Get a room: Why investors need to check in to NZ’s motel sector

Get a room: Why investors need to check in to NZ’s motel sector

Total Property - Issue 2 2018

New Zealand's accommodation sector is in an enviable position, with the number of tourists surpassing the number of beds available. The surge in international visitor arrivals is driving unprecedented demand for visitor accommodation across the country, but domestic tourism is playing its part, with domestic spending on recreation, travel, and eating out on the increase.

The increase in hotel occupancy and room rates in the major cities has boosted the fortunes of the motel sector, which has absorbed the extra demand. Domestic tourists who feel priced out of high-demand destinations such as Auckland and Queenstown are increasingly seeking out holiday experiences in regional areas, which are well serviced by the motel sector.

Nick Thompson, Bayleys Director Hotel and Tourism, says: “For commercial property investors looking to reap the benefits of the tourism boom, motels remain a cost-effective point of entry.

The amount of capital needed to build or buy a 30-room, single-level motel is significantly less than the multi-million-dollar injection required to develop or acquire a hotel. And with demand for accommodation unlikely to drop-off, motel businesses offer owners a long-term, secure income stream.

“For long-term investors, there is also the option to land bank or redevelop. Motels often occupy substantial tracts of land in high-profile locations, and those in metropolitan areas, where demand for space is high, can be turned into higher value property as gentrification occurs.”

While demand for tourist accommodation is outpacing supply, the sector is not without challenges.

“Competition for motel properties in metropolitan areas can be high, and while opportunities in the regions may come at lower price point, they may also require more investment capital to bring them up to the standard expected by an increasingly discerning tourism market,” Mr Thompson says.

“Operators cannot afford to be complacent either. With just a few swipes in a travel app, consumers can compare more motel and private accommodation options than ever before,” he says.

He believes motel operators that find ways to be more relevant to their customers lives will benefit most.

Mr Thompson says: “Breathing new life into the motel experience could include investment in modern design aesthetics, the provision of technology-rich experiences, such as voice-activated rooms and easy-to-use booking platforms, or innovation around food and beverage, for example partnering with experienced restauranteurs.”

Overall, motels make up the lion’s share of commercial accommodation establishments in New Zealand – 56 percent of total businesses.

Auckland remains the largest motel guest night provider in the country (with 1.6 million guest nights a year, according to 2016 figures). Canterbury is not far behind with 1.3 million guest nights. In Waikato, Hawke’s Bay and Taupo, motels are the most popular, with 46 percent, 51.7 percent and 47.8 percent of total guest nights, respectively.

In smaller cities and towns, motels make up a major part of tourist accommodation. Rural areas tend to have an even higher proportion of motels – for example, motels make up 68 per cent of accommodation businesses in Manawatu and 67.5 percent in Taupo.

There are 1,714 motels in operation in New Zealand, and that number has stayed relatively stable over the last five years. The sector employs about 2,488 people and provides 875,471 room nights, with domestic stays accounting for about 62 percent of all motel business, and international stays making up the rest.

Most motels are relatively small in size – comprising around 17–20 units – and are located on or near main driving routes, making them easy to access for travellers and tourists alike.

There are multiple options for those interested in reaping the benefits of the sector, ranging from developing new stock to buying a freehold going concern or buying a leasehold asset, Mr Thompson says.

“Freehold options tend to come onto the market less frequently than businesses, but ownership of the underlying land and buildings offers buyers more flexibility and more opportunities for wealth creation.

“Property owners can always redevelop their sites, with those with assets in strong locations, which tends to be the case for most city motels, able to capitalise on demand for residential or warehousing space,” he says.

“There is plenty of room for further motel development, especially in smaller markets - regional centres and city suburbs - where demand isn’t high enough to sustain a hotel but can comfortably support several 15- to 30-room motels.

“About 60-70 percent of motel properties that do come to the market have leases in place. In most cases the holder of the commercial lease also owns and operates the business but there are instances in which the lease holder engages a third party to run the business.”

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