Can you remember 2002?
I can. I was valuing management rights in Brisbane, the Gold Coast and Sunshine Coast.
And 2002 was the year when S8 and Breakfree were active so large netting management rights became highly sought after.
I have listed the following events to remind us of the market in 2002:
• The pilots strike -1989
• The Ansett collapse – 2001
• The attack on the World Trade Centre in New York – Sept 2001
• S8 listing on the Australian Stock Exchange – Dec 2001
• Breakfree float on the Australian Stock Exchange – late 2002
• Launch of Wotif.com – 2000
The dynamics of the market along with the disintermediation of business models by the Internet, was set to change the market.
In 2001 and during 2002 we witnessed a trend for experienced management rights operators to progressively buy larger management rights properties. In effect they were continually trading up to larger netting businesses. Coupled with this was the use of different marketing channels and the use of the Internet.
In the 1990s a successful marketing strategy was to be the preferred supplier with the wholesalers of Ansett Holidays, Qantas Holidays and Sunlover Holidays.
The first noticeable change in the market was the pilots strike and how properties within a driving distance to a capital city fared better. North Queensland and the Whitsundays suffered more than the markets of the Gold Coast and Sunshine Coast.
Once the pilot strike was over, then we had the Ansett collapse. Then the attack on the World Trade Centre in New York on September 11 2001 reduced international visitations.
Early into the millennium there were opportunities for “economies of scale” with operations and marketing through the increased use of the Internet. 2002 was a year of improvement and there are current similarities as we enter 2014. In 2014, the impacts of the GFC are fading and there is increased competition among buyers for large management rights properties.
Where once the Gold Coast was the highly sought after location in 2002, now it is the location of Brisbane. Short term corporate letting businesses in Brisbane are in high demand and short supply. For every short term letting business, there are about 30 buyers expressing interest. Most corporate letting management rights business are not advertised for sale, and there can be “dutch auctions” between a number of buyers.
Back in 2002 there was a high level of demand caused by S8 and Breakfree. This was most prominent on the Gold Coast as they sought to acquire the large holiday letting buildings. The Breakfree acquisitions were “off-market”. As the number of buildings on the market for sale reduced, the remaining owners held out for higher prices.
What we can learn from history is that when demand outstrips supply, a price creep will eventually follow. In 2001 and 2002, Breakfree’s purchasing strategy was to pay a marginally higher price to secure the property. We also know that often part of the purchase price was in the form of shares in Breakfree at a predetermined price once the company listed. It was a simple but effective strategy to pay around 0.25 times more than the prevailing market. Within 3-6 months the market firmed by this amount and Breakfree had a portfolio of 20+ properties.
In 2014, I believe we are poised in a similar position. Management rights stock is tightly held and not being offered for sale and thereby we are experiencing limited supply. On the other hand, demand is high and we have had discussions with buyers expressing the intent to pay a higher multiplier (years purchase) range for the right property.
Just like 2002, when there was high demand and low supply, in 2014 I believe we will see “price creep” in the highly sought after segment of the short term corporate letting business market in Brisbane.
Some 60% of RNR’s total sales of management rights in 2013 was for corporate short term letting businesses, of which 80% were sold “off-market” to established operators on our waiting lists. This further supports that supply is not satisfying the current level of demand.
Another trend is for multiple ownership of large corporate short term letting businesses. Just like in 2002 where the major operators (like Breakfree) acquired multiple properties, in 2014, we will see more “off-market” transactions occur with purchasers adding to their existing portfolios who will invariably be seeking scale of operations through their purchase. Some operators are aware of the current machinations of the market and have expressed their ability to pay additional amounts in order to “meet the market”.
In 2002, Breakfree and S8 had a clear and defined objective to float on the stock exchange. In 2014 the purchasing motivation of most purchasers of corporate short term letting businesses has been to increase the portfolio. The motivation for an initial public offering has not been expressed to date.
In 2002 as the supply of good quality management rights property started to dry up on the Gold Coast, purchasers started to consider other locations such as Brisbane, the Sunshine Coast, the Whitsundays and Cairns. In 2014, I believe purchasers will again need to cast a wider net and consider some other leisure based locations.
In the property industry there are contrarian or counter cyclical purchasers – they “buy at the bottom and sell at the top”. It is widely accepted that the Cairns market has bottomed and the metrics of RevPAR and occupancy are indicating an improvement over previous years. Combine this with a development market where banks are not keen to finance new property developments in Cairns, this will further restrict supply of new development stock. High netting properties will soon be of greater interest.
Summary:
• Prices for Brisbane based short term corporate letting businesses will be under pressure for price increases and we will witness price creep.
• A large proportion of the transactions will be “off-market”.
• Demand for holiday letting businesses (in particular Cairns where there has already been tourism market improvement) will increase.
At the beginning of 2015, we should reflect back on this discussion and see how the market has progressed.
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