Investors ‘checking into’ motels

5:09 PM Tuesday April 3, 2018 True Commercial

Motels seem a cost-effective entry to the lucrative tourism boom. Photo / Supplied

The accommodation sector has been having “nice headaches” with tourist numbers at times surpassing the number of hotel beds available.

The surge in international visitors is driving unprecedented demand for accommodation across the country, but domestic tourism is playing its part, with spending on recreation, travel, and eating out also on the up.

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 Auckland and Queenstown are seeking more holiday experiences in regional areas well-serviced by the motel sector.

Nick Thompson, Bayleys’ director of 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 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 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,” says Thompson.

But the sector has challenges, he says. 

“Competition for motel properties in metropolitan areas can be high, and while opportunities in the regions may come at lower price point, they may need to be upgraded for an ever more discerning tourist market,” Thompson says.

“Operators cannot afford to be complacent. With just a few swipes in a travel app, consumers can compare motel and private accommodation options.”

He believes motel operators who find ways to be more relevant will benefit most and recommends investment in modern design, technology-rich experiences such as voice-activated rooms and easy-to-use booking platforms; or innovation around food and beverages, like partnering with experienced restaurateurs.

Motels make up 56 per cent of commercial accommodation in New Zealand and Auckland remains the largest motel guest night provider in the country (with 1.6 million 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 make up 46 per cent, 51.7 per cent and 47.8 per cent of total guest nights.

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 per cent in Taupo.

There are 1714 motels in operation in New Zealand, and that number has stayed relatively stable over the past five years.

The sector employs about 2488 people and provides 875,471 room nights. Domestic stays account for about 62 per cent of all motel business, and international stays make up the rest. Most motels are relatively small (around 17-20 units), and are on, or near, main driving routes.

“There are multiple opportunities, ranging from developing new stock to buying a freehold going concern or buying a leasehold asset,” 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.

“Owners can always redevelop 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.

“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 per cent of motel properties coming 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.”

Chains like Bella Vista Management operate in this space. Bella Vista leases motel properties in 27 locations across New Zealand, but the motel businesses are run by separate operators under the Bella Vista brand.

Bella Vista Management CEO Natalie Evans says some view larger commercial developments as less problematic with tenants and the like, but this is the advantage of Bella Vista.

The landlord leases the freehold to Bella Vista, which sub-leases it to the motel business owners. Bella Vista handles the headaches.

“Investments need to be win-win, meaning our landlords reap a return via rental income and our motel business owners reap a return from their business.”