The commercial property asset class that’s inflation and recession-proof

Alongside this influx of old and new money, patrons have poured into their favourite local watering holes to eat and drink with friends and family. It’s a tradition that goes back to the pioneering days of early white settlement in Australia, to pubs such as the 195-year-old Wisemans Ferry Inn on the banks of the Hawkesbury. That’s changed hands as well – for $10 million in September – into Arnaout’s pub empire, Iris Capital.

“The recovery has been extraordinary,” says hospitality king Justin Hemmes, whose Sydney-based Merivale group expanded interstate during the pandemic, snapping up Tomasetti House in Melbourne’s Flinders Lane and the Lorne Hotel on Victoria’s Great Ocean Road.

Pandemic purchase: Tomasetti House in Flinders Lane. 

For publicans, the pandemic “was horrifying”, says Hemmes from his plush offices above Merivale’s Ivy hospitality complex on George Street. “You had no job and a business with no income but still expenses to pay. But it brought out the best in people.”

Hemmes is Sydney’s biggest pub baron – he acquired a large site on King Street for about $100 million in May, where he plans another Ivy-style precinct – and puts the recovery in part to something Australians inherently crave. “We want to meet face-to-face, and the best way to do that and to break down barriers is over a meal or a drink.”

Whether that’s uniquely Australian is beside the point; what many of us do crave is a chicken parmigiana and a pint of pale ale, or perhaps a smoked trout salad and a glass of pinot gris. At the pub, your go-to is almost certainly on the menu. There’s no “focus on sharing” – besides the chips, of course. The decor is contemporary, the prices are good. And if it’s a nice evening, you can head to the beer garden or rooftop for a cocktail.

So, with inflation running off the hook, and markets betting that next year will bring a recession, is it any wonder that so many of us are saying: “Shall we just go to the pub?”

Pub grub evolution

While the desire for social connection has undoubtedly played a part in the extraordinary rebound in trading, myriad other factors, many of them sowed well before the pandemic, have encouraged the unprecedented flow of investment dollars. “Pub grub” has evolved into a more sophisticated food and beverage offering.

The emergence of large groups such as Australian Venue Co and Endeavour Group has leveraged scale and technology to lift standards, and many of the “blokey” venues of the past have been redesigned to appeal to a wider demographic including more women. Rooftops and outdoor areas have been added and spruced up to appeal to a younger clientele.

That explains the appeal to patrons. As for investors, pubs are hot property because they can offer multiple revenue streams: food and beverage, gaming, accommodation, liquor sales and events. Plus, they throw off cash, handy when you’re looking for a hedge against inflation or an economic downturn.

“A typical pub will operate on a profit-to-sales ratio of between 20 and 40 per cent, dependent upon the revenue mix,” says Rick Woelms, national director at specialist finance broker HTL Capital.

Andrew Jolliffe, director of HTL Property and a former pub fund manager, says in the post-pandemic era, growth in cash flow has been critical to staying ahead of rising costs, which is a key reason why pubs are in such high demand.

“People are still seeking investment-grade properties, but hospitality and tourism properties can pass on more of the costs to the consumer than is possible in most rent-based assets,” he says. Part of that is their relative affordability: an occasional night out for a beer and a steak, even if it costs a couple of dollars more, is manageable.

Paul Waterson bought his first pub with a couple of business partners in 2014. He now heads Australian Venue Co, which has a 200-plus portfolio. Nicole Reed

“You can get a pint for $12.50 – you’re not buying a Louis Vuitton handbag,” says Paul Waterson, boss of the country’s second-biggest and fastest growing operator, Australian Venue Co. “Pubs have found a really nice middle ground between high-end dining and QSR [quick service restaurants, or fast food].” He adds: “Pubs remain the most accessible and affordable form of entertainment for people who are now craving experiences over material things.”

By far the biggest pub landlord is ASX-listed fund manager Charter Hall, which owns a $3.6 billion portfolio of hotels; all of which are leased to ASX-listed Endeavour Group, which was spun out of Woolworths last year.

Highlighting the institutional investor demand for pubs since the pandemic, Charter Hall partnered with hospitality industry super fund Hostplus last year in the $1.7 billion takeover of ASX-listed landlord ALE Property Group, which owns famous venues such as Sydney’s Crows Nest Hotel and Young & Jackson opposite Flinders Station in the Melbourne CBD.

