Management Rights – The Way We Were

Since entering the property industry in 2005 there have been many and varied changes and challenges both naturally aspired and financially driven.

We have seen interest rates up and down, large public operators come and go and the demographic of buyers dramatically alter. The multiplier, the industry standard for valuing the business, has gone from an average of 3 times the last 12 months net income, where it stood for over 10 years and spiked at a peak of over 6 times. The large public companies entered into a buying frenzy in an attempt to control the market in prime locations, artificially pushing up prices which were always going to be unsustainable in the long run.

The finance providers were accommodating, some offering LVRs of 70% to 75% and up to 100% gearing in some cases, again which unfortunately proved to be the undoing of some.

All of a sudden, there were cracks appearing and the inevitable happened, for the first time ever we started to see management rights businesses in the hands of receivers. This was a new trend and one that made people sit up and look at what was sustainable. We have always advocated that management rights was the “safest business to buy” for decades and then all of a sudden perhaps it wasn’t.

However if you put it into perspective the percentage of failed rights was still miniscule in the big picture and most of those businesses that collapsed were solid but simply over geared and undermanaged and all it took was a market downturn to trigger this off.

Ownership of management rights businesses, as we knew them years ago were mostly the traditional two person or Mum & Dad operation, most at or nearing baby boomer status, or in the larger sites partnerships or two couples dominated the sector.

In the last few years, we have seen a shift in the demographic of buyers. Larger sites are more likely to be owned by large corporate groups or high net worth individuals and the age group of purchasers in the smaller sites likely to be much younger, many with small children.

Then with the collapse of some high profile groups, we started to see bank policies tighten and prices come back to more sustainable levels, to the detriment of those caught up in the buying boom. Valuers became more conservative and now buyers are certainly more educated.

Buyers started looking at return on investment instead of just looking at the multiplier and it became evident that many smaller rights netting under $100K were looking much less attractive and have taken the largest price adjustment.

Properties with a ROI less than say 14% are now less attractive to buyers and financiers so it’s imperative to take this into consideration when pricing rights for sale. In the past we saw what could loosely be termed as lifestyle buyers but we are now seeing buyers predominately looking for sound business opportunities.

Sales of management rights in holiday complexes small and large on the Gold Coast, Sunshine Coast and further north, have been most affected with Brisbane corporate standing out as the strongest market with ongoing demand. Buyers are still active in the market however but are much more cautious and are taking more time to analysis the business and consult with industry experts prior to making purchase decisions.

Quality management rights, with long agreements, harmonious bodies corporate showing a strong ROI as still in demand and still attaining solid prices and, as the market improves again, we will see strong buyer interest. After all, management rights is still arguably the most secure business proposition that money can buy.

With the few that fail it’s more likely, the business model of individuals that is flawed, not the business itself.

Glenn Millar
Resort Brokers

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