09 Nov 2023
Words
Grantlee Kieza AccomProperties
Story of a steadfast Management Rights sector thriving against the odds
Amid a backdrop of rising interest rates, inflationary pressures, and legislative uncertainties, the management rights industry appears to stand tall, defying the odds with its resilience and adaptability.
This article takes a closer look at key updates from leading insiders in the permanent and short-stay management rights sector. Takeaways from 2023, shed light on the industry's robustness, the challenges it continues to face, and how the future looks.
Permanent management rights market
Despite minor disruptions caused by rising interest rates, the long-term prospects for permanent management rights properties remain positive. Although the buyer pool may have shrunk slightly, multipliers are reaching record levels, indicating strong interest from buyers who recognise the inherent value of management rights.
Tim Crooks, Director of ResortBrokers, provided valuable insights into this trend. Noting that historically high multipliers, such as 7x transactions, exemplify the industry's resilience and highlight sustained demand from investors.
ResortBrokers has now settled some of the highest multipliers in the permanent management rights sector, with transactions achieving remarkable results.
“It’s the large-netting premium assets with a single body corporate and little to no real estate (except perhaps for a small office) that are attracting a lot of interest, “Mr Crooks said.
“We've seen the first 7 x multipliers (that I’m aware of) for a permanent management rights business. We’ve also got three 7 x transactions ongoing.
“We recently settled a property in Newstead returning over $650,000 net for its annual profit, which sold at 7 x. We also settled one returning over $575,000 at Toowong. It sold for 7.1 x.”
“Currently, I have another large permanent business netting $800,000 in Newstead, it’s just gone under contract at 7.1 x. It’s a very strong multiplier even in a rising interest rate environment.
“Interest rate rises have probably moved multipliers down just a point or two because of the increase in servicing the debt”.
However, he said all the signs are “very positive” for long-term, permanent management rights properties, but admitted there are fewer buyers.
“While I might have had seven to 10 people competing over a premium asset a little while ago, now it’s more like three or four. The number of sales might not be as high, but we’re still getting very good results.”
“There are also more newcomers to the industry than I’ve seen for years. We’re seeing people coming into the sector who’ve had success in other fields such as building or engineering. When they compare management rights with other businesses or franchises, they see real value.
“There is great security in management rights. The rental market is very strong, and CPI increases have also been strong. Everyone needs somewhere to live, so permanent management rights, being an essential business are very appealing. The permanent market is being driven by a lack of new supply and rising building costs making it tough to develop more residential towers.”
Mr Crooks said in the realm of permanent properties there was solid interest for entry-level assets and “incredibly strong multipliers” for the premium assets at the top end of the market.
“There has been talk that the market is softening a bit, but I think buyers are getting more sophisticated,” he said.
“They realise that trying to group four small complexes together to make a larger one is extremely hard work and that's not what they're looking for. The properties that are returning $150,000 to $300,000 are where we have seen a bit of downward movement on the multipliers and that’s largely because of the rising price of the associated real estate so the return on investment is not as high.
Due to a swift surge in real estate values, Mr Crooks pointed out that the attachment of expensive managers' units to management rights businesses render them less enticing, primarily due to diminished returns.
He said: “Investors are looking for a return of 10 to 14 percent and if the cost of the real estate component has risen, this affects the overall return.”
Tim Crooks, Director
0417 544 562
tim@resortbrokers.com.au
Decoupling?
A notable trend in the sector is the emergence of the decoupling phenomenon, primarily witnessed in regions like the Sunshine Coast where real estate value has risen dramatically. The increased value of some owner’s units has necessitated decoupling it from a MR business. A transformation that has sparked diverse opinions and legal discussions about its implications.
Management rights lawyer John Mahoney has previously cautioned about this trend.
“While I totally understand why decoupling is becoming common around places such as Noosa, I don't like it as a general principle,” Mr Mahoney said. “I think it detracts from the basis of management rights that we have always tried to sell, and that is the work of resident managers.
