The concept of Management Rights originated in America, but developed a uniquely Australian form on the Gold Coast in the early 1960's. It is now estimated there are over 260,000 apartments in Queensland alone operating under this system.

State legislation controlling the operation has been refined Into the Body Corporate & Community Management (BCCM) Act 1997 which replaced the Building Units & Group Titles Act of 1980. The major changes were aimed at eliminating rorts, encouraging professionalism and providing a sound commercial base for the industry. More amendments are proposed.

We have now experienced 4 years of the BCCM Act together with further refinements in the Managed Investments Act of 1998 and it is clear these aims have largely been realised.

Valuing Management Rights

Management Rights are bought and sold on a regular basis. In fact the average turnover is under 2 years. This may be due to the fact that the work is a lot more demanding than is appreciated by many superannuants looking for a beachside residence with an income to boot.

The value is normally expressed as a multiplier of the "annual net income", plus the value of the manager's unit, office and inventory. The real estate is the easy part as it can be assessed by using comparable unit sales in the building (on a floor area basis), plus $1,000 to $1,400 per mē for the office and a premium for commercial use.

The inventory can be substantial, as the manager often owns the PABX and telephones, computers, linen, cleaning consumables and television sets.

The multiplier for Gold Coast buildings has gradually increased over the years. During the 1970's it went from 1.5 to 2.5 and reached a peak of 4.8 in the crazy days of the late 1980's. Keating's recession brought it back to 3.0 in the early 90's but It crept up to 3.8 again by the late 90's and now can be as high as 4.5. Brisbane buildings can be as low as 3 and Noosa up to 5, depending upon the perceived potential.

A new building can be much lower as there is no track record from which to gauge the net income, and a new holiday-let building needs a lot more in put from an experienced manager to establish its place in the tourism market.

The price of management rights for a new building can range from $10,000 to $20,000 per unit in the letting pool. That can reach $30,000 per unit in an established building, A manager stands to gain most by buying rights to a new building and working hard to achieve high returns for unit owners so that a high proportion will lease their units on a short term holiday basis through his pool.

The value of management rights in the right location, such as a building like Reach Haven at Broadbeach, has increased tenfold in the last 20 years, from $250,000 to over $2.5 million.

Annual Nett Income

Nett Income Is defined in the REIQ management rights contract to exclude bank interest, tax and depreciation. Remuneration for the work performed by a 2-person management team is included in the figure to which the multiplier is applied when assessing the value of management rights. Any labour costs over and above the 2-person team are excluded from Net Income.

Returns on Investment can be as high as 30% on beachfront properties by the third year, and are often around 25% to a competent manager and tourism promoter. This latter part of the job is crucial in a tourist property.

Size of the Letting Pool

Managers make very little income from permanent residents or absentee owners who lock their unit up when not using it themselves. Similarly there are more opportunities to add value to a holiday let unit than one on a long term lease, e.g. $5,000 and $1,500 p.a. per unit respectively.

The greatest potential for loss is where dissatisfied owners remove their units from the manager's letting pool and lease them through the local real estate agent. They would only do that if they felt the manager was not giving them a fair allocation of lettings, or if they had a personal dispute. Managers who are not good at attracting tourists to their building find it difficult to keep all their owners happy all of the time.

Other points to consider in assessing the value of management rights include:

• The remaining term left in the agreement (ideally 10 or more years for a secure investment)
• Attitude of the Body Corporate Committee - cheek the Minutes for disharmony
• Condition of the rooms and the building amount of the Body Corporate salary
• Extent of duties covered by that salary potential to increase occupancies, room rates and the size of the letting pool

Future Directions

To date Management Rights have been mainly a 'Mum & Dad' investment by a couple that works together on reception, bookkeeping, marketing and maintenance. But a recent trend has been towards a single investor buying a group of buildings and marketing them together whilst employing younger professionally trained staff to manage the buildings. There are economies of scale here.

None of these groups has gone past 6 buildings yet, but two groups are currently raising capital with a view to listing on the ASX, The S8 Group is awaiting listing after raising $2.3m in a public issue to buy Enderley Gardens in Surfers Paradise. It already manages Crown Towers, Imperial Surf, Moroccan and Phoenician totalling 680 Gold Coast units.

This opens the door to a much more professional operation of a chain of apartment buildings along the same lines as a hotel chain. The Outrigger Hotel group from Hawaii is already active from Gold Coast to Port Douglas, with 4 properties and a total of 650 units, and they intend increasing this to 20 resorts by 2005.

The main difference is that the real estate of a hotel is usually owned by a single company, whereas each holiday let apartment is owned by an individual investor, and is consequently much more complex to administer.

Please contact us if you require more information about Management Rights that may currently be available for purchase.

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