Should I stay or should I go?
A very common question posed by management rights owners in today’s difficult climate.
Although many managers are ready to move on to pastures new (whether it be retirement, a new management rights or something completely different) they know that their hopes and expectations may well be dashed by the realities of the market. What will tomorrow bring? Will the market revert back to the heady pre-2008 heights? This really is the million dollar question and one that it difficult to answer with any certainty.
Nonetheless, professional opinion is reasonably unanimous; the peak of the management rights market that was witnessed from 2004 until 2007 is very unlikely to be replicated anytime soon. To be clear, we’re talking years, not months, if ever.
That is not to say that there may be some exceptions to this. Management rights in prime, booming, blue chip locations or perhaps those that have a genuinely unique and major distinction from others can still achieve abnormally high multipliers. However, these will form a very low proportion of the market as a whole.
What about the rest?
The reality of the situation is that many management rights owners considering selling today bought between 2004 and 2007 when the market was at its peak. Fuelled by an influx of corporate purchasers looking for speedy growth in trading volume and market share, values were inflated to levels that were unlikely to be sustainable in the future. As if to prove this point, some of these companies have now divested or are looking to sell their non-key properties at prices well below what they paid. The same force that acted to push the market up at its peak is now helping to drag it down.
What became of these corporate newcomers is no secret. MFS are now owned by Mantra Hotels and Resorts, Wentworth have left the management rights business altogether, Outrigger Hotels sold out at the top of the market and are now entering back into the market when suitable opportunities arise and Oaks Hotels and Resorts continue to power on (their most recent purchase being the 165 unit management rights to Sanctuary Broome). However, the important point to consider is how this affects the average mum and dad operators who built the management rights sector in the first place. Can they bide their time until the market improves and multipliers return to previous levels? Simply put, it depends how long you are willing to wait for.
Based on the advice of valuers and financiers, many properties that sold for c 5x multipliers at the peak of the market are unlikely to command a position like this for some years to come. Even this is a best case scenario. It is quite possible that the upward pressure on values created by the influx of corporate operators up to 2007 will never be repeated. As such, many of the values from this period might well be seen as abnormal blips on a long-term trend.
Although perhaps coming across as a bit negative, the point of this article is to highlight that there is little point waiting around for pre-2008 values to return… it might never happen. If you want to sell, you need to be prepared to sell in today’s market. As discussed in a previous article, the worst thing you can possibly do is go to market at an unrealistic price, only to sit stagnant for months. As negative stigma attaches itself to properties long on the market, they can only devalue further.
The best course of action is to forget about market conditions and focus on your business. After all, you cannot have any influence on one but can have a huge amount of influence on the other. Increasing your bottom line can go a long way to filling the void between the multiplier you bought for and the one you are able to sell for. If you are thinking about selling in the next year, put together a business plan of how you might be able to increase your net profit. Look towards what you might be able to achieve at your next AGM. An extra five years on your agreements can only have a positive influence.
Management rights businesses continue to do well and continue to sell. Although the housing market is still depressed (a traditional driver for management rights sales), recent corporate redundancies have created a fresh pool of buyers looking to purchase secure incomes. If you want to sell this year, you can. The only obstacle is mental one… you need to meet the market.
And as far as we can tell, now is as good a time as any.
Glenn Millar
Resort Brokers
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