“I think there are some buildings that will always have an onsite manager purely by virtue of their size, particularly holiday buildings.
“We are seeing in some of these bigger buildings - Mirvac being a classic example - where the developer will build an office for the manager, but they don’t have to reside there.
“If you go back five years or even longer you could justify buying a manager’s unit based on the income being derived.
“But it just got out of kilter as the prices of the real estate have trebled, in some cases even more, but the income has probably only gone up maybe 30 to 40 percent. In those cases, decoupling is understandable.”
John Mahoney, Mahoneys
The short-stay management rights space
With occupancy levels and room rates at all-time highs and rents through the roof, demand for short-stay management rights businesses in some locations such as Brisbane and Noosa are very strong. In other locations, despite a degree of caution among buyers and banks, sales and multipliers remain stable.
Director at ResortBrokers, Alex Cook, specialises in the sale of larger management rights, particularly in the short-stay sector. He confirmed these are continuing to sell with little change to the multipliers, but he too has seen fewer buyers vying to secure top assets and in some cases it’s taking longer to find the right buyer.
He said: “Generally speaking, and particularly at the top-end of the market, multipliers have been largely unaffected by increased interest rates.
“Having now fully emerged from pandemic conditions, the last 12 months has seen a pent-up demand to buy and sell big, short-stay properties finally translate to a number of noteworthy transactions.
“The demand for big, short-stay MRs is certainly still present, but with corporates such as Accor and Minor probably focusing more on off-the-plan opportunities, and with several key operators now having made significant recent investments, it will be interesting to see how long this will last”.
“Many of the big properties are now going to syndicates, and as agents we are doing what we can to assist those putting the syndicates together. Often making key introductions between like-minded investors and operators.”
Mr Cook said demand was such that he ‘was always busy with numerous deals to work on’.
“The Brisbane short-stay market has come back in force, with several noteworthy sales on record. Annexe Apartments next to Royal Brisbane Hospital (which largely runs off outpatient business) went for more than $8 million, and the Manor Apartment Hotel, a heritage-listed building in Queen Street, went for well over $6 million. Both showed NOPs in excess of $1 million.
“Furthermore, Drift, located in Palm Cove (North Queensland) was sold on actual/part projected NOP of between $1 and $2 million, for circa $8 million inclusive of extensive real estate.
“There are another three or four very large, short-stay MR deals under contract, expected to settle late 2023, early 2024. The market is definitely still there, but it’s requiring a more proactive and lengthy process to achieve the right result.”
Market reports suggest an upward trend in demand from syndicates but less interest from traditional ‘mum and dad’ buyers, which impacts the sale of smaller ‘lifestyle’ MR properties. Another challenge is the trend of investors becoming owner occupiers, which has an impact on letting pools.
Alex Cook, Director
0467 600 610
alex@resortbrokers.com.au
Michael Philpott, from MR Sales and Tourism Brokers, has seen a big demand for permanent properties. However, with occupancy levels up across all properties, he’s beginning to see a resurgence in short-stay too.
He said: “The permanent rentals market has been very strong with a lot of activity by syndicates buying large off-the-plan properties because they see them as safe investments.”
“Many holiday properties have been impacted by the loss of units, due to owners moving in, especially if they've got two or three-bedroom units. We're seeing some letting pools drop off. On the other hand, we're also seeing a significant increase in the returns for the units.”
“The underlying values and the underlying foundations of the industry remain incredibly strong,” he confirmed.
“There are green shoots in the market. There's a lot of activity and there are new buyers coming through from Sydney and Melbourne. Well-priced, well-positioned management rights are still selling and we're getting a lot of inquiries.
“Managing the vendors’ expectations relative to the market is a little different. The multipliers have come back a little bit, certainly with tourism-related properties along the coast. And that's been reinforced through the sales.
