motels of the future by GedCorcoran

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									motels of the future?
MANAGEMENT RIGHTS ..........THE MOTELS OF THE FUTURE? There’s been a fair amount written supporting this view and a fair amount of insider opinion leaning in this direction; you be the judge! Historical: Management Rights as an Industry commenced over 30 years ago in Queensland where it has probably already cemented itself as the accommodation industry model of the future. In NSW things are just warming up, we have a long way to go! NSW has lagged behind Queensland at an alarming lack of pace! There is probably only a hundred or so Management Rights business in the Premier State as opposed to 3-4000 successful businesses operating in Queensland. Why? A lot of us associated within the industry are still scratching our heads. I don’t think there is any one clear answer but there are some observations that we should consider: • The industry originated in Queensland as the accommodation module offering, not just a Caretaking role, but servicing primarily the Holiday Letting needs of investor/absentee owners. This was, and still is perhaps, Management Rights’ raison d’être. NSW has a number of similar operations in the various sea-side towns along the coastline (Byron, Coffs, Port Macquarie, Port Stephens, Merimbula) but the larger properties/businesses are to be found in Sydney which have become principally residential in nature. This, therefore, is NOT the successful Queensland model! Queensland has always had sympathetic State legislation supporting the industry and helping it to grow. This legislation has been very supportive of Tourism and Holiday Letting. NSW ran into immediate confusion over this “usage” issue when a great number of investor oriented buildings were constructed to take advantage of the perceived 2000 Olympics Tourism spike. These buildings ended up missing the investor target market and became predominantly residential owner-occupied structures. Once again a far cry from the successful Queensland model! The developers, who have proven to be more sympathetic to the demand for Management Rights are located, mainly in Queensland. Queensland has become the Management Rights Industry’s home base where Developers have learnt the benefits and the added profitability of including them within every new Queensland development. In NSW, by comparison, there appears to be a lack of knowledge and understanding within the Developer community. There is also a definite lack of Developers who are willing or educated enough to even consider the possibility of including Management Rights into their projects. These Developers are basically turning away additional profit to each and every development purely through lack of awareness. The growth of Queensland’s Management Rights’ Industry was unimpeded by State interference and by litigious elements of Queensland society. NSW has had to battle

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Management Rights Pty Ltd ABN 79 003353919 Ph 0421 048408 Fax: (02) 4392 1987

Po Box 4578 Lake Haven NSW 2263

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zoning issues, usage issues, tenancy and mixed use issues and litigation challenges even unto its very existence. The outcome of all this has forged a new Management Rights credo and a unique residential model for NSW. We, in NSW, have had to rewrite the rule book and re-invent Management Rights to suit our buildings and our peculiar social idiosyncrasies. We haven’t finished by a long shot, in fact it is the writer’s belief that the debate has only just started. So for NSW these are exciting times because those of us at the forefront of change and innovation are the ones who will reap the benefits of growth and predominance within the exciting future of this NSW accommodation industry. Management Rights in NSW still offers a ground-floor opportunity to get on board and make things happen – we are the fore-runners, in this Premier State, promoting the Motels and Hotels of the Future! Where to from here? I have written an earlier dissertation concerning the different models of Management rights in NSW. For those interested in this subject I refer them to the library page of my website: www.managementrightsnsw.com.au For our purposes in this article we are primarily interested in the Holiday Accommodation model that relies heavily on its holiday letting income as it’s “raison d’être” and its main source of income. They are few and far between at present in NSW; they are not however in Queensland. We should take heart and learn from this! Queensland is, after all the “Tourism“ State in Australia; tourism precedence set in Queensland soon echoes throughout the rest of this beautiful country. In Queensland Management Rights have already become The Motels of the Future! Perhaps we should understand why.................... Historical The motels of the future will not be built like the motels of the past. The Past belongs to 1948 when the first motel was constructed at Bathurst NSW. Not many of these original motels remain. They are not unique in their obsolescence. I think we all understand that the motel concept originated in America. Motels were created in 1925 in California by Arthur Heineman, whose first motel sprung up in San Luis Obispo (C.A.) to cater for the automobile age of travel that was just starting to open up in the Western States. Motels were predated (only a few years) by the “Auto Camps” that sprang up on the outskirts of towns. These “camps” were kind of like Caravan Park cabins designed to cater to the 1920’s age of the automobile and the first wave of auto-warriors who traversed the USA. These “camps” stuck around throughout the depression years but were finally relegated to history in the 1940’s

