While Victorian gaming venues were closed to patrons for much of 2020, this didn’t stop transactions occurring, involving both leasehold business interests and freehold investment sales.
 
The Victorian gaming market differs from that of other Australian states, with venues tightly held and, in the case of the Melbourne metropolitan market, controlled by a group of six to eight corporate and family owners.
 
This helped drive strong, ongoing interest in available freehold and leasehold opportunities, even during the turbulence of 2020.
 
The trend of separating the freehold investment component of a hotel operation from the leasehold business interest has been prevalent in Australia for decades.
 
This separation was originally undertaken to create two premiums and therefore enhance a venue’s overall sale value. It has also made gaming businesses more affordable for operators and resulted in higher returns, while allowing for freehold hotel interests to be sold to private investors.
 
This specialised industry has appealed to savvy investors, who have focused on the long term growth prospects and rental income potential in a market where the total number of gaming machines is capped.
 
Over time, the leasing environment has also become increasingly appealing.
 
While leasehold terms were originally in the order of 20-25 years inclusive of options, this later  stretched out to as long as 40 years (including option terms) providing a more valuable business to on-sell, allowing for deals to occur with, say, 20-30 years remaining on a lease term.
 
More recently, total lease terms have increased to 60 years in some cases (including options), fuelled in part by the long terms offered in the freehold sale between ALH and pub fund ALE.
 
ALE owns a total of 86 Australian hotels that are all leased to ALH/Woolworths on the same lease structure. This corporatisation of the gaming industry has seen other major listed funds, notably Charter Hall and HPI, also invest in the sector.
 
For instance, Charter Hall recently acquired the Parap Tavern in the Northern Territory, while HPI recently acquired two hotel investments in Queensland and one in Victoria for a total of $63.3m.
 
These funds investing in the gaming sector are attracted by the long lease terms and options which provide a “bond like” income. Private investors in the sector have previously focussed on 30-40 year terms as they see some form of reversionary value in either getting the business back at the end of the term or a future development option. Alternatively, the benefits associated with negotiating a lease extension and rent increase can be financially rewarding to a freehold owner.
 
The yields attached to freehold investments with long leases and reversion many decades away are being viewed somewhat differently by investors. The calibre of the Lessee, such as a listed operator like ALH, will attract sharper yields than that of a single private lessee profile. Based on recent transactions we are seeing a yield spread from 5%-6% with the same rental structure but differing strength of guarantees.
 
For instance, ALH is very favourably viewed given the financial strength inherent in operating hotels and Dan Murphys Retail Liquor Stores.