Charter Hall CEO David Harrison calls pubs “nirvana in real estate”. “We have the best-in-class tenants on triple net leases and our rent reviews are uncapped to CPI, meaning our rents are growing at 7-8 per cent per annum,” he says. In addition, Harrison says, most of its portfolio is located on high street or arterial road locations, where the underlying land is a big proportion of investment value and where there is the potential for higher and better uses.

And while Harrison is a landlord only, he is well aware of how strongly Endeavour has been performing since the ending of lockdowns. “The great irony is that everyone is going to the pub, before they go back into the office.”

Pubs reinvent themselves

At the forefront of the sector’s renaissance, and one of its leading success stories, has been AVC. Starting off on the simple premise that it would be “nice to own a pub”, Waterson, a former Royal Melbourne Hospital nurse, and a couple of business partners bought their first pub, the Wayside Inn in South Melbourne, in 2014. “We quickly saw that it was a very fragmented industry with not many corporate players,” he says.

Now with a portfolio of more than 210 venues and the backing since 2017 of private equity giant KKR (which is looking to sell down its 80 per cent stake) AVC has used large portfolio deals to create a tech-savvy business that this year will turn over more than $1 billion and generate earnings before tax (EBITDA) of $194 million, substantially higher numbers than it did before the pandemic.

In August, AVC reignited a $100 million pre-pandemic deal to buy eight trophy Melbourne hotels from hospitality operator Sand Hill Road, including one of the city’s best-known live entertainment venues, The Espy in St Kilda. In tandem with its biggest landlord – ASX-listed Hotel Property Investments – AVC also snapped up eight pubs in Adelaide.

Waterson says it was clear even during the pandemic that the sector would bounce back strongly: “It was very binary, either you were closed or when you were open, you were full. We have seen a 45 per cent increase in the number of people who have been to our venues five times or more.”

The 160-year-old Imperial Hotel overlooking Victoria’s State Parliament building – one of AVC’s trophy venues – is a good example of just how strongly the sector has rebounded, and how pubs have reinvented themselves.

Tech has helped transform the Imperial Hotel in Melbourne. Luis Enrique Ascui

It’s lunchtime on a Monday and the rooftop bar, added by AVC after it acquired the venue in 2016, is three-quarters full of office workers gathered in groups and enjoying lunch in the sunshine. Waterson, having a porterhouse steak and chips with The Australian Financial Review Magazine, is quick to point out how technology has helped this pub operate more efficiently and with fewer staff (a handy innovation given the staffing challenges being experienced across the sector).

We’ve ordered our food from a QR code-generated menu, which AVC pioneered before the pandemic in partnership with mobile ordering and payments tech company Mr Yum (and in which it holds a 6 per cent stake).

“Look at the bar, there’s one guy waiting to be served, but everyone else has a drink. Five years ago, there would have been a queue five or six deep.” Now with the use of a simple app, junior staff can take drinks and meals to tables while the more experienced staff make cocktails. “It means you can really delineate your workforce.”

He points out a small black box with a screen on the bar counter. It monitors how long it takes for food and drinks to get to diners’ tables after being ordered, meaning AVC can also track the performance of its venues in real time and deal with any problems as they occur.

And of course there are customer reviews posted online via Google, Facebook and TripAdvisor. Waterson reads every one of the more than 200 AVC gets each day and responds personally to many of them.

“I get an immediate alert on my phone whenever we get a one or two-star review. I reckon 40 per cent of the time, we deal with the problem when the patron is still in the venue,” he says. It all shows how pubs, while hovering above fast food outlets in terms of price and quality, have been consolidating to the point where they can borrow more than a few tricks from industrialised hospitality.

Mario Volpe, managing director of the country’s biggest pub operator, ALH – the 350-venue pub business within Endeavour Group – says COVID-19 accelerated its digital transformation and improved its operating model. Its latest quarterly update shows sales have almost doubled in a year.

“Over 50 per cent of our transactions either start or end in digital, whether that’s through our close to 2 million social media followers or through our booking platform,” Volpe says. “We have me&u smart technology table-ordering in more than 340 of our hotels. Guests can order drinks and food with a few clicks on their smartphones, which means they can spend more time connecting with friends and family.”

