What impact has COVID-19 had on management rights businesses?
COVID-19 has been a huge disruptor and as we move into the second half of the year, we are gaining clarity on the likely long-term impact. We have heard from many short-term holiday managers concerned for their business due to the loss of tourism and this has been widely publicised. However, managers of permanent lettings have been telling us a very different story!
Resort managers have been adapting to the new market, ushering a vast increase in permanent rental units. Our own Patrick Clarke from Accom Properties confirmed that from March onwards, his management rights sales and rental platform saw a sharp rise in enquiries from managers looking to use the portal to secure residential tenants (they were focussed on anything from two to six months) who could take up longer term leases across their holiday letting pool.
He said: “When the borders closed it became apparent that the pandemic was going to be hugely disruptive to tourism and the accom industry. Consequently, holiday apartment owners asked their MR managers to find permanent tenants for their investment units. Managers turned to Accom Properties and we were able to swiftly step in and help.
“This change of direction may have been a good decision for many unit owners who were able to rely on a regular and steady income throughout the crisis. However, I do worry that management rights operators could have difficulty convincing those owners to return their units to the potentially more profitable holiday rental pool while there is uncertainty around COVID-19 and border restrictions.”
Those managers of holiday management rights businesses that do not allow permanent lettings at all, may have suffered more hardship than most during lockdown and this may be a concern for these businesses going forward. On the other hand, they could be better positioned to benefit from the upsurge of holiday makers expected when state border restrictions lift, or dare we say it, when a New Zealand bubble is created!
The COVID trend of converting holiday units to residential accom also coincides with a surge in Airbnb properties seeking permanent renters and this has sparked fear about a residential oversupply and the knock-on effect of reduced rents. However, in Queensland, at least, this does not seem to have happened yet.
A random cross-section of Queensland’s permanent managers spoke to us earlier this month and reported that only a small number of tenants have actually asked for rent reductions due to COVID hardship. In fact, most reported that the pandemic has had virtually no impact on their business.
ARAMA CEO Trevor Rawnsley told us: “Long term rentals in Queensland have held up reasonably well and, in some markets, the average weekly rent has actually increased. There is a relatively small number of rentals which qualify for the COVID hardship relief (no evictions and a rent reduction or deferral, etc). In Queensland less than four percent of rentals qualify for this hardship test.
“There is a mixed bag elsewhere, for example the Sydney and Melbourne long-term rental markets are very soft, corporate short-stay and student accom is very badly effected as is short stay (holiday letting) in hard to get to places such as Port Douglas, Cairns and around this region.”
Sales of holiday management rights businesses fall
A total absence of incoming international visitors to Australia and a downturn in domestic demand in many regions for short term stay accommodation has taken its toll on the sale of holiday management rights. Some management rights and motel financiers have stopped lending for holiday lets because they are viewed as too much of a risk while the sector navigates uncertain terrain. Although, according to specialist finance broker Mike Phipps there are still lenders who are prepared to look at opportunities on a deal by deal basis.
Even so, a significant downturn in management rights business sales has been reported by industry insiders and is also highlighted in our most recent Resort News monthly sales report, which was down by an average 85 percent with almost all management rights business sales being permanent properties.
The general downturn may have also been influenced by a shortage of management rights businesses entering the marketplace, a delay in property viewings due to COVID restrictions, and lenders’ reluctance to commit to finances.
Property valuers, Herron Todd White’s Management Rights Market Update on August 19, also highlighted concern for the value and sale of holiday management rights businesses, pointing out that permanent management rights are holding up well.
The report states: “June and July were very quiet months for management rights valuations. There have been no holiday transactions reach an unconditional contract stage (that we are aware of) and the permanent business market recovered somewhat, though most transactions were mostly for smaller scale and fringe location businesses.’
“August, to date, has provided a number of quote opportunities and there appears to be movement in the permanent business market. We are aware of a small-scale holiday business contract on the Gold Coast along with negotiations continuing for a larger resort style complex on the Sunshine coast, which may reach a contract shortly.
“Further we are aware of recent contracts for permanent complexes on the Sunshine Coast, Mackay, Brisbane suburbs and the Gold Coast. A contract was negotiated for a smaller permanent complex in May and settled during July on the Sunshine Coast with the multiplier in line with expectations given the size at just under five times.”
The valuer’s research also suggests that since June, the “residential markets have experienced an increase in sale volumes and agents now report low levels of owner occupier stock for sale. Investor product in fringe areas remains higher and units in holiday buildings hard to sell”.
Holiday letting demand to rebound with restriction easing
When restrictions began to ease and people began to travel longer distances within their state, some regions reported a mini-boom caused by a ‘drive market’ made up of Aussies keen to get out and visit their own backyard. Regions away from the usual school holiday hot spots seem to have benefited the most from this drive market, for instance some Gold Coast resorts reportedly lost out to hinterland hideaways, regional coastal resorts, and holiday parks. Expectations of more rebound later this year is good news for the future of holiday lets.
The future will be positive for management rights
The management rights sector has always shown resilience in times of hardship and many holiday managers have used this forced “rest period” to reflect and make changes that will benefit the future of their business. Permanent lets have certainly proved how resilient they are by continuing to sell and operate well.
Now may not be the ideal time for you to sell your holiday management rights business; those managers who have a five-year exit plan for their resort may have to extend it by a few years. However, this could also be an excellent time to make a long-term investment.
There are certainly some very positive signs for the whole industry and permanent MR businesses have tackled the crisis especially well.
Trevor Rawnsley says: “The Sunshine Coast short stay (holiday let) is booming as are most parts of the NSW Coast and Central Queensland Coast. The Gold Coast is mixed at the moment, but expected to bounce back quickly as with all areas as soon as the borders reopen.”
He advises: “Overall the management rights industry has come through the COVID period very well. Long-term let businesses are increasing in value while short stay businesses will recover quickly as soon as the future is a little more certain.
“I am hesitant to say that we are a fortunate industry because there are some operators who are still in the doldrums. While this is a small group, it is a big deal for them.
“It’s a good time to buy and a good time to sell because there is definitely demand out there. The banks need to be a little more flexible and then some volume sales will return. Hopefully, the lending reforms will help to stimulate the market.”