Business fundamentals remain strong across Australia and for those savvy pub owners who implemented systems to counter any potential downturns it's business as usual.

However Jones Lang LaSalle Hotels is now seeing some price adjustment. "Yield compression could not continue forever - it was not sustainable," said Mr Tony Bargwanna, Senior Vice President, Jones Lang LaSalle Hotels.

As has been the case in all asset classes, hotel transaction volumes have softened during the first quarter of 2008, albeit to varying degrees throughout Australia. "We're still witnessing continued interest for quality assets in prime locations," said Mr John Musca, Senior Vice President, Jones Lang LaSalle Hotels.

Those adept at selecting quality hotel investments and managing these assets accordingly will outperform.

Despite some recent negative press regarding the performance of the pub market and some of Australia's largest pub operators, as a whole Jones Lang LaSalle Hotels is continuing to see strong gaming, retail liquor and on premise sales.

NSW has achieved more than $150 million worth of pub sales during the first three months of 2008, making it the most active pub investment market in Australia.  "Almost all of the major transactions were negotiated through Jones Lang LaSalle Hotels and a result of existing publicans seeking to broaden their portfolio," said Mr Musca.

With the increasing cost of capital, heavily geared operators with B grade assets could struggle to meet their debt obligations. "This may force such owners to divest portions of their portfolio to lower their gearing levels. In turn, this may result in more value coming back into the market when compared with the prices that have been paid for assets over the last five years," said Mr Musca.

Whilst trading growth is expected to remain steady and underpin asset values, lenders and purchasers will be increasingly cautious and analytical.

This will create a multi-tier pub market where A grade pubs will continue to be in high demand and tightly held with strong yields, while B and C grade assets will be less sought after with a softening in yield. Of all assets, gaming pubs will continue to attract the strongest demand.

"We caution those hotel investors who adopt a ‘wait and see' approach as they may miss some excellent buying opportunities," said Mr Musca.  Similarly, if the misalignment between buyers' and sellers' price expectations does not improve, pub sales will remain constrained.

Publicans in Queensland generally continue to benefit from positive trading conditions.  "From all accounts, on and off premise sales remain strong and according to the latest Queensland Office of Gaming Regulation data, the total state net metered win in Queensland hotels and clubs has experienced eight consecutive months of positive growth," said Mr Bargwanna.

For the first three months of 2008, the Queensland pub market recorded several sales to a combined value of approximately $80 million.  Whilst the talk of softening yields seems to be a hot topic for most industry analysts, these sales were transacted on yields comparable to the 2007 average. This was despite an increase in the level of stock available on the market during 2008. 

In Victoria, a considerable number of hotels are likely to be formally offered for sale during the remainder of 2008.  "Owners will look to capitalise on significant capital growth achieved over the last five years," said Mr Matthew George, Manager, Jones Lang LaSalle Hotels. He added, "Furthermore, investors will look to consolidate their holdings and there are several cashed up buyers looking to re-enter the pub market."

Notwithstanding, some purchasers throughout Victoria are beginning to adjust prices and yield expectations particularly on secondary assets as a result of the increased cost of funds.  "While the current credit market woes may result in deals taking longer to complete and be more difficult to finance, transactions will occur as long as the underlying trading fundamentals remain strong," said Mr George.

Victoria's pub investment market continued to strengthen in 2007. With more than $230 million of pubs transacted during the year and heady competition for assets, investment yields moved to historic lows.  "To date in 2008, investor sentiment and recent transactions have indicated that there is still strong demand for quality pub assets," said Mr George.