In the first part of a regular series, Real Estate Business talked to some of the country’s most influential real estate business brokers about rent roll activity in their local markets, and where there are opportunities for astute buyers
Ross Hedditch, director of Melbourne-based BDH Solutions, which operates as a rent roll and business broker in Victoria and NSW, said demand for rent rolls remains robust in both of the markets he services.
While the type of buyer varies, he said “there are some agencies out there at the moment that are being aggressive”.
In Victoria, buyers are snapping up rent rolls from agencies that are struggling in light of a sharper fall in the local property market, he said.
Many of these rent rolls contain between 25 and 60 properties under management, and these form a large part of the sales he has handled of late.
Recent buyers have managed to reap returns of up to 40 per cent from their acquisitions as they’ve been able to integrate the new properties into well-managed property management departments, he added.
“They’ve got the systems to manage and grow the rent roll, and they’re generating sales activity from it as well,” Mr Hedditch said.
Optimal profit levels generally flow from rent rolls that contain specific properties under management totals as these numbers maximise employee output, he said. These totals are 90 (one employee); 250 (two employees); 500 (three employees); 900 (four employees); 1,500 (five employees); 2,500 (six employees); 5,000 (seven employees); 12,000 (eight employees); and so on.
He added that finance is being made available, with each of the primary real estate agency-focused lenders, namely Macquarie Bank, Westpac and NAB, all being supportive of rent roll and business acquisitions.
One trend Mr Hedditch has noticed recently is that of more principals giving their property managers a stake in the business, getting away from the historical focus on sales staff. Often, the forgotten party to business development, Mr Hedditch said the rising importance of rent rolls to a business’ overall success has helped boost the prevalence of this trend.
He also expects to see more mergers this year, as more principals seek out partners in markets that may not be able to support the number of agencies operating there. Mr Hedditch said that while recently he has seen more activity, this may in part be due to more principals’ using brokers for transactions.
According to Chris Goodway, CEO of The Rent Roll Broker, rent rolls in Melbourne city and inner suburbs are in high demand and prices achieved have been good although there has not been much stock coming onto the market.
“The outer suburb [market] is quite active, with lots of smaller portfolios being available and sold.
“Buyers are cautious with quality of the properties and their management being a big issue. Hence good portfolios in the inner suburbs can achieve in excess of $3.00 [per dollar of management income] while outer suburbs and country regions and can come in under the $3.00 mark.”
NEW SOUTH WALES
Bob Walters, director of The Real Estate Business Brokers, True Property and Leading Property Managers of Australia, brokers the sale of real estate businesses and rent rolls in Sydney and some parts of regional NSW.
Demand for rent rolls in Sydney is strong for portfolios of up to 500 properties, he said.
“Over 500 properties, the market thins out as there are not many buyers who can afford the dollar outlay to buy a large rent roll,” he said. “In
Sydney, we find that multipliers are between 2.5 and three times annualised management fees for the cheaper suburbs, three and 3.5 times annualised management fees for the middle income suburbs and 3.5 and four times for the inner, higher value suburbs.
“In regional NSW, rent roll multipliers range from low twos to high twos depending upon the quality of the area. For example, on the mid-North Coast, a rent roll was recently sold for 2.5 times.
“That translates into each property on the rent roll being worth anywhere from $2,500 to $9,000 each, depending on the area, the average rent and the average management fee.”
Mr Walters said that in Sydney, a recent sale of a rent roll of 100 properties in the southern suburbs yielded 3.05 times annualised management fees.
“The multiplier would have been higher if not for the lower than average management fee percentage, [due to] discounted fees, and an unusually high rent arrears [due to] poor tenant selection and/or ineffective rent collection methods.
“Since Christmas I have noticed a small upswing in enquiries from prospective vendors,” he said.
“I believe that the number of real estate agencies and rent rolls changing hands will increase in 2012 as the real estate sales market is likely to be flat and real estate business owners will increasingly retire or look for a new business direction.
“The main buyers for real estate businesses and rent rolls will be cashed up local real estate business owners looking to boost the constant revenue streams and sources of sales listings that rent rolls provide or to knock out their competitors.”
Meanwhile, The Rent Roll Broker’s Chris Goodway reported strong demand for rent rolls in Sydney’s inner suburbs.
“For good quality rent roll portfolios generating high income from high rents and fees, buyers are prepared to pay up close to $4.00 on management fee income.”
According to Paul Brooks, director of Brisbane-based Real Estate Dynamics, the start of 2012 has been frenetic, with buyer enquiries up and seller enquiries steady.
“It looks like it is going to be another good year,” he said. “The Brisbane market remained very strong in the last quarter of 2011, with a large volume of sales being pushed through just before Christmas.
