Published: 12 February 2010.

Contributed by Damien Windle of PCS Finance

Surviving the last 12 to 18 months is a good feeling.  I can proudly say to my father in law that I survived a Global Financial Crisis (GFC), the worst in 100 years.  You see my father in law has been in business since the mid 70’s and he’s experienced the good and bad times (more than once).  The GFC was a topic of discussion at many family dinners.  The uncertainty of the extent of damage this could have on Mums and Dads and the many different industries, at times, was overwhelming.   My business relies on people requiring finance for Management and Letting Rights (MLR) and residential property, so if money was scarce and confidence was shattered how would this affect my business?  The last 18 months has me made me realise how important cashflow is and the saying “cash is king” is underestimated.

Like many, my business was affected by the GFC but compared to others, the impact was minimal.  Thankfully, banks continued to support the MLR industry and with interest rates reducing, it meant for those on variable rates, interest costs were reduced in some cases by 35%.  This is a significant amount of savings if you do the calculation on a debt of $500,000.  Not to mention $1M +. 

Did the GFC have an effect on MLR sales and purchases?................I am often asked what is the trend in MLR sales and purchases.  Based on my seven years experience financing MLR’s there is a clear pattern in the Brisbane market.  From March to August purchases seem to be very active.  It tends to drop off through September and October and then the last half of November and early December there is a rush to purchase a business prior to Christmas.  There is an expectation the contract will be unconditional before Santa comes down the chimney.  During the Christmas period it slows down and during this time, I believe people start thinking of life changing experiences and want to try something new.  They start to set themselves goals for next year and one of those goals is to purchase a business they have been procrastinating about for the last ten years.  By the time February / March comes around there’s a flood in the market from those people looking to change their career and finally deciding to purchase Management and Letting Rights.  The only change in this trend was from July to Dec 2008.  The phone and email enquiries decreased dramatically during this period as much as 30%.  People were reluctant to part with their money and or borrow to purchase a business.   They lacked confidence and there was an unknown factor that was becoming increasingly overpowering.

The reduction in interest rates assisted with keeping confidence in the market plus banks did not really make any major changes in a negative way to their MLR lending policy.  They have continued to support the MLR industry not like other industries.  Whilst some banks did ‘tighten’ up and paid close attention to the performance of existing clients, this did not have a massive effect on lending to MLR’s in general.  Based on my experience in the last 12 to 18 months it is now proven, that banks are confident lending to MLR’s even through a GFC.

I think it’s important to say that my comments mainly relate to Management Rights located in Brisbane, in particular permanent and corporate let.  Too often I read comments (positive or negative) made by other professionals commenting on Management and Letting Rights and not stipulating their comments relate to permanent, holiday, short term, corporate or student accommodation.  The majority of business that I have experience with are MLR’s located in Brisbane.

Finance tips

•  It pays to keep accurate financial records in relation to profit and loss reports.  Banks will request annual figures which forms part of the annual lending review requirement.  If you cannot produce a P&L in a professional format eg quickbooks or MYOB etc this could have a negative impact on your annual review.  It also helps if you wish to borrow additional money eg investment property purchase.   If you have up to date and accurate figures, this could be the difference between the bank lending the money or not.
• If your bank is insisting on converting your loans from IO to P&I, in some circumstances you do not have to accept this.  Banks will tend to request this after a few years but if the business has been trading well and the value of the residence and business has held up, the bank should have no reason to insist on Principal & Interest reductions.
• Work smarter not harder by putting your assets to work and taking advantage of growth. 
  

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