“We've seen a multiple drop of 0.5 to 1, and we put that down to supply and demand issues.”
Mr Philpott said there had been a lot of adverse publicity coming out of discussions over revised legislation. The possibility of 25-year terms being grandfathered and new agreements potentially being 10-years, creating a two-tiered market and the longer agreements being a premium value.
“There has been some uncertainty in the marketplace, but many properties have record figures on their occupancy levels,” he said.
“There are a lot of people who are based in Sydney and Melbourne who are realising their assets from house sales, and they are moving up and purchasing businesses. We are seeing an increase in demand on the Gold Coast where it has been quiet, while the Sunshine Coast has been powering along.
“We've also seen a little bit of a resurgence in Cairns.
Mr Philpott said properties “in the $1.5 million to $3 million band” were in high demand in most locations.
“That’s because that's a sweet price point where there is a number of people around with the money to purchase, above that you're getting the syndicates in large groups and below that the banks are finding it difficult to finance them because of the ratio of the real estate relative to the management rights business.”
Regarding settlements, Mr Philpott said they were taking longer.
“It’s sometimes taking up to 60 days for finance and then through the body corporate process it might take another couple of months. We’re seeing settlements take between four to six months which is a long time for a business, but there is certainly a great deal of confidence in the industry that management rights remain great businesses for the future.”
Michael Philpott
Why are settlements taking so long?
Lawyer Frank Higginson from Hynes Legal said, in part, it’s because body corporate committees are taking “a more engaged position over who they want running their management rights business at their complex”.
“It seems that if they’ve had a poor experience with the current manager, they're going to look a lot harder at the proposed new one,” he said.
“For some committees, it’s not so much trying to get out of a bad relationship but not wanting to jump from the frying pan into the fire. So, I tell my management rights clients that if you've been blueing with the body corporate you can expect the assignment process to be a little bit harder. When everyone gets on famously there’s usually not a problem.”
Mr Higginson said one of his clients was currently trying to buy a management rights business, but the body corporate was “trying to square up with the seller” and his client was “the meat in the sandwich”.
“They're trying to make the process as difficult as possible because allegedly that's what the seller had done to them over the years,” he said.
“Generally, it is becoming more common for the sale process to take longer. I'm not sure whether that's because of COVID or whether there are more people living in units and committees are more engaged.
“Some settlements do cruise through, and I’ve got one like that at the moment but to be honest they are few and far between.”
From his experience committees are looking with more detail “at who they're getting served up and whether these people can actually do the job”.
He warned: “It's not going to be as easy a process to take over a management rights business as it may have been a decade ago.”
Frank Higginson
Transactions: Checks and balances
Leading financier Mike Phipps admits there seems to be a lot of buyer uncertainty now.
“Assets that we thought would have been snapped up are sitting on the market longer than they should,” he said. “We're seeing syndicated opportunities showing really strong returns that we would have been run down in the rush for, two years ago. Now they are much slower transactions to put together.
Mr Phipps said it appeared that multiples for holiday properties were softening.
“We think that uncertainty is driven by the economy, some of it is interest rates and some by the over-volatile political landscape.”
“However, I think the greatest risk to the industry right now is the influx of migration into Queensland and people buying units in holiday buildings,” he said.
“That is putting letting pools under pressure, and I think the housing crisis is going to contribute to that risk.
“When I look at a listing if I'm advising a syndicated group, one of the first things I look at is the composition of the letting pool. If it's got a lot of owner-occupiers in it and it's a nice place to live, my advice is, ‘you're at risk of losing some of your letting pool to interstate buyers’.
“That’s a higher risk than interest rates as far as I'm concerned.”
He added that he’s not seeing any concern in the market based on possible legislation changes over the cutting of 25-year terms.
Mike Phipps
On the other hand, Tony Rossiter, from Holmans Accounting, said that from his experience prices for management rights businesses had held up well over the last 12 to 18 months. “And that’s across about 75 transactions that I’ve been involved in, mainly in South-East Queensland, but also in regional areas of New South Wales,” he said.