“Buyers looked to kick start the New Year locked into a contract so that settlement would happen in early 2012.
“In the outer lying areas of Brisbane, the market was soft, with agents either not having the money or foresight to buy rent rolls,” he said.
“The Gold Coast market remained very strong, with buyer activity outstripping supply. The Sunshine Coast market was soft, with a lot of agents still feeling the affect of a sales market slowdown.
“Queensland Coastal regions remained patchy, with some areas showing no demand and other areas, like Townsville and Mackay, showing high demand.”
Mr Brooks said an article written by Robert Bevan, in his Best Practice Newsletter, revealed how profitable property management divisions can be.
According to the article, in Australia and New Zealand, the current average operating surplus of residential sales departments is 16.92 per cent, well down on the current average operating surplus for residential property management departments, which is 26.76 per cent.
“We are working with companies that are currently averaging an operating surplus for residential property management of up to 40 per cent,” Mr Brooks said.
“Yet we still see a lot of other business owners spending all of their time in their sales departments with the lowest returns and not building a property management-based business so they will have something to sell when it comes time to retire or cash in.”
Mark Sinclair, CEO at Realestimations, which primarily deals with business in Perth and the major WA regional centres of Albany, Geraldton, Busselton and Margaret River, said his firm has handled 11 rent roll and five ongoing business sales in the past 12 months.
“Buyer appetite is very robust, and hasn’t abated in relation to the flat property market,” Mr Sinclair said. “The bigger real estate businesses are in a position to take advantage of the tough market conditions.”
Rent roll multiples have eased from $3.20 per dollar of management income (i.e. excluding auxiliary fee income) four years ago to between $2.75 and $3.00. Mr Sinclair stressed this price range was for good quality rent rolls only – those with high management fees, solid auxiliary income streams, a tight geographic spread of properties and adequate staffing levels.
Rent rolls that fail to meet these criteria earn between $2.00 and $2.50 per dollar of management fees, he said, although he acknowledged there is little buyer demand for these.
These multiples are expected to remain steady this year, he said, buttressed by tightening vacancy rates and rising rents.
Buyers – most of whom are savvy businesspeople looking to build their own asset base rather than buy a business outright – are actively looking for quality rent rolls, according to Mr Sinclair. They were generally happy to meet the seller’s price expectations as they could see the benefits the transaction could deliver to their business.
He added that, anecdotally at least, finance is being provided by the bigger lenders although banks are taking a close look at the strategy that each buyer has for the rent roll before committing funds. It’s not enough to have the capacity to repay a loan; buyers need to show the lender how the rent roll will be managed after the sale, he said.
Mr Sinclair currently has seven rent rolls for sale, all of which are being handled on a private (i.e. confidential) basis. This includes one rent roll each in Sydney and Adelaide.
Offices with rent rolls of between 50 and 100 properties (being sold as going concerns) are the hardest to sell due to generally lower profit margins and proportionally higher running costs. The strongest market demand is for rent rolls of between 150 and 300, he said.
According to Chris Goodway, WA has a strong market for rent roll sales at the moment, due mainly to a difficult 12 months of trading from a slow sales market.
“Many of the more vulnerable agents have had to close and sell off their rent rolls to make ends meet,” he said.
“Most of these smaller transactions have been done privately without a broker being appointed and prices have varied dramatically. Multipliers in the suburbs have varied from $2.40 -$2.70 on management fee income depending on location and quality of the operation,” Mr Goodway said.
Chris Goodway, of The Rent Roll Broker, said much of the recent rent roll activity has occurred in Adelaide’s outer suburbs and regional areas.
According to Mr Goodway, who said his firm handles the bulk of transactions for rent roll sales in the state, this activity flowed from the amount of stock coming onto these markets.
Buyer demand, however, while strong overall was particularly robust in Adelaide’s city and inner suburban areas.
“Overall demand is still good, with multipliers within suburbia varying from $2.45 to $2.70,” he said.
“City and inner suburbs demand has pushed the multiplier up to $3.10 - $3.15 depending on the quality and profitability of the portfolio.
“Regional and country areas have the disadvantage of that smaller pool of agency buyers to market to.”
Mr Goodway said finance was proving to be the only impediment to rent roll activity of late, and not just in South Australia.
“There are a good number of agents that want to build their rent roll portfolios that are being limited by their ability to borrow and fund their desired purchase,” he said.
“However, this has been the situation for over a year now and we don’t see any improvement on the horizon.”
“Agents that have a well-run agency, with a minimum of 150 properties unencumbered should have a good chance of being able to qualify for financing.”
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