Mad for motels: SMSF investors are checking in

Mandi Morison, a conveyancer by occupation, purchased the Ocean Shores Motel in the eponymous coastal town in the NSW Northern Rivers with a group of partners using their self-managed super funds in August last year.

“Self-managed super funds can’t operate a business, so the leasehold to the property is owned by our super funds, which we have a separate entity with, and then we lease it off our super funds,” Morison told The Australian Financial Review.

“We have, I guess, two sources of income. We have the motel income, and then we have the lease to ourselves. We kind of rent it from ourselves.”

She also owns another motel in the Northern Rivers that she initially purchased three years ago, with plans to later redevelop it. But after interest rates and construction costs rose, Morison said she was forced into learning how to run a motel.

“[I] fell in love it and that’s what led me to purchase the leasehold of the Ocean Shores Hotel,” she said.

Investors, particularly millennials, are cottoning on to the motel industry’s rapid growth in the past few years.

ResortBrokers defines a motel as a walk-up with one or two floors. It is typically focused on short-term accommodation in a low-rise building, has generally less than 50 guest rooms, direct access to an adjacent parking area, and limited amenities.

Nationally, there are about 3586 motels and 86,637 motel rooms, predominantly located in regional areas. Coastal markets represent about 35 per cent of all motels.

They are run under three different models: freehold going concerns, leasehold businesses and freehold passive investments.

In a freehold going concern motel, one party is both the owner and operator. By contrast, a freehold passive investment means the land and building are owned as a passive investment by a commercial property investor – the landlord – who isn’t involved in the business.

A leasehold business accounts for the vast majority of motel operations nationwide. In that case, an operator buys a lease, typically over a 30-year term, and conducts the day-to-day management of the business.

While the agency has not previously estimated the motel industry’s overall value, ResortBrokers’ Josh Mangleson said the $15 billion figure was based on median key rates, an industry term referring to the median price per room when a motel is sold.

“[In] those markets over the last year, your going concern market is up 22.6 per cent, the passive market up 14.3 per cent and the leasehold market up 22 per cent,” Mangleson told the Financial Review. “So you’re talking [about a] 15 to 20 per cent increase year-on-year.”

Median key rates applied to motel sales across freehold going concerns, passive investments and leaseholds have risen by about 59 per cent, 46 per cent and 81 per cent respectively in the past five years, ResortBrokers research showed.

Trudy Crooks, managing director at ResortBrokers, said driving these increases was the amount of capital looking for a home across commercial real estate, and the underlying drivers of accommodation were stronger than ever.

“There’s not enough rooms across the country. We’re travelling more around the country,” Crooks said. “The reason that [motels] have been selling for more is because they’ve been making more, and that’s because people have been using them more than they ever have.”

While NSW has nearly 70 per cent more motels than Queensland, Crooks said she had never seen Queensland be “so hot” for motel transactions.

“Probably [the state with] the biggest growth, that’s definitely been Queensland. But I don’t think it’s capped out. It still shows value,” she said.

“NSW has forever been the most popular place, I think again because Victorians will buy in NSW and sell to people from Queensland.”

Looking ahead, she said motels, from a demand point of view, would continue to trade strongly, yields would compress, and key rates would be driven up this year.

“In the last couple of months and even since the data we’ve published has come out, we’ve seen deals that literally have had hundreds of inquiries in a matter of days,” Mangleson echoed. “There’s been a real acceleration in demand, particularly over the last two months.”

Purchasers weren’t just buying motels for cash flow, but were considering the capital gains on the investment as well, especially amid a housing crisis, he added.