Is The Pub Market Overcooked?

In recent times, the Australian pub market has seen a surge in demand, resulting in record-breaking sales for regional and metropolitan pubs. This trend is driven by factors such as increased population in regional areas due to COVID lockdowns and a sustained increase in the value of poker machine entitlements. However, the sustainability of this growth and whether it is overcooked remains a topic of debate.

Regional Sales

The recent sale of the Robin Hood Hotel in Orange, Central West NSW for a staggering $51M, which is a 268% premium on what was paid for the asset in March 2021, has raised questions about the sustainability of the current pub market. The hotel had received some capital upgrades, to the kids' outdoor and indoor dining areas, beer gardens, and car parks. It was purchased by a syndicate that included some local existing market participants and high-net-worth individuals.

While this sale is not an isolated incident, with other regional pubs achieving impressive results, the deal is double the most recent inland pub sale Thomas Blarney Tavern in Wagga Wagga, which sold for almost $27M in 2022. Other recent inland hotel transactions of note include the Canobolas Hotel, Orange which sold for $25M in late 2021, and the Royal Hotel, Orange, which sold for $24M in 2020.

Metropolitan Sales

Some recent metropolitan hotel sales have also continued to break records within this asset class, with The Oaks, Neutral Bay having reportedly traded for 'close to the asking price' of $175M, in early 2023, which is unconfirmed due to confidentiality reasons. This sale is approximately $15M higher than the previous record price paid for a pub in Australia, the Crossroads Hotel in Casula, which sold in 2022.

The overall metropolitan story differs in that the price entry point is substantially higher than the regions, with many hotels offering development potential upside.

Pub yields for freehold - 'walk in walk out' interests - are reflecting all-time lows and have changed hands on returns of 5 - 7% in metropolitan areas and 8 - 12% in regional areas, depending on various factors.

Factors Driving Growth

Cashflow: As is the case in the cities and regions, well-operated and maintained pubs - which regularly provide add-ons to their offerings such as trivia nights, live music, sponsorship, and live sporting screenings; offer cashflow to the investor/operator. It is cash flow that currently sets this asset class aside from its commercial counterparts and is driving demand in many cases.

Population shift: The increased demand for pubs has been driven by a population shift from metropolitan to regional areas during COVID lockdowns, which has increased patronage and profitability for many operators.

Social connection: The 'local hotel' offers patrons the opportunity for social connection and community engagement, two critical well-being factors that emerged post-pandemic lockdowns.

Poker machine entitlements: Another fundamental market driver for many operators has been the sustained increase in the value of poker machine entitlements over the last five years.

By way of example, Country to City entitlements has risen approximately 75% in value from around $160,000 in 2015 to around $650,000 in 2023. These entitlements underpin the value of the asset in many cases and are currently the catalyst for many small regional hotels being sold with pokies, with the entitlements being transferred to other venues, with the pub being returned to the market minus the poker machine entitlements. The venues which benefit from the increased entitlements are also adding to their offerings, through increased quality food and entertainment options.

Despite these positive factors, the overall performance of pubs will undoubtedly be impacted by inflationary pressures. However, well-operated and maintained pubs that offer community-focused family-friendly environments and regularly provide add-ons to their offerings are well-positioned to maintain current pricing within this asset class.

Notwithstanding, there are always anomalies in terms of sales and pricing. The recent sales of the Robin Hood Hotel in Orange and The Oaks in Neutral Bay are examples of this. Whilst from the outset, the value quantum of both sales is nothing short of astronomical, both venues offer strong cashflow through a variety of income streams such as gaming, bar/bottle shop, food, and accommodation. Common to both transactions, is underlying development potential, which has also been a contributing factor in achieving such results.

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