According to The Appraisal of Real Estate (TARE), there are typically four interdependent economic factors that create value. These include:
- Utility
- Scarcity
- Desire (Demand)
- Effective Purchasing Power
All of the above must be present for a property to have value. To quote TARE, “The four factors interact in the marketplace to influence the relationship of supply and demand. A market’s perception of value can affect real estate prices swiftly and significantly.” While it’s often said that golf courses and clubs’ value is simply a function of their ability to produce income, I thought it would be interesting to explore the elements of how that income is estimated and how it is converted to value, both by the investor and the user.
Utility is “the ability of a product to satisfy a human want, need or desire.” With golf courses and clubs this relates to whether or not there are people who want to play or join the club and pay the associated fees and/or dues to use the facilities. If the course is desirable, in most instances more people will want to play it, be willing to pay more for it and thus it will be considered to have greater utility to the users. With golf courses, utility can come from a variety of sources, such as golf course design, playing conditions, scenic beauty, location and the amenities some clubs offer like swimming, tennis, fitness and more. At private clubs there is also a social element to value. Among the questions relating to utility is what type of golf is desired? Short courses and alternative golf facilities (TopGolf, et.al.) have become very popular and some think they feed the more standard golf courses in the future. “Championship” courses that have hosted major events and those in especially scenic locations enhance the course’s perceived utility and often command higher fees.
Scarcity is the present or anticipated supply of an item relative to the demand for it. Basically, the supply side of the equation is represented by scarcity. If there aren’t enough golf courses for those who want to play them there is a scarcity, or under-supply. Typically, when demand is high and supply is limited, dues and fees increase. This has become apparent in the past 4 years as COVID created more demand for golf after a long period of diminishing supply as 2,000+/- golf courses (US) closed during the pre-COVID period. Scarcity, combined with utility makes any property, including golf courses, more valuable. For the first time in a long while, there are some new courses being developed. Will they be comfortably absorbed into the market? Only time will tell, and some think that given golf’s historically nagging problem of player retention, we could fall back into an oversupply situation.
Desire is the wish of a user for an item to satisfy needs (e.g., shelter, clothing, food, companionship) or individual wants beyond the essentials required to support life. This is often referred to as demand and with golf properties addresses two groups, investors who seek to acquire and operate golf properties (usually for profit), and golfers (users) who seek venues to play golf and pursue their recreational goals. Some investors (developers) have used golf as an amenity attraction to sell real estate. While residential homes are usually owner-occupied and the purchaser and user are the same, with golf courses (and other properties) the prospect of user activity is what motivates investor purchases. Demand for golf is at a peak right now but one thing we don’t know is how sustainable that demand is. Golf has had a history of gaining, but not always keeping new players. Will new golfers revert to their pre-COVID activities?
Effective Purchasing Power is the ability of an individual or group to participate in a market—that is, to acquire goods and services with cash or its equivalent. Do those who seek to play golf have the ability to pay the dues and fees required. Can they afford it? This is a big question being asked now as the price of golf, at both private and public access venues has risen dramatically as demand has increased and pressured a diminished supply since COVID. Influences from the broader economy could impact how golf sustains the COVID surge.
Each of these factors are interrelated and it is the patterns and trends of user actions or anticipated actions that dictate investor actions. Thus, it’s important to understand what makes golfers choose a specific course or club to play or join.
It’s often been said that course conditions, the quality, speed and smoothness of greens and consistency and appearance of fairways, tees, bunkers and roughs are the most important element to golfers. That suggests that the perceived quality of the design or the course’s history take a back seat. Since it typically costs more to produce such conditions, the question arises as to whether golfers will pay for enhanced conditions and if so, how much. Most certainly, the location of any golf course or club is important from the perspective of how many golfers can easily access the course, so like any other type of real estate location is a key consideration from a demographic perspective. Golfers have demonstrated a willingness to travel for weather, noteworthy courses or other considerations to play their favorite game so while location is always important it may not be just from being able to serve a large number of golfers but also offering a product which is physically unique or offers desirable playing conditions, especially during the off-season.
To the golfer, when supply outpaces demand, dues and fees are suppressed and tee times are likely more available. Conversely, when demand outpaces supply, dues and fees increase and it’s harder for the golfer to find space on the tee sheet. In some markets, like we’re experiencing today, golf courses are not only healthier, but more investors seek to purchase them, often favoring golf properties over the more traditional investments like multi-family, industrial, office and retail. These are still perceived as less risky and subject to lower cap rates and higher revenue multipliers than golf courses, resulting in lower returns on investment.
As TARE says above markets can change swiftly and significantly. Time will tell how sustainable the COVID surge in golf is and whether golf will achieve real, long-term growth. In golf, the fundamentals of value are the same as any other property, just influenced by different elements. As a leisure activity, golf requires the use of discretionary spending and as such can be more sensitive to economic fluctuations than other property types. That said, cap rates and multiples that convert revenue and cash flow into values and pricing have been generally consistent in golf for a number of years and through several different economic cycles. We’ll keep watching for what the future holds for golf courses as investment properties.