Let’s not kill the goose!

It would be an understatement to say that management rights has been one of the most successful businesses in Australia over the past 2 or 3 decades.

Even through the GFC the industry ticked over pretty well compared to most other industries – yes, there were a number of receiverships and liquidations but these cannot be blamed on the industry itself which remains fundamentally strong, well regulated and very well supported and protected by the relevant legislation.

However recent trends have caused me and others in the industry to question whether the strength of the industry and its quite valid perception as one in which it is safe to invest, is turning into a problem.

Over the past few years more and more quite inexperienced people have joined the industry. While they have been encouraged by these perceptions of strength and safety and the willingness of financiers to lend generously, the greatest attraction appears to be the apparent return on investment. Regrettably many of these buyers do not really appreciate that there is a whole lot more to the industry than just that.

We are seeing increasing situations where people with no previous experience in management rights, nor in any other business that might give them the skills to properly operate a management right business, purchase a business because at face value it offers a massive return on investment. Whilst on the total sale price at a multiple of 5 that return might be 20%, after borrowing the maximum and paying interest on the borrowings, the actual return to the buyer on the capital the buyer contributes may be as much as 50%. If, as many recent buyers seem to do, you pay no regard to the work required to achieve that return, it is incredibly attractive.

That is where the problem seems to lie. Many of these buyers simply do not appreciate that, depending on the size and nature of the complex, there may be a substantial amount of personal exertion required to perform the duties under the agreements with the body corporate. Many do not appreciate the extent of the work nor the quality of work owners might reasonably expect. Others simply do not want to do the work nor pay anyone else to do it.

Not surprisingly, we are seeing many more disputes around poor performance than we have seen before. We are finding that bodies corporate are becoming very anti management rights although it would in most cases be fair to say that the body corporate ought to have been more careful when deciding whether or not to approve the assignment in the first place.

The problem has been compounded by certain agents who are relatively new to the industry being more concerned about making a sale than the industry itself or in ensuring that the buyer understands what he or she is getting into. The industry then suffers and our opponents are given more ammunition to use against us in their efforts to remove many of the legislative protections that long term members of the industry have over many years fought so hard to get.

While it is easy for all of us to put our head in the sand and say it will work itself out in the long run, I fear that the industry will suffer enormously if we take that approach. The industry has been very good to many of us – managers, brokers, accountants, lawyers and financiers – but if we ignore the warning bells that are ringing loudly at the moment, then I think that the goose that has laid many golden eggs for all of us might begin a slow but inevitable decline.

Businesses should not be marketed on the basis that there is minimal hours involved in the management/caretaking side of the business. Buyers need to know that bodies corporate and owners have a valid expectation that a manager will put in the hours needed to perform all the duties required and that they want value for the remuneration paid. Buyers need to be encouraged by all concerned to look carefully at the remuneration they are to receive and the duties required under the agreement with the body corporate. The focus on just “return on investment” has to change so that buyers are aware of and factor in the personal exertion required to achieve that return.

ARAMA is to be commended for their efforts in offering educational opportunities for potential managers but that needs greater support from the industry at large. The industry needs to appreciate the frustrations that many bodies corporate and body corporate managers are facing and work with the body corporate management industry to address those frustrations.

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