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and 1950’s during the golden age of Motel development in the US and the creation of the interstate highway system. In Australia our motels arrived later. Many of our motels today still date back to the 60’s and 70’s. They may have received a number of facelifts and renovations but their origins are firmly rooted in this era. Have you ever thought about this? Have you ever questioned why there are so few new motels being developed? Do you actually know of any new motels? The basic Motel of yesterday is being constantly re-invented, refurbished, and renovated, but it is not being replaced by a wave of new motels! There is good reason for this: Firstly, the basic small motel room is being rejected in favour of a larger more modern and more salubrious apartment style of accommodation. Society’s taste and affordability has changed. We demand more and are willing to pay for it. The corporate traveller of today is not the company rep of yesterday. The humble motel (in many cases) hasn’t kept up. If it wins at all in the accommodation stakes it wins on price alone. This is a sad indictment in any industry – selling on price alone creates no loyalty, limited return and minimal future potential for growth. In fact motels competing in the same marketplace on price alone will drive room rates and revenues downward! Secondly, the basic motel “model” costs far too much to develop in today’s market. Land values, development fees, construction costs now mean that the average motel room’s replacement cost is between $70,000 - $150,000. If we do the math, to break-even new motels will need to charge in the vicinity of $120-140 per room per night! This is fundamentally why there are very few new motels being developed today. To develop a new motel today, there has to be a pent-up demand or a unique niche market that can be serviced. Any new developments have been either in major urban centres or in extreme rural areas where there is obvious “unsatisfied” demand (mining towns), little competition (economically strong rural cities) or strong corporate activity (CBD Areas like Newcastle or Wollongong, NSW). All of these examples have succeeded because it has been possible to achieve the higher Average Room Rates and maintain high occupancy rates. Compare these very few examples against the absolute lack of any comparable new motel developments along the Eastern Coastal strip of NSW. In these “tourism” towns and regions, motels are battling to achieve ARR’s (Average Room Rates) of more than $60-70 a night! Next door to these old, refurbished 1980’s coastal motels is often a near new, swanky 10 storey luxury 4.5 star Hi-rise apartment block which operates as an hotel/motel – successfully charging $140 a night and up! These buildings have become the Motels of the Future! They are predominantly run under some form of Management Rights structure. These buildings have an on-site Resident Manager who usually owns his ground floor Manager’s Apartment with adjoining office and reception, from where he operates the hotel/motel accommodation business.

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The secret to the success of these hi-rise condominiums is in the ownership. These structures have been developed and sold, in the main part, to investors. The Gold Coast is a prime example of this practice. The apartments are sold to investors for their holiday appeal, their capital growth and hedge against inflation, and their return on investment. They are not sold to owner occupiers! They become Motels or Hotels by virtue of these investors putting their investment units back into a “letting pool” and agreeing for them to be rented out by the on-site Resident Manager. Unlike the motel, these Resident Managers only need to own their personal Managers unit and reception area. The rest of their letting stock is owned by the building’s other individual investor owners. So for the same price as a 10 room, 3 star, budget country motel, built say in the 70’s with flat roof and timber cladding one can buy the Management Rights and Managers Unit to an Avoca Beach, 4.5 star luxury, 32 x 3 bedroom family Apartment, Resort Complex. This is an exact market example currently for sale! Both examples return similar net profit (15% ROI); both cost approximately $920,000 to purchase. The motel is entirely freehold. The Management Rights are based on freehold ownership of a managers 2 bedroom apartment and separate office/reception area on title, with current valuation of $470,000 – balance of Management Rights business is $450,000 which is secured by a new 10 year renewable Management Agreement (like a shop lease). The motel owner gets paid no salary to manage or maintain the property. He collects ALL the rent but pays ALL the costs. If the occupancy rate drops he loses all the income but still keeps the running costs. (It costs money to keep a motel unit “vacant”!) The Resident Manager gets a monthly guaranteed salary to look after the building for the other owners. He rents out the other owners’ units BUT those owners pay all the costs like cleaning, servicing, laundry, stocking, and repairs and maintenance. The Resident Unit Manager (RUM) collects a commission on rentals and makes profit from servicing the units. If units stay empty it costs the Manager nothing – he only loses a potential commission. If the reader of this article is astute I think he will quickly realise that the Resident Unit Manager is basically leveraging himself into an accommodation manager’s role in a property far in excess of anything that he could ever hope to personally own! If we need more evidence supporting this viewpoint we can look at groups like Breakfree, Mantra, Oaks, Waldorf and Windward Resorts who have similarly used the leverage principal to enter this lucrative accommodation industry. Quest is perhaps the one and only successful “Motel” operator who are currently winning all accommodation awards for innovative development and management of new motels in major urban areas around Australia.

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The reason is because Quest is basically using the Management Rights leverage principal in their acquisition and expansion program across the country. In short, Quest owns the “Management Rights” to the motels which display their corporate badging. Quest commission the building of each new Motel and then sell, to investors, the individual motel strata- titled units (or rooms) on the stipulated agreement that the purchasers agree to lease back their investment unit to Quest on a 25 year lease-back arrangement. The entire motel is therefore funded by investors who (like the Management Rights scenario) agree to place them back into a letting pool operated by Quest. The owners also agree and contract with Quest that they will meet all unit refurbishment requirements, on an ongoing basis, to keep their unit up to the required star rating standard. Are there any doubts now that Management Rights are:The Motels of the Future?

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