Uncertainty continues for pubs and clubs
April 24, 2012
Uncertainty surrounding proposed legislative changes to the gaming industry may impact the revenue streams and property values of Victorian pubs and clubs, according to new research from Colliers International.
A new Colliers International white paper, The State of Gaming in Victoria – What it Means to Pubs and Clubs, found proposed legislative changes to address problem gambling in Australia had put the industry under a cloud of uncertainty.
Jim Macey, Colliers International National Director, Valuation & Advisory Services, and principal author of the white paper, said many hotel and club operators relied heavily on gaming to keep their businesses viable.
"Legislative changes have the potential to heavily impact existing revenue streams of businesses,” Mr Macey said.
“The Australian Hotels Association has estimated that mandatory pre-commitment would reduce revenue by 40 per cent.
“Although this estimate may be on the high side, the drop in revenue has implications to the viability of some businesses, as well as the corresponding rental that operators pay and therefore the value of the freehold property.”
Much of the proposed legislation both on a State and Federal level is related to pre-commitment technology and low intensity machines, in an attempt to reduce the number and losses of problem gamblers.
“The increased media awareness of problem gambling has created significant scrutiny on gaming venues,” Mr Macey said.
“It would be difficult for any industry player to argue that problem gambling does not exist, and it is indeed an issue that needs to be addressed.
“Clearly, an efficient and effective way of reducing the social and economic toll of problem gambling is required, be that on a national or state-based scale.
"The problem faced by operators and property owners is how this can be managed without impacting the wider business operation of a gaming venue.”
To date, 2012 had witnessed significant changes to proposed poker machine reforms on both a Federal and State level, with the Federal Labor party shelving proposed regulations pending a state trial within the ACT.
The Ballieu Government in Victoria had postponed the implementation of proposed voluntary pre-commitment regulations, citing uncertainty surrounding federal changes.
“Regardless of what legislative changes are introduced or even further proposed, uncertainty about how far legislative changes will go to reduce problem gambling creates significant uncertainty in the industry,” Mr Macey said.
“This has flow-on impacts to the availability of credit, confidence for investors and ultimately value of property.
“By removing this uncertainty, it would be possible for operators to construct their businesses around the new laws but until then, this is not possible.”
Mr Macey said availability of credit was a major concern for the industry, with most financial institutions having reassessed lending criteria to gaming industry participants in recent years.
“Increasingly lenders are reducing their appetite for lending to new clients within the industry due to the perceived exposure to sovereign risk, variations to the gaming operation within Victoria and the subsequent impact this may have on values,” he said.
“In recent years, the loan-value ratios (LVR) have generally decreased. Existing operators and incoming purchasers have been impacted by reduced LVR’s as banks and industry players grapple with gaming changes both in operation and legislation.”
The gaming operation within Victoria, due to commence in August 2012, is set to operate for an initial 10 year period.
“The perceived impact of the new gaming model from a financing perspective is in effect a diminishing asset over the 10 year window,” Mr Macey said.
“This issue impacts freehold operators, leasehold businesses and freehold investment properties, resulting in increasingly stringent lending practices.
“Until legislative changes become more certain, difficulties will persist with lending.”
Mr Macey said the next 12 months would prove critical in the viability of many Victorian venues as operators became accustomed to new gaming operations.
He said the potential impact of both gaming operation changes and pre-commitment legislation in effect placed on hold the sale of gaming venues and operations, whether on a freehold going concern, leasehold or freehold investment basis.
“Vendors have been largely pre-occupied with preparing for the gaming operation changes and somewhat restricted from selling their interest due to this ongoing uncertainty caused by legislative change.
“In recent months, purchasers and vendors have discovered avenues around such legislation, witnessed in recent transactions.
“Such transactions increase confidence in the broader market, and have been welcomed by all industry participants.”
At present, Mr Macey said it was difficult to gauge the impact of pre-commitment technology on property values, but the reduced lending appetite had restricted potential purchasing opportunities.
“The value of a gaming venue, like all hotel venues, is derived from the turnover and profitability of the business operation. Sustainable future trade is a key driver in the value of any going concern property,” he said.
“Changes to gaming legislation, whether actual or perceived, will continue to constrain the market for gaming venues.
“There is no doubt that the issue of problem gambling and losses incurred by problem gamblers should be addressed, keeping in mind that the potential impact on hotels and clubs, as well as local communities, could be significant.
“Until a point where legislative changes are introduced or completely withdrawn, there is little chance for the hotel and club market to transact under typical conditions.”
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