20 Nov 2012
Words Tim Admin

'Golden Age' Meets Global Crisis

PART 3 IN OUR SERIES COVERING THE GROWTH OF MANAGEMENT RIGHTS Resort Brokers' Informer continues our series on the evolution of the management rights industry. Valuable insights are provided by industry advocate, SP&G Lawyers partner John Punch. From 1998, Queensland’s pioneering Body Corporate and Community Management legislation provided the management rights industry with an excellent foundation on which to build. The new Act, balanced and succinctly expressed, meant financiers, developers, existing operators, buyers and sellers all knew where they stood. So began what John Punch described as “quite the golden age of management rights.” “There was plenty of development in Queensland, plenty of need and opportunity for new management rights, and settled arrangements for everyone to work within,” he said. “So there was a rapid increase in the value of management rights.” For example, Punch recalled, after the Raptis Group developed The Phoenician at Broadbeach, they sold the management rights in the late 1990s to industry veteran Frank Picone for close to $4 million. Just three years later, Picone on-sold the rights for a reported $15 million. What’s more, financiers were prepared to lend at that level. It was into this environment that two ambitious Gold Coast-based players launched their highly publicised forays into management rights – logistics and travel entrepreneur, Chris Scott, and former AFL player and Schoolies accommodation pioneer, Tony Smith. Punch, who acted for Scott at the time, says there was an obvious “corporate agenda” from day one. Scott saw the opportunity to conglomerate a series of large buildings sufficient to create a viable public company, founded S8 Ltd in 2001, and set about capital raising to build an accommodation empire. Similarly, Tony Smith founded BreakFree Limited, listing on the ASX in 2002. He brought in the holdings of the respected Frawley family, successful management rights operators for many years. Other key industry operators, such as John Gardner and Russell and Adrian Leary, also sold in. “It changed the ballgame completely,” Punch said. “Management rights drawn into these public companies effectively achieved a stock exchange valuation. You might have owned your rights at a 3.5 multiplier, but as shares on the stock exchange, that value would jump to a multiplier of double or more that rate.” This world of big business was a far cry from the traditional family-owned management rights model that had previously prevailed. Opinions on the new paradigm varied. Many investment unit owners were pleased, enjoying better returns thanks to the marketing power of the corporate managers. “While traditional mum and dad management rights owners had to rely on accommodation wholesalers as a source of guests, the corporates vertically integrated, owning their own wholesalers and marketing their stable of buildings direct to the public, creating a better supply of guests for owners,” Punch said. Resistance to the public companies came from some body corporate committees who were displeased to find their influence over management diminished. In place of their resident owner-manager, they now had to deal with an employed manager answerable to a corporation. In some cases, anti-sentiment even led bodies corporate to write into letting agreements that the rights must never be go to a public company. By and large, however, the corporate push drew in large resort-style accommodation buildings. Smaller properties and permanent complexes continued to operate as before. But they would not be insulated. While the various management rights models co-existed, this period would have far-reaching consequences for the whole industry. Properties large enough to be an acquisition target for the public companies now commanded greatly inflated prices. This drove the multiplier up and fuelled the expectations of everyone in the market. At the same time, a soaring residential market drove the property component (manager’s unit) to ever higher levels. “The effect was certainly to skew the market and it started making it very difficult for traditional independent operators to buy in,” Punch said. For those management rights owners in a position to capitalise on rising values by selling to the corporates, this time may well have been regarded as a “golden age”. But those who bought into the booming sector at newly inflated prices, were to find this period of corporate excess would not end happily. By the mid 2000s, the likes of S8 and Breakfree were so successful they were being eyed as takeover prospects. “They were certainly hectic times where the stakes were high,” John Punch said, recalling some contentious legal challenges over turf. Each tried unsuccessfully to take over the other, leaving the door open for others. Investment group MFS Ltd took over both and merged them to form the Stella Group, with its signature brands Mantra, Peppers and Breakfree. But then came 2007 … dawn of the global financial crisis! For companies who’d been on spending sprees, overpaying for assets using excessive debt, the crunch had come. Returns on investment couldn’t sustain high levels of borrowings when the credit crisis struck in early 2008. The “golden age” was characterised by stable laws, a wealth of new development and burgeoning demand for investment in Queensland. Prosperity in the management rights industry was also underpinned by the strong advocacy of QRAMA, later ARAMA. (see our interview with long-time president, Kim Cox, on P.?) But a major shake-out was about to unfold. The legacy of the “golden age” will be covered in our next edition. To catch up on previous articles in this series, go to http://resortbrokers.com.au/informer-archive.htm