Meanwhile, Mr Phipps’s colleague, Cameron Wicking, said while there had been “some softening” of multiplies, and more caution in the market, he had not seen dramatic changes over the last year.
“I think people are probably being a little bit more discerning when it comes to business value,” he said.
“There has been some feeling from some buyers over future potential risks, and they are a little bit more wary. I think that’s reflected in the slightly softer multipliers, but there are still solid, multiplies out there, even if market demand seems to have slowed a little.
“Banks are certainly going through more checks and balances than in recent times. It is harder to get transactions over the line and I think that’s simply because we are now dealing with higher interest rates.
“Anecdotally, we hear that some contracts are taking longer to negotiate and that some buyers fear rates are going to continue to rise. It doesn’t mean that people aren’t moving forward but they’re doing it with caution.
“The fundamentals of the management rights industry are still very sound, with a great future.”
Tony Rossiter
Is MLR stronger than ever?
Trevor Rawnsley, the CEO of ARAMA (the Australian Resident Accommodation Managers Association) said the cash flow of management rights businesses was stronger than ever, and occupancy levels were very high.
“The Sunshine Coast had a record year in 2020, 2021 was an increase on that and 2022 was even better again. This year we’re starting to see some seasonal fluctuations, but the legacy is that the properties have held their rates and it’s still a great business to be in.
“We’re hearing from people in North Queensland that it’s a bumper season, but people are booking last minute.”
Mr Rawnsley said management rights had withstood COVID, another financial crisis, increases in interest rates and the squeezing of finance.
“It’s harder to get a loan these days,” he said.
“After bad press earlier this year, over interest rates and cutting terms in management rights there was a softening in deals, but a high level of demand remained.
“Certainty equals value. Talk of rises affects the value of a business and investor interest, even if it doesn’t affect the cash flow.”
Trevor Rawnsley
Sam Hodgetts, a partner at McAdam Siemon, emphasised the enduring strength of the management rights market, “a business that has seen little change in its fundamental appeal over two decades”.
With offices in Brisbane and the Sunshine Coast, Mr. Hodgetts highlights management rights as a “low-risk, high cash flow venture, offering immediate returns”.
He said: “This industry offers the unique advantage of a 25-year guaranteed income, a rarity in the business world.”
While the sector remains somewhat undiscovered, Mr. Hodgetts believes “its potential is unparalleled, provided it gains the exposure it deserves”.
“Management rights entail minimal upfront costs, with banks readily providing financing due to their straightforward and financially strong nature,” he said. “Skill acquisition is accessible to anyone with a personable disposition, and the year-on-year analysis demonstrates consistent sales activity.
“Though there may be occasional fluctuations in multipliers, these primarily affect properties with specific issues or shorter management terms. Overall, while not experiencing the astronomical growth of recent years, the management rights market appears to be in a strong position.”
In Mr. Hodgetts' view, “this steadfast and low-risk business model holds immense promise for those who recognise its potential”.
Sam Hodgetts
Values and multiples
Alex McCowan from Accom Valuers said while he hadn’t seen a great deal of change to values and multiples over threats to cut term, “12-odd interest rate rises have had an effect”.
“Some businesses have been affected more than others by the rate rises, especially those businesses with a $200,000 net or less,” Mr McCowan said.
“Those properties with a very high real estate value are nearly impossible to sell. Those with a net profit of $200,000 or less are generally properties with only 15 to 20 units in the letting pool.
“Some businesses have been successful in separating the business from the unit but that is difficult to do and not all body corporate committees are going to agree. In some cases, the body corporates have been reasonable, and they've allowed the sellers to separate the expensive unit from the business.
“'If the seller can successfully separate the unit, they then have a business which is saleable, without the real estate component to worry about. I've seen more of that happening in the last 18 months to two years than pre-COVID. Back then we didn't have the big rise of real estate values and it wasn't such a big issue.”
