Strong pub sales results hint that sector may be past the bottom

The sales of three Melbourne pubs for $16 million have raised hopes that the struggling hotels sector may finally be emerging from the gloom.

The pubs, which were sold at an auction held at Melbourne’s Crown Casino yesterday, were the subject of “feverish bidding” according to agent CBRE.

The vendor, ALE Property Group, sold The Elsternwick Hotel in Elwood for $6.225 million on a yield of 5.05%; the Rose Shamrock & Thistle in Reservoir for $5.02 million on a yield of 5.48%; and the Rifle Club Hotel in Williamstown for $4.81 million on a yield of 5.81%.

All of the hotels are tenanted to Australian Leisure & Hospitality Group which is jointly owned by grocery giant Woolworths (which has a 75% stake) and Melbourne publican Bruce Mathieson.

Joel Fisher, director of CBRE’s hotels division, said the quality tenant ensured that the properties were hotly contested.

“Quality is always important. In these uncertain times, people do want security. There have been some situations where tenants in other properties haven’t been able to pay, but with Woolworths in there you’re London to a brick to get your rent for the next 25 years.”

Fisher says CBRE has now sold $40 million worth of pubs in the last 10 days, which is a good sign that the market for good quality pub assets remains strong, despite the pub sector being rocked by a series of receiverships in the last few months.

Just two days ago, Sydney hotel group Landmark Leisure was placed into receivership with debts of $90 million.

“I do think we are past the bottom and through the worst of it. There will be more receiverships but there is a lot of money starting to come back into the sector,” Fisher says.

“Having sold $40 million in 10 days, I think this sitting on the sidelines is almost over.”

Fisher says pubs remain a reasonably defensive asset and hotel revenues have actually held up pretty well in the downturn.

The pub operators that have run into trouble are those with extremely high debt levels, and those, particularly in Sydney, that have been hit by changes to the operating environment, such as smoking bans and the 2am lockout that has been introduced in the city’s CBD.

Fisher describes the impact of the 2am lockout as “enormous”.

“I know situations were certain assts have had their net profit halved and that’s seen their valuations fall by 50-60%. That’s $20 million in some cases – gone almost overnight.

“It’s having an unfortunate spin-off of really hurting these businesses badly.”