The state of the market
By Frank Higginson20 Aug 2014
In a word – busy.
There seems to be more activity in the management rights market than we have seen since before the GFC.
Pre GFC the activity was driven really by the big end of town in a sense – Breakfree (MFS), S8 and Oaks chasing big buildings with one or two smaller operators trying to do the same thing. Anyone remember Amrites or Prime Apartments?
Current management rights activity seems more organic and is seemingly across the board.
This is not a ‘legal’ newsletter in a way, but we think it is something that most of our audience will want to read about. So, without trying to cross any professional lines, here we go.
What’s going on?
Quality listings are not thick on the ground – every broker has the same story. They have multiple buyers but not as many quality listings for them to buy. There are the usual catalysts for sale which brings properties to market (of which morphing into a grey nomad is always a common one), but part of the market is usually people changing from one building to the next. Part of the lack of listings is a bit self-perpetuating – sellers don’t want to sell unless they can move into something else, and the inability to find something else means they don’t list their complex for sale. A very unvirtuous circle from a broker’s perspective.
Direct deals – we have been involved in more direct deals than we have in a long time. Before anyone asks – we haven't brokered the deal. Clients come to us saying they have bought or sold direct. Sometimes this is through a friend and sometimes it is through being door knocked. These deals are always a bit harder because sometimes the parties are simply not ready for sale - meaning there is far more execution risk to the transaction (i.e. it falls over because one side or the other isn’t properly managed through the process or otherwise prepared).
Multipliers are on the move – this is as close as we get to valuation advice. Valuers tell us multipliers have very much stabilised and are increasing for quality properties. Brokers are telling us the same thing.
Dutch auctions – these seem to happen when properties are open or at least dual listed. One offer seems to incite another – particularly from the buyer of the other broker involved in the deal who didn’t get the first offer on the table. Not that it is anything to do with the broker – it is usually the other broker's buyer fear of missing out on the building.
Holiday buildings are selling again – there is only so long people can wait it out. You cannot say it hasn’t been tough for tourism operators with a high Australian dollar (meaning it’s more expensive for tourists to come to Australia and easier for all of us to travel), along with the confidence sapping news cycle. But with multipliers moving and revenue increasing, we are seeing more of these buildings transact.
Corporate buildings – In Brisbane everyone is waiting for the bonanza that will be the G20. The LNP cuts were tough for corporate operators, as was the downturn in the mining sector (particularly coal and mining services), where costs were cut dramatically. That has been across the board as well – particularly in central Queensland. You would like to think the worst has passed for the moment.
Permanent lettings – without doubt there was some softening of multipliers along with everything else post GFC, but the cash flow for permanents is very continual. As a rule this style of complex has basically sailed through unscathed over the last few years. The increase in development creating new rental product is the only real threat to permanent rentals as vacancies then take longer to fill with the increased supply.
External managements – it is becoming more common for permanents to include some outside managements in a sale. You need a full licence to run these (and that will still be the case under the PoA when it arrives – reportedly around October).
It’s not just the south east corner – Brokers up north are telling us they have done more sales in the first six months of this year than they have in the last one to two years. This probably reflects the holiday buildings starting to transact.
Off the plan – we wrote about this a few months back here, and these still remain relatively frequent occurrences. One trend seems to be that people are buying them (or sellers are selling them) later and later in the project, meaning there is often a mad scramble to get the contract done, letting appointments out and settlement effected.
And it’s not just Queensland – New South Wales management rights (for us at least) seem to transact in bunches. We have four transactions on or none. The management rights market in New South Wales is much smaller than Queensland, but they still turn over. We have also seen our first few Victorian deals too – showing the management rights system is spreading.
Bodies corporate – are becoming increasingly more informed (that damned interweb thing again). The days of ‘tick a box’ assignments are gone, and this especially applies where the body corporate’s previous management rights experience was not a pleasant one. We are aware of a few (literally three) bodies corporate who have said no to an assignment based on the purchasers’ qualifications and / or experience (or lack thereof) in the last few months. The same comments apply to getting new agreements or topping up existing ones. Taking either for granted is not necessarily a smart move.
The latest wave of buyers – buyers tend to come in themes. We have had Kiwis, South Africans and now we are seeing an increase in Chinese buyers. For us the big difference between these groups is the different mother country (which ordinarily allows an immediate bond for antipodeans) and the potential language barrier. Chinese management rights owners are no different to any other management rights owner – there are good ones and bad ones. More often than not the difficulty we see is that when there are issues with a body corporate the different cultural backgrounds and the potential inability to communicate effectively can create a large roadblock to solving the issues. These differences sometimes exacerbate the problem before it even hits our desks.
As best we can tell (noting we come from a very unqualified economics background), while interest rates remain low and confidence with residential property increases there probably aren’t too many clouds on the horizon. Having travelled through a few of these downturns now (and with some skin in the game in the last one – some of which was unfortunately left on the playing field) it is incredible how much our economic activity is tied to the residential property market.
Our homes and / or investment properties are catalysts for almost all investment at the SME level. If we can sell or gear against them we are fine. Things happen. If we can’t then things grind to a halt. In bank lending the sales force on the front desk are seemingly back in control, with budgets to meet, so when banks loosen the purse strings things happen too.
All of this is opinion. It isn’t fact. It will however be very interesting to publish another one in 12 months and see what played out. They say forecasters should predict early and predict often – you are bound to get something right. Let's see how we go!
Also, when digging through the archives, we found this old newsletter. Sort of a comment on the times then in a roundabout way (when it was written in the GFC).
We would be very interested in feedback from anyone on what they are seeing.