Of course, the increasing corporatisation of the industry and the use of big data also creates the risk of a more homogenised McDonald’s-style product. That’s especially the case in Sydney, where so many venues seem to be mimicking Merivale’s successful formula.

Arthur Laundy at the “Woolly Bay” pub. Louise Kennerley

“What I don’t want to do is bring the Woollahra experience to the bush,” says Byram Johnston, the former CEO and chairman of funds administrator Mainstream Group, who bought the near 150-year-old Tarana Hotel near Lithgow in central-western NSW in May for about $5 million.

“I feel the Tarana Hotel, with its historic memorabilia and friendly atmosphere, can stand on its own. Just like other iconic hotels such as the Birdsville Pub or the Blue Heeler, the Tarana’s secret is in its authenticity and its long and colourful history.”

Octogenarian Arthur Laundy still enthusiastically greets guests at the family’s many venues, while son Stuart heads up acquisitions. It is Arthur’s daughter, Justine, as Laundy Hotels creative director, who shapes the decor and menus of its revamped establishments.

The latest example is the historic “Woolly Bay” harbourside hotel in Sydney’s Woolloomooloo, which reopened in October after a $14 million renovation that includes a new rooftop bar and Arturo’s, a 100-person casual-dining restaurant on level one named after Arthur.

Its small-plates menu includes kingfish crudo, Vannella burrata, and lobster rolls. For shared mains, there’s a 12-hour braised lamb shoulder with oregano, lemon and garlic; and a whole butterflied market fish laced with dill, capers and butter. Posh? Well, yes, but it’s taking its cue from the neighbours.

Justine Laundy at Arturo’s. Louise Kennerley

“We’re across from Finger Wharf with all its fine-dining restaurants, so we needed to offer something good enough for a discerning customer,” says Justine. “The whole venue is pitched at a long-lunch mentality and a slow, casual dining experience. Not too formal, pretty laid back and comfortable. You need distinct venues – gone are the days when every pub had the same look and feel and the same menu. You need a point of difference.”

It’s all a far cry from the family’s original culinary efforts, which Stuart says were little more than “sticking pies in the warmer. Dad and I had no idea.”

In a similar vein, Rich Lister Chris Morris, the founder of share registry service Computershare, is focusing on delivering a pub offering based around “great food, wine and outstanding service”.

The Woolloomooloo Bay Hotel has had a $14 million revamp. Edwina Pickles

This year, Morris’ Colonial Leisure Group acquired The Vincent Hotel in upmarket Albert Park and O’Connells in South Melbourne from AVC in an asset swap deal that involved CLG selling the leaseholds to nine Perth pubs to AVC.

“Albert Park Hotel stands as a great example of what can be achieved in, and what customers now expect of, a modern pub,” says Morris. “Cantonese food, premium dining, sitting comfortably alongside a classic front-bar experience. We’re extremely proud of what we’ve created there. COVID has accelerated the attraction of a pub environment, many of which are family-friendly with good F&B [food & beverage], large footprints and good accessibility.”

As far as wider trends go, Waterson says cocktails, perceived as being a lower-sugar option and favoured by women, are on the rise. “Cocktail growth is in the high double digits year-on-year. This has come partially at the expense of the wine category, which has only had slight growth.”

But for all the ways in which cocktails and Cantonese food are replacing the pie warmers, and for all the ways that pubs are incorporating technology and scale to strip out costs, there’s another reason why buying a pub is the ultimate investment – a reason that resonates with Hemmes’ take on what we crave. And that’s the pure pleasure of owning your own pub: a place where everybody knows your name, a waterhole for your neighbours and mates.

Back in Darlinghurst, it’s this kind of mentality that’s driving forex trader Adam MacFarlane’s dream for his first pub, the Lord Roberts. He hopes to be at the helm for many years, and doing good things like “finding someone who is having a rotten time and giving them a couple of shifts a week”. “Sure, this will also be a money spinner, but for me, this is a legacy play. Pubs have staying power. I intend to be here in 30 years’ time.”

The December issue of AFR Magazine is out on Friday, November 25 inside The Australian Financial Review. Follow AFR Mag on Twitter and Instagram.



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