by Chris Novak - Nova House Realty
26th February, 2018
Management rights valuations – highest ever!
It is a topic that comes up in conversations with management rights owners very frequently; and understandably so, as a great deal of individual or family wealth can be tied up in this asset.
There are more than 22 factors that go into determining the value of management rights and I broadly place them in four main categories.
They take into consideration the destination, country and industry and the overall demand and economic cycle.
Management rights valuation considers factors such as population, type and number of industries in a destination – the higher the number and the bigger the companies, the better – as it is offers employment opportunities. Infrastructure – such as airports, rail, convention centres, number of high quality attractions, restaurants, cafes, shopping etc. as they have an impact of attracting high volume of travellers from different markets, thus ensuring stability of income of an asset.
Current supply over apartments and hotel rooms and a pipeline of future projects also has a significant effect on the valuation. This is linked to fair market share, which is a total number of rooms at the hotel divided by a total number of rooms in the hotel’s competitor set.
Valuers get all this data from Australian Bureau of Statistics, STR (a global hotel consultancy), tourism authorities, government departments and economic think tank organisations.
Interest rates also play an important role.
All these factors are then distilled and will become part of the overall multiplier. Needless to say, an operator has no control of influence over the above except for whether to buy or not an asset in a destination.
They pertain to the actual management rights and everything is distilled into a single net operating profit. The key influencers are:
Net operating profit
The benchmark is net profit of $500,000 and complexes that can demonstrate this are in very high demand, command premium price and often sell very quickly. Companies, syndicates and partnerships with a portfolio of MLR assets are active in this space.
Ease of earnings
Larger complexes are considered a true and proper business as the owner has the choice of managing it by himself/herself.
Technically, only one year of financial data is used by valuers to determine the MLR value. Increasingly, buyers ask for Occupancy Report printed or sent from the reservation system for the last three years to determine the value, as do bankers and financiers.
Since last year, income from credit cards is…
· This examines the ratio between income generation from letting versus from maintenance.
As income from letting is much easier to generate, higher premium is placed on it. Maintenance work is often done by the MLR owner and if outsourced, it reduces net income.
- Accommodation module with the maximum duration of 25 years. Consequently, the longer the agreement, the higher the multiplier.
- Standard module with the maximum length of the agreement of 10 years.
- Top up of the agreement term is a very important factor in maintaining the value of your management rights business.
Size of the complex and number of units in the pool
The bigger the complex, the better as it is possible to increase the unit pool and thus revenue and profit.
The number of units in the pool – again, the higher the better.
Age of the building
Normally, the multiplier will be reduced when it is a new building as the valuers believe it takes time for the business to reach its full potential. Conversely, if it is an old complex that has not been maintain, will result in a lower multiplier.
Fringe versus centrally located asset, beach location of further away from the ocean. This will affect occupancy, rate and marketing costs and ease of attracting guests and patrons. The more challenging the location – “last to fill and first to empty” will have a reduced multiplier.
Capital city or large population centres with diverse economic base, will command
Often, MLR operators to ensure the size of the pool will offer guaranteed monthly income to some five to 20 units, to retain the size of the pool, income and in some cases viability of the business. Although, an important strategy, it carries risk and adversely affects the value of the business and it financiers will lower the loan valuation ratio, thus requiring a higher deposit.
Reception and office on the title
It gives the operator greater control of the asset. It effects the value, and price and it is easier to sell.
Body corporate salary
It ranges from $1000 to $1400 per unit in a complex.
Body corporate relationship
This is often reflected in the Annual General Meeting Minutes and can both affect the value and the selling process.
Short-term versus permanent
In most cases, short-term let complexes, which can cater to the tourist, corporate or both markets; versus permanent-let, which comprises of owner occupiers and tenants, have much higher income and profit. Therefore, the value and multiplier are much higher.
Recently, permanent-let complexes with no requirement to live onsite, command much higher multiplier as buyers find it more sustainable as it puts less pressure on family life.
Occupancy, average daily rate and RevPar will give a clear picture of the health of the business as they are all key contributors to profitability.
Legislation in individual state jurisdictions
In Australia, 85 percent of all MLR businesses are located in Queensland, where it is considered an important asset class and where the law offers a much higher degree of protection to the MLR owner, hence the valuation will be higher.
Owning a unit in a complex that is part of the management rights business, can command a price premium of 10 percent to 20 percent. Some other assets included in the title deed can be public areas, restaurant, storage and parking bays.
Composition of the value of management rights, e.g. value of real estate versus value of the management rights, plays a part in financier’s view of the risk. If the real estate value is high in relation to the total value, it is much easier to secure finance.
Management rights multiplier
Traditionally, the multiplier for a management rights business ranges from three to 5.5. Over the last two years, we have seen a significant uplift of these values, with some MLR businesses commanding a multiplier as high as 6.75.