'Still undervalued': Why the regional pub boom might just be getting started

Paddy Coughlan behind the bar at Five Islands Hotel, the pub he bought for $20 million as CEO of an investment group earlier this year. Picture: Robert Peet
Paddy Coughlan behind the bar at Five Islands Hotel, the pub he bought for $20 million as CEO of an investment group earlier this year. Picture: Robert Peet

From inland areas like Armidale and Dubbo to tourism hotspots on the coastline, regional pubs have been changing hands at an "unprecedented" rate during the pandemic, with some assets undergoing dramatic transformations to match the expectations of gentrifying communities.

According to industry sources, there have been at least 66 pub sales in regional NSW alone this year, with sale prices ranging from as little $1.8 million to around $40 million for the Lennox Hotel.

There have also been plenty of sales in regional Victoria, including the $38 million sale of the Lorne Hotel, on the Surf Coast, to Sydney-based pub tsar Justin Hemmes earlier this year.

HTL Property director Andrew Jolliffe, who has handled many of those sales, said that the prices and number of sales was "unprecedented" in his experience.

Part of the reason for the boom was the local pub's ability to weather all economic conditions, even in times of uncertainty.

"Pubs are aspirational, familiar and tangible to almost all Australians. Time and time again the resilience of hotel trade in Australia is proven through all economic climates," Mr Jolliffe said.

Armidale's Royal Hotel sold for more than $5 million in July. Picture: Supplied

Armidale's Royal Hotel sold for more than $5 million in July. Picture: Supplied

But other factors had made now an even more attractive time for larger groups to buy in the regions

On the economics side, low interest rates and lower returns on city pubs meant the regions made good financial sense for many operators, while the tree and sea change trend during COVID-19 meant prospects there were strong.

Buyers have included private family groups like the O'Hara family and Newcastle-based Hunt Hospitality.

Large groups were behind 90 per cent of the sales, with traditional 'one hotel' family ownership "very rare these days".

Most of these new owners would be looking to "improve the business rapidly", he said, with changes including cosmetic renovations and improved customer experience.

For all the recent activity, some operators still think there's plenty of future upside in the market.

Publican Paddy Coughlan recently launched the $500 million Ludlow Pub Opportunity Fund, to buy more pubs in both regional and metro markets.

"There are a huge amount of opportunities ... we're talking about a sector or an asset class that is part of the fabric of our culture.

"I still think they [pubs] are undervalued. When you're looking at commercial property selling on 3 per cent yields and you're looking at pubs selling on 8 to 10 per yields, they are undervalued."

The fund's first buy was the $20.7 million purchase of the Five Islands Hotel, located in the Wollongong suburb of Cringila and once known for its strippers.

The pub has subsequently undergone a "family friendly" transformation, with a focus on dining.

"I'm always looking for pubs in areas in the midst of change, demographic change is a big one I like those type of areas you know you're getting you want to be getting in at the start of the early stage of the cycle and be involved in that change in whatever areas. Cringila was a perfect example of that," Mr Coughlan said.

Mr Coughlan said the Wollongong market offers an ideal mix of natural beauty, strong employment and a growing population.

"[The purchase] was a bit of a read of Wollongong and in particular the suburb that it was in, Cringila. There's a whole thing happening in that Cringila, Port Kembla area ... there's definitely a shift, property prices are on the rise in these areas and that were, in the past, thought of as less than salubrious."

The tiki bar at Narooma's Quarterdeck, now owned by Justin Hemmes' Merivale. Picture: Supplied

The tiki bar at Narooma's Quarterdeck, now owned by Justin Hemmes' Merivale. Picture: Supplied

The newfound investor interest in the regional hospitality market, including pubs but also restaurants, motels and bars, hasn't been met with uniform approval.

A headline in a Sydney-based publication implying that restaurant tsar Justin Hemmes planned to make Narooma the "next Noosa" caused ripples in that community, and neatly encapsulated the concerns of some that these regional assets, and the towns they are located in, may suffer a fundamental change of character under the stewardship of new owners.

Mr Hemmes, whose Merivale group has purchased the Whale Inn (a motor inn and restaurant) and the Quarterdeck bar in the South Coast town, told Narooma News journalist Claudia Ferguson that he was passionate about keeping Narooma "as it is".

Back in Wollongong, Mr Coughlan said that the changes he's made at the Cringila were a reflection of the fundamental demographic changes already taking place in the suburb, as well as surrounding areas like Port Kembla.

"I think a lot of it's just talk. We're getting great reactions from the local community and the broader Wollongong community. In terms of the small number of people who still want that [previous] type of pub, they're still coming to the pub," he said.

This story 'Still undervalued': Why the regional pub boom might just be getting started first appeared on Illawarra Mercury.