18 Jun 2020
Words
Alex Cook
All you need to know about how valuers are assessing the coronavirus impact
Alex Cook:
So we're about two and a half months since the outbreak of the COVID pandemic. It's at a stage where it seems that the pandemic has been brought under control and that restrictions are being lifted and many businesses are starting to look increasingly towards the future.
So I thought, what better time to have a quick chat with Alex McCowan in regards to how he's looking at valuations within the management rights industry at the moment. And Alex, I think anyone out there watching this knows very well that there's two very different markets in relation to management rights between permanent and short term. So perhaps we'll start on the permanent side of things. Could you give us a quick rundown of the methodology you're using to look at permanent management rights valuations at the moment?
Alex McCowan:
Definitely. When we first recognised that we're in a different market, and obviously back in March, I guess methodology and analysis was quite different then compared to what it is today. We're in vacancy. We might've been looking at much longer periods today that's considerably reduced and that will vary a little bit between areas, but it’s vastly different to back in March. Still reductions are still an issue in some locations. But that's not wholesale rent reduction. It's usually very small where we're seeing some buildings might only be a $10 difference. And that won't be very many.
Alex Cook:
And that's presumably because now you're able to look at actual evidence rather than having to make assumptions.
Alex McCowan:
That's correct. The industry put together a comprehensive list of questions, which the accountants have taken on board. And I say that the mainstream management rights accountants and those questions asked of vendor managers and must be filled out so that we've got a good snapshot of what is happening in that particular building. And now that is where the accountant will then draw some conclusions on a sensitivity analysis or a forecast that they will do within that report and what we learned as well as valuers.
Alex Cook:
Okay. So from a valuation perspective, you're looking at the historical 12 months and also looking at the projection that the accountant comes up with. And how are you applying methodology to those two numbers to get to a value?
Alex McCowan:
Definitely the historical P&L. It's basically based off that. And then the forecast we're finding, there will be some slight reductions showing a difference in net profit, sometimes up to 5% reductions.
And we're basing a value, we're putting a softer multiply, if you like, on that differential. What that translates to is we're not talking large value. It also comes down to a very small difference in values. And it's just applying that soft multiplier by saying all this amount of this income is at a bit higher risk going forward.
I see that reducing considerably over the coming months. We've already seen big differences in two and a half months. Back in March, it looked like there was going to be chaos in the market. That hasn't transpired no matter where we are.
Alex Cook:
So in short, your pre-COVID valuation on permanent complexes compared to now is unlikely to be drastically different. And if it is different, it's really dependent on what your actual impact from COVID has been.
Alex McCowan:
Definitely, the values based on pre-COVID, that's the bulk of where sales are. There has been smaller deals done, and we are starting to see other deals now. So the confidence is returning. It is a confidence industry, and those multipliers are really not vastly different at all.
Alex Cook:
So you haven't seen a tapering off on multipliers for comparable businesses pre-COVID to now?
Alex McCowan:
Not really. Now it might be slightly and we'd probably put that down although there is a slight risk going forward. But no, we're not seeing a large discount if you like.
Alex Cook:
Tell me Alex, so I've always thought with permanent management rights, there's a level by which banks want them valued. So only the larger businesses get valued. Has that changed at all with COVID? Are banks wanting to look at smaller businesses now from a valuation perspective? Or is it still the same size bracket that they want the valuations done for?
Alex McCowan:
I would say probably since March, we've been instructed on numerous smaller ones. Where we may not have seen them, which is I think understandable. I think it's just getting that assurance in value. And those ones have been held a little bit.
Alex Cook:
Sure. And your general workload at the moment, Alex, the amount of new deals coming across your desk, are you getting back up to pre-COVID numbers? Are you busy?
Alex McCowan:
Not pre-COVID. But it's building now. And the good thing is we're certainly getting the phone calls saying, ‘well, this is going to happen’. It's taking longer, no doubt about that. Definitely time periods from talking to a broker such as yourself to seeing the deal come on my desk, it could be a couple of months.
Alex Cook:
And the million dollar question: short term, let's move on to talking about short term. And I know no one's got a crystal ball, including yourself. I think everyone's interested to start, if nothing else, brainstorming a roadmap to getting out of this and starting selling short terms. Any insights?
Anything you'd say to start that off from what do we need? What do we need from a valuer's perspective to start? I presume we need restrictions lifted. We need some trading months, perhaps more historical figures. How are we going to get out of this? When are we going to get out of it?
Alex McCowan:
Look, the short term, it is a different market altogether. And yes, as we've all seen the effect of what's happened, it'll just take a little time to get that back. It'd be a bit early today saying, applying a value would be as it's a bit tricky because the value would be reduced.
Alex Cook:
So it'd be quite detrimental for an owner to look at something.
Alex McCowan:
It's the unknown. And without borders open, without restrictions lifted entirely and planes back in the air, and I'm talking domestically. Internationally is probably a different matter. And the main string that we see, if we can get those things all back to normal.
And well, I guess ideally three to six months, good trading figures. There's got to be a lot more emphasis on guest origin, where you're getting your guests from, how regular you tariff basis is as well. So yes, there will be more information required. Yes, it will need more than one year's historical training because we'd need to establish what a normalised year is in that business. And so therefore we'd be pushing, not pushing, but we would be recommending between one and three, well more than one year, less than three years to get that established. And then a forecast done from there.
Alex Cook:
So hypothetically speaking for a short term business, which is more aligned on domestic, the restrictions get lifted. So let's say they have say four or five months decent trading. They're willing to go back three years. They're also going to get some projections done. And also those three to four months trading are pretty good. There's a possibility we might start getting back up to similar evaluations pre-COVID? I'm not going to hold you to it. I know that those are the sort of mechanisms that we would need to get the timing and the mechanisms.
Alex McCowan:
But we'll still be looking for a bit of a projected forecast done. I think that would be a requirement that I think your funders are going to be looking for too. It's been a fairly hot topic in May.
So yes, it would need to say, ‘okay, this is what we're seeing now in trading and everybody relax, you have more positive news coming in the next six months and then we'll see this happening’. So therefore you can provide your forecast. But that would be fairly well based on your three year P&L, what your trading has been. So out of that, yes, there's still a little bit of a differential.
Alex Cook:
And you mentioned funders. Are funders talking about getting back into it for the time being? I mean, are they talking about ways of getting back into it or has it been shelved temporarily?
Alex McCowan:
I haven't had any discussions.
Alex Cook:
So in summary of our conversation, Alex, the permanent market remains strong. If you're looking to buy or to sell, no reason not to do it at the moment. But on the short term side of it really, by the time that we see businesses likely come back to any sort of comparable values to pre-COVID, we're looking end of 2020, early 2021 by the sounds of it.
Alex McCowan:
That's a fair summation of it, yes.
Alex Cook:
Good, fantastic Alex. Thank you so much for coming in. Really appreciate your time and your wisdom.
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Alex Cook – Director & Senior Broker, ResortBrokers
0467 600 610
Alex McCowan – Senior Valuer, Australian Valuers
0417 405 115
