded at ten years ago.

"Increasingly, the search for yield and portfolio diversification is leading more traditional property investors to consider alternative property assets," said Mr Craig.  Alternative property assets such as pubs have become highly sought, as yields have compressed to a greater extent in more traditional assets classes like retail and industrial.  As a result, investor demand has increased with many new entrants into the pub investment arena including private equity groups and property trusts. 

Lenders are also responding to the increased institutionalisation of the sector, with some lenders prepared to lend at loan to value (LVR) ratio's of 75% compared to the 50% historic norm.  This is all fuelling additional demand.

Trading Performance Expectations

"Following the introduction or extension of smoking restrictions, investors remain cautious although generally positive about their expectations for short term trading performance," said Ms Wales.

Investors expect short term trading to decline in regional Victoria and to a lesser extent Melbourne and regional NSW as new smoking legislation comes into effect in July 2007.  For all other markets, investors expect short term trading to remain positive, with the strongest sentiment for coastal Queensland (62.5%) and regional and metropolitan Tasmania (50% and 46.2% respectively).  "Smoking restrictions in these two States was introduced about a year ago and the survey results anticipate that the short-term impact has now been absorbed," said Ms Wales.

Investors are much more upbeat about medium term trading, with performance expected to improve in all markets.   

The market expected to show the most improvement over the short to medium term is Melbourne.  "Arguably, Melbourne has the most sophisticated and diversified ‘pub culture' of any Australian city, however the extension of smoking legislation to all indoor areas in July 2007 will coincide with winter trading and it appears that investors are anticipating that initially this may result in some consumers staying away rather than standing outside," said Ms Wales. 

Competition for Assets to Remain Hot as Investors Opt to Buy

The heightened competition for assets in the sector looks set to continue unabated with 50% of all survey respondents favouring a buy strategy.  However, with only 19% favouring to sell and a further 30% looking to hold, investors can expect there to be at least four buyers competing for every asset that comes to market.

The survey results show the most hotly contested markets are likely to be coastal NSW and coastal Queensland with 62.1% and 60.0% of respondents looking to buy in these markets, followed closely by Melbourne and South East Queensland at 55.6% and 55.0% respectively.

Survey results indicate that over the next two years the hardest market to acquire a pub in will be coastal NSW with no investors indicating that they are willing to sell in the short term. 

No single respondent indicated the desire to build, reflective of the high land and construction costs, licence restrictions and requirement for gaming approvals, all of which make new construction unfeasible, undesirable or simply impossible.

Ms Wales said, "When asked which market offered the best opportunity for capital growth, South East and Coastal Queensland topped the scale."  In Queensland, the strong local economy and expanding residential corridors are having a positive impact on trading performance as populations and local wealth swell, creating some of the country's most sought after investment hot spots.