JLL: The hotel market’s many reasons to stay positive

02 April, 2020 by Vanessa Cavasinni

In partnership with Australian Hotelier’s #StrongerTogether campaign, John Musca, national director of JLL Hotels & Hospitality, explains why a positive mindset is crucial to the pub market in these unprecedented times.

By John Musca

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Those in the industry will now have borne the initial brunt, and dealt with, the physical, logistical and emotional challenges associated with the abrupt hotel and hospitality business closures. Financiers, suppliers, landlord and stakeholder negotiations have bred a raft of abatement and relief outcomes upon which to plan a way through the mayhem.

And in the temporary stillness and the briefest of pauses many of you are now wondering “What does this all mean for my hotel’s value and divestment and investment outlooks foreseeably”?

Its nigh on impossible to find a dispassionate opinion on the economic outlook in a post-COVID world, polarising between the doomsayers’ commercial Armageddon and the great Australian mantra, “She’ll be right mate’.

To all hoteliers, we have one resounding message – don’t race to an alarmist position as there remain many reasons to remain positive.  The Morrison government charged with the monumental task of proving enough stimulus and support to keep business afloat, employment redeemable and consumers with liquidity, have already announced significant measures to try and soften the trade adjustment upon the industry reopening. Depending upon any restrictions or staging, upon re-opening many expect an immediate trade bounce but just how strong and how fast it becomes sustainable is the question. One school of thought suggests it will take 12 months post full re-opening to reclaim the trade ground previously enjoyed, dependent upon your business mix. Others are more or less bullish.

Hotel values are traditionally driven by two top-line metrics – yield and earnings. Yield softening has always been a derivative of asset supply, available capital and debt (not particularly interest rates) and earnings which are a function of trading environments.

Ultimately hotels as businesses have proven to be historically resilient. They continue to enjoy some of the highest barriers to entry of any business class in the country and significant industry consolidation over the past decade has seen the big get bigger and balance sheets emerge stronger.  Those perpetuating ‘Chicken Little Syndrome’, preaching that the sky will fall in, correctly identify that the industry is facing obstacles of an unprecedented magnitude. However we’d prefer to believe that conditions will not manifest in an avalanche of asset supply and as such, that yields may not adjust significantly.

As hotel owners you have enviable businesses, sought-after by many and increasingly varied capital sources in a generationally low interest rate environment. Other than some normalisation of the rapid rate of yield compression that 2019 brought, and which happened to be the tightest yield compression since the last boom of 2006, normalisation may be all that we see. Those that entered COVID with excessive or stretched rental commitments or capital light will find the pending uncertainty and slower roads back to trade health challenging. Financiers have shown outstanding support of industry, and industry will repay that faith with an experienced rebounding to prosperity.

With the privilege of being one of the oldest and the largest specialist hotel brokerage and hospitality advisory firms in the world, at JLL we’ve seen many tumultuous markets globally and assisted clients through environments of commercial paralysis, locally many times.  Whether it be the GFC, the Wilkie legislative era or the introduction of smoking bans, we’ve continued to provide clients guidance and crafted outcomes – solutions are always available if addressed early and strategically.

Hoteliers, be confident in your assets and take this opportunity to revisit your ownership and operating models, ensuring you hold the assets you aspire to own, that meet your investment objectives. It’s prudent to continually question your investment strategies and if acquiring or selling an asset helps to reset your portfolio, then use this time to plan those next moves.

Let’s all support one of the country’s strongest and most resilient industries in charting its own rapid recovery, unimpeded by negative market narrative and confident in its proven underlying business qualities.

You can view more #StrongerTogether content – all of the information and resources needed to get through this restricted period of trading – here.