08 Mar 2024
Words Josh Mangleson THE AUSTRALIAN AND NEW ZEALAND PROPERTY JOURNAL

40 YEARS OF CHANGE: THE EBBS AND FLOWS OF CAPITAL IN THE ACCOMMODATION INDUSTRY

For nearly 40 years, Australia’s accommodation industry has been predominantly underpinned by private operators, with mum and dad type businesses serving as the dominant originators of capital.

The exception to this has almost always been Sydney and Melbourne, as the nation’s largest capital cities, where more sophisticated capital has more commonly been found. Over the last 20 to 30 years this has steadily expanded to also include other major capitals across the country, as properties of scale have been developed.

For private operators, the appeal of this industry has always been twofold in offering both the security of a dwelling in the form of a manager’s residence and cashflow from the operating business. The biggest shift in the industry over the last several decades has been its increasing commercialisation, much like several other specialised asset classes such as industrial, childcare and convenience retail, which have undergone similar transformations in recent years.

While the bulk acquisition and roll-up of high yielding individual assets into specialised larger funds for operation or re-sale has been common throughout many other parts of the world for some time, it is an increasingly prolific trend within the accommodation sector in Australia. Never has this practice been as common in this industry as it is now in Australia. Funds such as Salter Brothers, Elanor Investors, Redcape and Mandala have established themselves as major players in this segment by utilising this approach across a range of geographical locations nationally.

This trend is not exclusive to just hotels and motels. In fact, it was perhaps more fully explored even earlier within the caravan park space. In a classic example of mum and dad operators being bought out by more sophisticated capital, many caravan parks around the country have been bought up by groups such as Ingenia and Tasman, with many then converted into Manufactured Home Estates (MHEs).

MHEs represent a huge proportion of the USA’s affordable housing market, as the model offers a solution of both amenity (via the positioning of older caravan parks, which were traditionally on a town’s outskirts, now increasingly accessible, if not ideally located, due to urban sprawl) and affordability to residents (as the model enables residents to pay site fees while owning their own home on the site, in many cases leaving the pension on the table for retirees). For owner-operators, the benefit is threefold: there is both the development and re-sale of privately-owned housing stock, as well as a steady income stream via site rent.

Ingenia’s 2023 annual report positions the group’s value at $2.3 billion across 107 sites. A decade earlier, Ingenia’s real estate assets were valued at $224 million. At that point, going concern interests in caravan parks could often be acquired at yields of 14-16%, while more recently they have transacted around 9%-10% for assets of scale in regional locations. By adopting this model with a blend of high yields over time, and creating a secure income through what is in many ways government-secured site rental fees, many of these assets are now valued at yields of 4-5%, emphasising how commercialisation has given investors both great capital gains and cashflow.

Pre-MHEs, a similar undertaking was seen in the childcare sector. Now, this space is largely non-private, with most acquisitions for commercial operators being greenfield developments. As funds continue to hunt for value in specialised sectors, there is an emerging trend that regional assets traditionally run by private local operators are now being acquired and rolled up at 12-14%, run under a streamlined operation and stabilised for positioning into funds or resale.

Given this market segment is only just beginning to be tapped by an increasingly sophisticated buyer profile, weighted yields of buying groups remain significantly higher than many other already explored alternative property asset classes. This offers both returns to investors as well as creating new value as the sum of the whole becomes greater than the parts purchased.

With a strong long-term positive outlook for operators that sees limited new competition due to high development costs, a constrained construction industry, repositioning of assets and an ever-growing demand-side through returning global tourism and burgeoning population growth, it is clear that regardless of what trends are forecast for the accommodation industry, great opportunity awaits those willing to enter the arena.