Published: 07 April 2008.

Contributed by Dave Alexander of Suncorp - Management Rights Finance

First Published as Resort News Editorial, July 2006

Last year I used this esteemed publication to discuss management rights and unit valuations and trends. Recently a number of industry professionals from the accounting, sales, banking and legal professions got together to share views and opinions on the current state of play. Discussion was stimulated via a presentation by Chris Kennedy and Tim O’Connor of CB Richard Ellis. Chris and Tim are industry expert management rights valuers and their insights into current trends and methodologies provided real food for thought. Obviously from a lender’s point of view the valuation of the asset is critical as are the likely future trends impacting that value.

I was particularly interested in discussion around the so called manager’s unit premium.  As many readers will be aware it is common practice for the market to pay a premium for a manager’s unit. This premium can be as high as 10% to 15% above similar units in comparable locations.  While the practice is pretty much industry standard the reasons behind this methodology are worth reflecting on. Essentially the purchaser is paying a premium driven by the exclusive opportunities and income derived from ownership of the manager’s lot. The valuer will take into consideration the impact of on title areas, occupation authority areas and special rights to occupy common property. Also taken into consideration is the level of income and the potential to increase net profit levels. As we can see it’s not as simply as just adding on a “standard” premium. It’s more horses for courses.  In coming to an accurate assessment of the appropriate premium the valuer needs to really understand the management rights business including the agreements and the business model.  Hence the need to assess the financial performance of the business when valuing the manager’s lot.

Discussion around Regulation Modules also proved very interesting. It is now fairly clear that purchasers are prepared to pay more for longer agreement terms. With 25 year terms available under the Accommodation Module and 10 year terms under the Standard Module it should come as no surprise that the market is differentiating between the two. Same goes for management rights businesses with very high proportionate unit values.  If a potential purchaser has to pay a significant percentage of the total price for the unit it stands to reason that the return on the total investment will be less. Lower proportion unit values will drive higher overall returns on investment.  Demand for management rights with very high unit values is not high and this is impacting overall market values.

Average multipliers taken from analysed contracted sales on the Gold Coast and valued by CB Richard Ellis make for interesting reading. In the period 1 June 2005 to 31 May 2006 the following statistics were presented :

Business Values up to $1,000,000
Townhouse:  4.71 times the verified net profit
Three level walk-up:   4.83 times the verified net profit

Business Values $1,000,000 to $2,000,000
Townhouse:  5.05 times the verified net profit
Three level walk-up:   5.05 times the verified net profit
Medium to highrise:   4.80 times the verified net profit

Business Values over $2,000,000
Townhouse:  5.15 times the verified net profit
Three level walk-up:   5.43 times the verified net profit
Medium to highrise:   5.53 times the verified net profit

Obviously these figures are impacted by sample size, once off transactions and other statistical aberrations. However, the overall message appears to be one of a market which has stabilised over recent months.

As the industry continues to progress and mature CB Richard Ellis have identified a number of trends. Most of these will come as little surprise to industry professionals but they are worth repeating.

• Major corporate players such as Breakfree, S8, Trendwest, MFS and Outrigger Resorts, will continue to dominate the big end of the market.
• “Mum and Dad” operators will maintain their niche positioning albeit with continual pressure from the major players.  A more diversified source of bookings will be required to maintain occupancy levels
• Developers are now retaining management rights. Many accommodation and resort development groups now acknowledge the benefit and cash flow available by retaining management rights to their buildings.
• The risk of the current level of owner-occupiers to the lower end of the market is increasing as residential units and townhouses in the $200,000 - $300,000 value range are one of the more favoured options for average income earning first home buyers.
• The investor market has stabilised in both the new and second-hand property markets and will continue to do so providing interest rates remain stable and an acceptable return can be achieved.
• Pressure and competition from other investor markets would see the property market reluctant to go beyond the current returns.

All in all the market continues to mature with no alarming trends evident from a financier’s point of view.

I can’t let this month’s column pass without wishing Ken Window a happy and healthy retirement. Judging by the diverse range of industry professionals who joined Ken for drinks one evening recently it’s clear that over many years this true gentleman has gained the respect and friendship of all who have met him. Hopefully we can coax him out for a drink every once in a while.

Mike Phipps
National Business Development Manager
Suncorp Management Rights

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