Tuesday, 17 January 2012

Don’t Write Off Golf so Quickly

Tobiano - never made enough cash (courtesy Remax)
I was reading a recent article about golf and real estate where the writer equated the carnage in the real estate to the decline in participation in golf. What? I’m always at a loss to read something like this when the decline in real estate is simply the oversupply of property coupled with the difficulty to finance.
While many golf courses were developed as part of a real estate play, the development is still a about selling units and not about golf. The golf course is there to attract buyers, mainly for the views from their lots, which allow the developer to charge a premium where they can increase their asking prices. When you look at the fact that most golf course developments in places like British Columbia were intended as second homes, it’s no surprise that each of these developments is either stalled, in bankruptcy or up for sale.

Golf is not relevant to the decline in these projects. What is relevant is each of these golf courses was built as an unsustainable business model that assumed the golf development and future home owners would absorb the costs of upkeep (as owners or regular customers). Well guess what, they are not. Now the developer is left with an awful business model that drains their cash during a period where they can’t sell their properties and banks are calling their loans. The problem with these courses is they were never designed to survive on their own. That’s not a problem with golf, that’s a problem with the assumptions of the developer.
Ballantrae G&CC - a stand alone business (courtesy of fairways)

What I find fascinating is now people are saying golf is essentially dead as a sport. Yes it declined 15% in participation over the last five years, but rounds were down only 3%. Why is that? It’s mainly due to the fact that 90% of all golf is played on a publicly accessible facility. The inner city public courses are still jam packed and any low cost facility has a solid tee sheet. The problems lie in the high end public facility catering to wealthy and business and the private club. Why are these clubs struggling? Pure economics, the cost of the development must be supported by the green fees and in most cases the break even number creates a green fee golfers are not willing to pay at this time. Once again the problem is the business model.

There are enough really clever examples of great golf courses built for a reasonable budget with modest clubhouses where the business model works because the green fee is reasonable and the calculations never assumed a high green fee. Golf is not broken. It just needs a better economic plan if it’s going to grow from the next 20 years.