Springs Newsletter

Spring – Seasonal Newsletter Template

ROI vs MULTIPLIER

Shifting Focus in a Softer Market:
Prioritizing ROI Over Multipliers
In today’s softer market, it’s essential for sellers to
move beyond an overemphasis on multipliers and adopt a broader perspective on market dynamics when selling management rights. Recent changes in interest rates and capital growth have notably influenced buyer behavior and market conditions.

Interest rates have become a significant focus across Australia. As of July 2024, inflation has risen to 3.7%6, following a trend of unexpected increases. The cash rate remains steady at 4.35% after a series of hikes since May 2022. This has led to higher borrowing costs, making buyers more cautious and less willing to pay premium prices compared to the previous year.

Although borrowing costs have increased, buyers are still active, but their approach has shifted. They are now more focused on return on investment (ROI) rather than paying inflated prices. This change in investment criteria necessitates a new approach to selling management rights.

Historically, multipliers have been a reliable indicator of market conditions. However, with the market now softened, relying solely on multipliers can be misleading, particularly for sellers with real estate attached to their management rights, such as a manager’s unit or office.

While multipliers have seen an overall decrease, this reduction is more pronounced in cases where real estate is included. For example, Brisbane’s real estate market-once booming has become Australia’s second-most expensive market, which complicates multiplier expectations for properties with attached real estate.

Just because you bought your management rights business at a 5.5x multiplier doesn’t mean you’ll get the same multiple when selling. You must also consider the capital growth of the unit. For instance, if you purchased a management rights business with a net income of $200,000 and a manager’s unit valued at $500,000, and now the unit is worth $620,000, the multiplier may actually be lower than expected. This is because buyers may need to pay more for the unit, which can reduce the overall return on investment and affect the sale price of the business itself.

Victory for Management Rights and Strata Industry

Mahoneys, with support from ARAMA and EBM Insurance, has successfully defended the validity of extending caretaking agreements in a recent ruling by the Adjudicator in Atlantis West [2024] QBCCMCmr 340. Previously, some industry practitioners claimed these agreements could only be extended once, which could lead to significant limitations. The Adjudicator clarified that multiple extensions are allowed as long as the total term does not exceed 10 years, and individual extensions do not exceed five years.

This decision dismissed an owner’s challenge to an extension by the body corporate, affirming that such extensions are permissible under the relevant regulations. Had the ruling gone against the body corporate, it could have created substantial uncertainty and financial risk for management rights holders. The ruling also emphasizes the importance of obtaining legal advice for significant amendments, but it confirms that extending caretaking agreements is not inherently unreasonable if it complies with statutory limits.

Mahoneys’ team, including Ben Seccombe, Gavin Handran KC, and Mitchell Downes, played a crucial role in achieving this positive outcome for their client and the broader industry.

INCREASE IN Domestic TOURISM

In 2024, Queensland’s domestic tourism surged by an impressive 12%, fueled by a growing interest in regional travel. Travelers across Australia have been drawn to the state’s diverse landscapes and unique experiences, with Far North Queensland emerging as a standout destination. This region alone experienced a remarkable 15% boost in bookings, highlighting its appeal to both adventure seekers and families alike.

The rise in domestic tourism not only supports local businesses but as Queensland continues to promote its regional offerings. The future looks bright for its accommodation sector, with the potential for sustained growth and deeper connections to the beauty of Australia’s own backyard.