Mr McCowan said while residential real estate had spiked there had not been much of a decline and some management rights owners had sacrificed the value of the business in the sale when they might have gotten a better price for the business “prior to the big rise in real estate values”.
He said talk around cutting terms had probably made some new buyers a “little more cautious”.
“But certainly,” he said, “the main players – the big investors, public companies, or large partnerships – they're still buying and paying good market rates. So, they're not looking at the threats to cut term as a negative.”
Mr McCowan said the industry remained robust despite some hiccups.
“The number of properties we've been asked to value has probably dropped off a little bit and they're taking a lot longer to get the negotiations to contract and then through the finance. By the time it gets to us it could be a couple of months.
“There are lots of different hoops to jump through these days.
“The very slow transaction periods are not helping anyone. I know of a deal on the Sunshine Coast that was under contract last December and is still not settled. A lot of things can go wrong in those eight to nine months. Those poor vendors must be beside themselves with worry. That's probably an extraordinary case but five to six months is not unheard of.”
Mr McCowan said holiday-let properties on the Sunshine Coast have 'probably come off a bit in terms of multipliers' in some sectors.
“The year 2021 into 2022 was probably the peak time to sell but with the Brisbane market, in terms of permanent-let properties, I don't think anything's changed.
“Since about January 2023, we're still seeing very robust multipliers for quality businesses for 'corporate' let businesses with large Net Profits. They were almost non-existent until January this year and we've valued five or six since then. They're in CBD Brisbane and Fortitude Valley, Bowen Hills, Kangaroo Point and South Brisbane, and they're attracting business people coming to Brisbane for a particular job or meeting rather than a holiday.
“'We weren't seeing any of those deals in 2021 and into 2022 because trading was very difficult however, operators have had a good 18-month trading with MLR business owners deciding it's time to sell. As a result, strong market multipliers are being achieved which are up from pre-COVID times.”
Alex McCowan
Meanwhile in North Queensland…
Cairns-based management rights veteran Calvin Bailey, who has spent more than a quarter of a century in the industry said MR businesses in North Queensland “were going reasonably well at the moment.”
“The market is slow,” he said, “but I think that is everywhere including the south-east. We seem to have a gap in the middle market which has historically been the mums and dads who would have come from New Zealand in a good market or from down south. That’s any property from about $1 million to $2 million, which has generally been about their price range.
“I think it’s a two-fold thing. Partly because you would anticipate a net in that price range of about $150,000 to $300,000 for that sort of property.
“That sort of earnings doesn’t have the same power that it once did, and a lot of buyers are now going into partnerships and buying into larger properties with maybe a yield of $500,000 net.
“So, you are getting up into the $2.5 million levels or more and that has been essentially where most of my sales have gone recently.
“There are still buyers for properties below $1 million, but in the middle price range, there is a gap.
“There are a lot of building restrictions and height restrictions in the northern beaches and Port Douglas. Basically, they cannot build more than the height of a tall coconut tree, which restricts developers to a maximum of four levels. So, the bulk of the properties end up being three-level walk-ups, and therefore the average property would only be 15 to 30 apartments.
“That is the middle range that would normally be snaffled up by mum and dad managers. There are a lot of properties up here sitting in that bracket, which is a bit tough,” he said.
“But I’m confident it will all come back.
“We’re doing quite well with multipliers, and I’ve had recent sales with multipliers of up to 5.0 x. That’s for the quality larger properties including sales at the beaches and Port Douglas which were from $3 million to $5 million.
“We have achieved a 5-multiplier, and certainly 4.0 to 4.5 is quite common.
In conclusion, Mr Bailey emphasised: “There hasn't been a significant shift downward in terms of multipliers. It's just that we're facing a challenge in finding enough 'mums and dads' to invest in these properties. At the moment that’s what we need.”
Calvin Bailey
END
