18 Jun 2024
Words Jeff Keast Informer

Keep Your Eye on ROI

Focusing on multipliers when selling management rights is missing what’s most important.

There’s no doubt the dual effect of rising interest rates and capital growth has impacted the management rights market.

Interest rates are in focus right across the country. At the time of writing, monthly inflation figures for April show inflation has crept up from 3.5% to 3.6%. This is the second month in a row where expectations of slowing inflation have slightly overshot, which may increase the likelihood of another cash rate hike that no one wants to see. For now, the monthly rises we’d grown accustomed to since May 2022 have paused and the cash rate has steadied at 4.35%.

With the interest rates rises we’ve seen in the last couple of years, borrowing costs are significantly higher. This means buyers of management rights businesses are more sensitive around price compared to six to 12 months ago.

Don’t get me wrong, there are buyers out there, and they want to buy, it’s just that no one is paying overs in the current market. They are looking at return much more stringently than when money was cheap. And it was cheap for over a decade, meaning re-adjustment is in the air.

Which brings me to the subject of multipliers.

It’s a real education piece to convince sellers to not overly focus on multipliers, particularly sellers with real estate attached to their management rights, whether it’s a manager’s unit or office.

Traditionally, multipliers have acted as a sound guide of the state of the market for sellers of management rights businesses. But that’s no longer the market we’re in. Sellers have this preconceived idea that multipliers have gone up since they bought in, so they expect multiplier uplift when they sell. While it’s broadly true that multipliers have risen, it’s mostly for business-only management rights, or those with high net profits, and generally not businesses with attached real estate.

At the same time, we’ve also seen huge capital growth, particularly in Brisbane. Queensland's capital is now Australia’s second-most expensive real estate market in the country, displacing offering even greater capital gains in units and complicating expectations around multipliers even more.

With real estate tied to a management rights agreement, unfortunately you can’t have your cake and eat it too. Not in this market. Say an operator bought a management rights business netting $200,000 with a manager’s unit for $500,000. Now, three years later when they want to sell, the unit is worth $620,000.

But in their mind multipliers have also gone up, so they want a higher multiplier. If a seller says they want a 5.5x multiplier for their business and $120,000 in capital growth on their manager’s unit, when you do the calculations on what they bought in at and what the selling price should be now, the numbers rarely stack up from a returns perspective.

With the current rent crisis, operators have also had strong rental increases so their letting income has gone up. But many operators have also lost a number of units from their letting pool, which has offset those increases.

Savvy sellers will always consider the other side; that is, from the buyer’s perspective. The buyer will see it as double dipping if the seller is expecting a high multiplier plus capital growth on the real estate.

The buyer thinks: even though it’s a 5.5x times multiplier on the business, when you add the extra $120,000 of capital growth, the multiplier seems significantly higher, which directly affects this return.

Sellers really need to understand their overall return on investment (ROI), looking at the asset in its entirety. For some, that’s hard to hear, but to do your job as a broker well you need to be straight with your clients and tell them honestly where the market is at. What ROI you’ll get will depend on a range of factors influenced by the individual circumstances pertaining to each management rights business as well as the broader market. However, as this new market continues to emerge, the focus on the figures is paramount.

While ResortBrokers doesn’t set the market, we understand it, so we encourage sellers to talk to us early to avoid developing false expectations.

Like I said, there are buyers aplenty, but we’re in the middle of a market change at the moment. In every market, you have to meet it on its terms. If you do, you’ll sell. And by focusing on ROI instead of multipliers, you’ll have a firm footing for negotiation when you do sell at a good (or great!) price. END