Hotel sector experts have played down fears the banks could place up to 300 hotels in New South Wales into receivership, leading to a mass fire sale that could destroy asset values.
With the pub sector set to enter its third straight year of turmoil, rumours are sweeping the sector that the banks may lose patience with up to 300 pubs that are operating outside their banking covenants and put them up for sale.
Australian Hotels Association secretary Colin Waller told the Daily Telegraph there are fears that up to 20% of the hotels could be placed on the sale block this year.
“I think the banks are only starting to realise the folly of their own lending practices. They were lending to anyone and up to 90% per cent of the value to people with no experience. The value of those hotels is now 40% down.”
But while hotel brokers contacted by SmartCompany today acknowledged that a large number of pubs remain in dire financial trouble, lenders also know that a mass fell-off would not help them recover their debts.
“The banks aren’t stupid,” hotel broker Nick Tinning from the firm Chris Tinning and Company says.
“If they create the fire sale, it will destroy pub valuations.”
Tinning says fears of a tidal wave of receiverships actually started 12 months ago, when banks started to demand independent valuations of pubs to gauge how pub owners were placed to meet their debts.
But while the valuations showed many pub owners were in breach of their banking covenants, the banks have been cautious about sparking fire sales.
“There is little doubt that there are quite a number of operators in the industry that are outside their banking covenants. But evidence suggests that in the last 12 months the banks have tried to manage those clients.”
Tinning says banks have told troubled pub owners to sell their pubs off themselves, refinance their loan, or seek fresh capital for another investor – basically, whatever they could do to get back inside their loan covenants.
Tinning expects that trend to continue, although part of him acknowledges that it would be good to “get the bloody thing over and done with so we can be certain that we’ve hit the bottom, and the buyers can come back in”.
Tinning says there are a number of experienced hotel operators – many of whom sold out when pub values soared in 2006 and 2007 – who are waiting to re-enter the market when bargains appear.
“These are professional hoteliers, and they only want to buy in at the prices they believe the hotels are worth.”
Hotel brokers says the pub owners in trouble are the ones who bought in just prior to the GFC, when banks increased the amount they were willing to lend from 60% of the purchase price of a pub to 80% and above.
But the GFC changed everything. The banks have actively tried to reduce their exposure to the hotels sector and a swag of hotel companies around Australia have collapsed.
The situation was exacerbated in NSW by the state of the economy and measures to reduce gaming machine numbers. Experts say this has reduced the value of a “block” of gaming machines from $500,000 to $222,000. There are three machines in a block, although when they are sold only two can be transferred to the new owner – the other machine is taken out of the system under the NSW Government’s move to reduce gaming machine numbers.
Tinning says that if a mass sell-off of pubs was to occur, investors like John Singleton would be well placed to capitalise. Singleton and investor Mark Carnegie bought four pubs in late 2010 through an $80 million pub fund they have created to hunt for distressed assets.
Tinning says a fire sale would allow Singleton to build a network of pubs quickly and cheaply.
“I think that’s part of the reason Singleton is in the market so early. He wants to test his management team and see how many pubs they can handle.”
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
