The Rising Tide of Institutional Demand for Motels in Australia

In recent years, Australia’s motel industry has undergone a remarkable shift, moving from a landscape dominated by small-scale, family-run businesses to an attractive target for institutional investors, private equity firms, and large-scale developers. This growing institutional demand reflects motels’ repositioning as resilient, high-yield assets in a dynamic tourism and travel market. Below, we explore the drivers behind this trend, highlight specific examples of major players entering the motel sector, and consider the future of this evolving market.

A Resilient Recovery Post-Pandemic

The motel industry, like much of Australia’s hospitality sector, faced severe challenges during the COVID-19 pandemic, with occupancy rates plummeting in 2019-20 and 2020-21 due to border closures and lockdowns. However, as restrictions eased in 2022, motels rebounded swiftly, driven by pent-up domestic travel demand and a gradual return of international visitors. Their strategic positioning in regional and rural areas made them a go-to choice for domestic leisure travelers, ensuring steady cash flows even during economic uncertainty.

This resilience has drawn the attention of institutional investors seeking assets that can withstand volatility. Unlike luxury hotels, which depend heavily on international and corporate travelers, motels cater to a broader, more stable domestic market, making them less vulnerable to global disruptions.

The Appeal of Motels: Affordability and Accessibility

Motels occupy a unique niche in Australia’s accommodation market, offering affordable, no-frills lodging in regional and rural areas. New South Wales and Queensland, with their high tourist traffic, host a significant share of motel businesses, benefiting from proximity to popular destinations. For institutional investors, motels present several compelling advantages:

1. High Yield Potential: Motels, particularly midscale and economy properties, deliver attractive returns due to low operational costs and consistent demand. With domestic tourism surpassing pre-pandemic levels, motels are well-positioned for growth.

2. Geographic Market Power: In regional areas, motels face less competition from short-term rentals like Airbnb, allowing them to dominate local markets and maintain pricing power.

3. Value-Add Opportunities: Many motels, traditionally run by small operators, offer opportunities for modernization, rebranding, or conversion into alternative uses, such as serviced apartments. Investors with asset management expertise see these properties as prime for repositioning.

4. Inflation Hedge: As inflation has increased operational costs, motel operators have adjusted room rates to offset expenses, making them an effective hedge against economic uncertainty.

   
   

Institutional Players Entering the Market

The increasing commercialization of Australia’s accommodation sector has opened the door for institutional capital to flow into the motel market. Historically, motels were overlooked by large investors in favor of urban hotels, but recent years have seen a surge in activity from private equity firms, real estate investment trusts (REITs), and other institutional players. Notable examples include:

• Salter Brothers: This Melbourne-based investment firm has been actively acquiring motel and accommodation assets across Australia. In 2022, Salter Brothers expanded its hospitality portfolio by purchasing a portfolio of regional motels in Queensland, capitalizing on the state’s booming tourism market. Their strategy focuses on upgrading dated properties to enhance guest experiences and drive higher returns.

• Elanor Investors Group: Elanor has emerged as a key player in the accommodation sector, with a focus on motels and midscale hotels. In 2023, the firm acquired a portfolio of motel properties in New South Wales and Victoria, aiming to reposition them as premium regional accommodation options. Elanor’s approach involves leveraging operational efficiencies and branding to boost asset value.

• MA Financial Group: MA Financial has targeted accommodation hotels, including motels, as part of its real estate investment strategy. In 2023, the firm highlighted opportunities in the motel sector, noting their outsized yields and growth potential. MA Financial has been involved in acquiring midscale motel assets in high-demand regional markets, such as those near major tourist corridors.

• Blackstone and KKR: Global private equity giants Blackstone and KKR have also entered Australia’s accommodation market, with a focus on hotels and motels. In 2022, Blackstone acquired a portfolio of regional accommodation assets, including motels, as part of its broader hospitality investment strategy. Similarly, KKR has pursued motel acquisitions in Australia, targeting properties with strong cash flow potential in the post-COVID recovery.

These players are consolidating smaller motel businesses into larger portfolios, a “roll-up” strategy that mirrors trends in adjacent sectors like caravan parks. By acquiring multiple properties, firms achieve economies of scale, streamline operations, and enhance asset value through strategic upgrades.

Macro Drivers Fueling Demand

Several macroeconomic and demographic factors are driving institutional interest in motels:

• Tourism Growth: Australia’s tourism industry is thriving, with international arrivals projected to reach pre-pandemic levels by late 2024. Domestic tourism has already exceeded 2019 levels, with overnight trips up 5% and spending surging 21% year-on-year. Motels, as affordable options, are capturing this demand.

• Constrained Supply: High construction costs, labor shortages, and elevated borrowing rates have limited new accommodation supply. This enhances the value of existing motel assets, as demand outpaces supply.

• Population Growth: Australia’s population grew by over 466,000 in 2023-24, boosting domestic travel and discretionary spending. This supports motel demand, particularly in regional areas.

• Shifting Consumer Preferences: Travelers increasingly seek value-driven, authentic experiences. Motels, with their regional charm and affordability, align well with this trend, especially for families and road-trippers.

Challenges and Opportunities

Despite the positive outlook, challenges persist. Inflation has strained household budgets, leading some consumers to cut back on travel. Motels also face competition from serviced apartments, which offer more space and flexibility. To remain competitive, operators must invest in modern amenities like high-speed Wi-Fi, eco-friendly practices, and enhanced guest experiences.

For institutional investors, these challenges are opportunities. Acquiring underperforming motels allows firms to implement dynamic pricing, upgrade facilities, and align properties with consumer expectations. Technology, such as mobile check-ins and automated systems, can further improve efficiency and guest satisfaction.

The Road Ahead

Australia’s motel industry is at a turning point. With institutional players like Salter Brothers, Elanor Investors, MA Financial, Blackstone, and KKR entering the market, motels are evolving from small-scale operations to strategic assets within diversified portfolios. Over the next five years, the industry is expected to grow, driven by a robust tourism sector, limited new supply, and increasing investor confidence.

For investors, success lies in identifying well-located motels with strong fundamentals and untapped potential. For operators, adapting to consumer preferences and leveraging technology will be key to staying competitive. As Australia’s tourism industry continues to flourish, motels are set to play a pivotal role, offering both value and opportunity in a dynamic market.

Sources: IBISWorld, MA Financial Group, Colliers, STR, ResortBrokers, Deloitte.